A Guide to Capital Resources

There are ways to get money to finance good ideas

P> A young entrepreneur named Benjamin Franklin once bought a print shop by working his way up -- and eventually buying out the boss with his own hard-earned money.


But if Franklin, the writer of "The Way to Wealth," were flying his kite in the rain today, he'd probably look to a comparative feast of choices for capitalization before sweating it out and financing that old print shop himself.

As the 21st century nears, methods to raise capital resources continue to rise. Most any poor Richard with a great idea can get money behind it -- from somewhere. Some are hard to get, others comparatively easy. Here's how today's entrepreneurs can gather the capital that will forge their way to wealth. Inclusive? No. A good start? We hope Ben Franklin would be happy to print it.

1.Customer Money

They pay; you provide. It is often ideal having your customer base funding the business. Your company pays no interest, gives up no equity and makes a profit.

2.Deal Money

This is almost as good as customer money. The deal paves your way to produce the product. Again, you incur no interest liability and give up no equity. Make sure you sign an enforceable contract, and get all or as much of your money as possible up front.

3.Franchisee Money

You buy in, and the big brother of the franchise capitalizes you. This is good, but you give up autonomy in doing so.

4.Licensee Money

License your great idea to those who will pay for the privilege of putting it in motion. This works especially well in foreign territories where you don't want to compete.

5.Supply-side Financing

Get your suppliers to give you credit. You might have to pay interest, but you won't have to give up equity. Ideally, the supplier will agree to ship to you on credit and will wait until you sell and collect on that shipment before you have to pay them. Suppliers may extend credit if they see you're having cash flow problems because of rapid growth.

6.Bank Money

With only one in five businesses surviving the first five years, banks will finance just about any asset or lend money for any logical business reason except, of course, for starting a business. You need an aggressive banker in an aggressive bank. This banker can do wonders with bank policies if he understands what you're trying to do. Finding the right banker, then, is more important than finding the right bank.

7.Money from Family and Friends

Entrepreneur, beware. This may seem to be an easy source of capital. But mixing the savings of friends and family with your start-up venture can create a volatile brew. Sometimes it leads not only to a loss of money, but a loss of good feeling. If you can, don't put money from family and friends at risk.

8.State Business Development Corporations (BDCs)

BDCs are chartered by states to make loans to small businesses. Yet they're quasi-governmental because they're funded by private individuals, financial institutions and corporations whose interests are served by making small business loans and increasing the availability for jobs. To find them, start with your library's research department under state agencies. Or simply consult the white pages of the state capital phone book. The state chamber of commerce also has a list of state programs and agencies. The key words here are: "development," "industrial" and "economic."

A BDC can:

- Make conventional loans.

- Enter a purchase/lease back agreement where it may buy or build and then lease back the plant to a small company.

-Make Small Business Administration loans.

-Provide venture capital.

9.The Small Business Administration (SBA)

This is a good place to start for information on SBA (http://www.sbaonline.sba.gov) loans. Some 95 percent of all businesses in the United States qualify. Most loans run parallel to the Guaranteed Student Loan program. Banks love SBA loans because they're guaranteed by the federal government should the borrowing company default. Direct loans from the SBA are much harder to get.

For minorities and those with disabilities: check out SBA programs at http://www.sbaonline.sba.gov/med.

10. Grants

A grant is the greatest form of direct financing because it usually does not have to be repaid. Not surprisingly, they're tough to get. The good news is that there are a slew of federal and state grants available. A good place to start is the Office of Innovation Research and Technology, (202) 653-6458.

11. Small Business Investment Companies (SBICs)

These are private traditional venture capital firms specifically licensed and partially financed by the SBA. The big difference between a traditional venture firm and an SBIC is that the SBIC is prohibited from taking control of your company.

12. Minority Enterprise Small Business Investment Companies (MESBICs)

A MESBIC is an SBIC that must invest in minority-owned businesses.

13. Venture Capital Funds

These funds get their money from large institutions such as pension funds and insurance companies. They are staffed by professional managers accountable to deep pockets. Far from being gamblers, traditional venture capital funds are houses of prudent risk. Be prepared before you plop a business plan in front of one of these firms. They finance companies by buying equity in it. But you surrender some control.

14. Corporate Joint Ventures

Save money by doing business under the shoulder of a large corporation. Use capital, credit, management and facilities of a major company to get what you need for your company. In return, it gets a share of the profit and/or equity.

15. R&D Limited Partnerships

These are usually limited partnerships where "angels" invest in the development stage. The R&D angels come in as partners and buy the rights to the results of the research. The partner usually sells the right when it becomes marketable.

Between start and finish, the investors use the losses to write off income tax liability. And when your company becomes profitable, you get income along with your R&D angels.

16. Facilities Management

You agree to manage a facility for another company -- or the government. The customer provides the capital, people and operation. In turn, the entrepreneur runs it. In effect, it's a shortcut. They've given you the means of capitalization. You don't have to raise money to pay for the means.

17. Financial Angels

They're out there, but they're hard to find. You won't find them in directories.

Directories

The above-cited sources of capital are not inclusive. Don't forget directories. There are several good ones that map financial resources. National Venture Capital Association in Arlington, Va., has one of the best, (703) 528-4370.

Make sure the directory you use is current. They're expensive, but most libraries carry them. And when you're starting a business, any coin you don't have to spend, is capital you can use. Or as one of America's first and best entrepreneurs once wrote: A penny saved is a penny earned.


Reader Comments

Please post your comments here. Comments are moderated, so they may not appear immediately after submitting. We will not post comments that we consider abusive or off-topic.

Please type the letters/numbers you see above

What is your e-mail address?

My e-mail address is:

Do you have a password?

Forgot your password? Click here
close

Trending

  • Dive into our Contract Award database

    In an exclusive for WT Insider members, we are collecting all of the contract awards we cover into a database that you can sort by contractor, agency, value and other parameters. You can also download it into a spreadsheet. Our databases track awards back to 2013. Read More

  • Navigating the trends and issues of 2016 Nick Wakeman

    In our latest WT Insider Report, we pull together our best advice, insights and reporting on the trends and issues that will shape the market in 2016 and beyond. Read More

contracts DB

Washington Technology Daily

Sign up for our newsletter.

I agree to this site's Privacy Policy.