Published by Florida Times-Union on June 29, 2003.
You have a dream.
Whether it's been bouncing around in your head for years or it woke you up out of a sound sleep a week from last Tuesday, the dream has now taken over your life: You want to start or expand a business.
OK, we're assuming you've gone through all the preliminary stages -- figuring out what you want to do, giving some thought to the viability of the enterprise, maybe even mocking up a business plan. The big looming issue, of course, is how to get the seed money you need to get your venture off the ground.
If you're looking to start your own business, the first seed money you have to fling into the field is your own: Raid your bank account, bust open the piggy bank and search behind the couch cushion. We're talking about your business, after all, and it needs to have your money in it.
"Most businesses get started with some combination of equity and debt," said Cathy Hagan, area director of the Small Business Development Center at the University of North Florida. "A lot of people don't understand that, that some combination of their own money has to be on the line."
Remember to keep enough in savings to keep body and soul together during the start-up phase. Also, no matter how optimistic you are, you probably want to keep some investments stashed away for retirement.
Other places besides the checking account where you might find personal cash, according to authors Terri Lonier and Lisa Aldisert:
* Leverage whatever you have left in the stock market. (We figure there's somebody out there with money still floating around on Wall Street.) By setting up a margin account, you can borrow against your securities, pledging them as collateral. This can be risky, though, especially if your stocks, bonds or mutual funds are of the volatile sort.
* Plunder your retirement account. Keep in mind that you'll be facing hefty penalties for early withdrawal and will have to pay income tax on the money -- but if your business takes off, isn't it worth it?
* Borrow against life insurance. Assuming, of course, that you have a whole life policy. You'll have to pay the interest on the loan to keep the policy in place, and the loan will be deducted from the payout, so be extra careful crossing the street.
Of course, the equity side of things doesn't have to technically be your own money. If you want to make sure you can still keep food on the table during the first few months of operation, you might have to tap into the bank accounts of family members and friends.
"When I was in the concept stage, even with my experience and excellent credit, banks just didn't want to look at me," said Reasa Pabst, looking back almost five years to when she started Surfside Printing and Blueprint, a Jacksonville printer. "My relatives, knowing that I'm a hard worker and that a lot of what I do pans out, were willing to get involved."
In borrowing the money, Pabst followed the suggestion given by many financial advisers: Make the transaction as official as possible. In Pabst's case, she set up a contract with her relative, laying out when she would pay him back and how much interest she would pay. To make sure he got the money back, she included him in her will and took out life insurance that would cover the loan.
"I was very aboveboard," she said. "I tried to treat it very seriously. A lot of people take advantage of family members and it can get pretty ugly."
The other rule of thumb, says Florida Small Business magazine, is asking people who can spare the cash. Remember the widows and orphans huddled on the streets in old movies, destitute after some scam artist took their last dime? Now think about if it was your Aunt Martha shivering in the cold and it was your fault.
"Treat your new investors with the same respect you would provide any stranger who lends you money," Lonier and Aldisert advise. "Document any investment to protect all interested parties."
Coming up with your own funding can also mean borrowing from yourself, leveraging your personal credit to get money for the business.
When Robin Rukab-Azzam started Dollar Land in 2001, for instance, she borrowed money against certificates of deposit she had in her bank. The interest rate is 2 percent higher than whatever the CDs earn, rising and falling as they do.
She could have also waited and cashed out the certificates, but that didn't fit her timeframe for getting the business started. "I didn't want to waste time doing all of that," she said. "I wanted to hurry and get the store open."
Credit cards are another way of using your personal credit for the business, although relying on plastic seems to work out more apocryphal than in real life. The upside: Ready access to cash. The downside: High interest rates, and the chance to destroy your personal credit if your business fails.
For smaller amounts, though, they may be a good way to go. "Small loans are a hassle for you and for the bank," said Hagan, with the Small Business Development Center. "[Credit cards] are a viable option as long as they're managed well. You have to convince whoever is loaning you the money, yourself or somewhere else, that you can pay it back."
And sometimes credit cards can be enough to get the business rolling, at least long enough for a bank to give you a more serious look. "It's amazing the number of people who use credit cards to finance small businesses," said Greg Bossow, a CenterBank vice president who handles a lot of Small Business Administration loans. "We have several companies where the business started on credit card and then the people refinanced."
OK, so what if it's still not enough? You've tossed in everything you can, hit up everyone you know, maxed out the credit cards and you're still coming up short. That's where -- hopefully and in theory, at least -- your friendly neighborhood banker comes into play.
One option: Home equity loans, a source of funding rather close to borrowing from yourself. The advantage: They're relatively easy to get and you'll have a credit line you can draw on as needed . The downside: You chance losing both your business and your house.
According to Ronald Docie, who helps inventors commercialize their products, going for what is basically a second mortgage should be a cause for pause. "It should be looked at as if you were going to Las Vegas," he said. "You would not want to risk any more time and money than you are willing to lose."
Hagan, with the Small Business Development Center, agreed. "If you look at home equity lines as an alternative," she said, "it should be when it's questionable if the bank is going to loan you the money."
What you'd probably actually like is a commercial loan -- and, in certain circumstances, you might actually be able to get one. (If you, say, have a friend willing to put up cash as collateral, or if you have a large amount in the stock market that you can pledge the bank.) Usually, though, without a business already up and running, it'll be hard to convince a banker you're a good risk.
"Generally, commercial loans are made to established companies," said Bonnie Dennis, a vice president with First Guaranty. "We're not looking at projects, we're looking at historical figures."
Interest rates are generally more favorable with straight commercial loans, Dennis said, and you don't have to deal with SBA fees and paperwork. "That's a more favorable way for people if they meet the requirements, but most don't," the vice president said. "There's usually so risk intensive that SBA loans are the way we go."
Loans guaranteed by the U.S. Small Business Administration are designed for just those cases, to give banks an incentive to hand over a check to riskier startups. The government agency doesn't hand over the money itself: You still have to convince a lender that her money will be safe in your hands; having the government back you up, however, might make it easier.
That doesn't mean getting SBA loans is a snap. "SBA is in business of making good loans, too," said Hagan. "Nobody is going to give you money you can't pay back." (The box above tells what the SBA requires.)
When Eric and Donna Fritsche set up their restaurant, Pastiche, they went the SBA route. "Buying a restaurant is considered very high risk," Eric Fritsche said. "We had to prepare ourselves to have a fair amount of cash to put down. We checked out conventional options, but there weren't any because of the risk involved."
Many restaurants get other investors involved in the financial side (that's another article), but the Fritsches wanted to retain control of their business.
In the end, even with the SBA guarantee, they had to pledge their restaurant property as collateral, and pay a quarter of the purchase price for the business they bought.
"When you go to bank and say you want to start a restaurant, the rules are different than if you want to start a tire shop or something," Fritsche said. "I would absolutely advise people that if they couldn't finance it themselves, to go with the SBA route."
Even if you think you can self-finance, a loan might still be a good option, said Greg Bossow, the CenterBank vice president who handled the Fritsches' loan. "You might have enough money to get the doors open, but businesses rarely generate sufficient cash in the first few months the way you envision," he said. "Then you use all your personal resources and aren't in a position to borrow more.
"You can always pay the loan back early, but people sometimes box themselves into a corner."
The key part of the loan process, Bossow said, is the interview he holds with anyone coming in looking for seed money. Part of the process is going through a checklist from the SBA so clients know what paperwork they need. Far more importantly, though, is a conversation about what the client's goals are.
"It's always important to ask what they want the proceeds for," he said. "We help a lot of local people who want to go into business and we want to keep them from making a mistake."
And that's an approach to finding money that Hagan, the area director for the Small Business Development Center, wishes more people embraced. The main advice she gives clients, she said, is to think about what they're doing.
"Any way you go, it's not a decision to take lightly," she said. "I think people do it a little lighter than they should. It's a risk, a calculated risk."