11/25/2005
Funding a Start-up Business
by Phil Harris, Business Consultant, UALR Lead Center
When someone plans to start a business, one of the first things to consider is the acquisition of funds. It is great to have a business idea, but you need money to bring the concept to life. Raising money and having an adequate supply of funds is fundamental to the success of any business.
Many, many new entrepreneurs think they can go to a bank to get funding for their start-up businesses. Normally, most banks just will not give funding for any new business. Banks are not being mean nor are they discriminatory; rather, they know the failure rate for start-ups is over 70%. The Small Business Administration does entice banks to lend to start-ups by providing loan guarantees. However, even with a SBA guaranty, most banks require a minimum 20% cash injection and management experience in the same industry.
There are two major types of funding: equity and debt. Debt is cheap and tax deductible, but it increases the risk to the business. Equity, on the other hand, is more expensive and not tax-deductible. However, equity never has to be repaid. For this reason -- lack of repayment -- equity is greatly preferred for start-up businesses.
If you are considering a new business, develop a strategy to obtain equity financing for your start-up venture from you, your relatives, and your friends. Obtaining equity financing to get started will increase your success rate and reduce your stress.
To learn more about how to obtain financing to start your business, visit the ASBDC library or the SBA web site at http://www.sba.gov/financing/index.html.
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