How to Fund a New Business

Installment 3 of The Plunge

Start-up businesses are as varied as the people behind them (“founders”), but their funding follows a pattern. Business funding comes in two flavors: equity and debt (but like soft-serve ice cream you can get a swirl that combines elements of both). Equity is money invested in your company and debt is money borrowed by your company. Many founders, however, will also rely on personal credit to borrow (from credit cards, second mortgages, etc.) to put money into their new companies.

Before you put a penny of your money in the company (and certainly before you take other people’s money), invest your time, intellect and passion in writing a business plan. Do not buy a business plan. If there’s a study comparing success and failure in businesses with individually-developed versus canned plans, I would love to hear about it. Until I’ve seen that study, I have to go with my gut, and my gut tells me a plan you write is more likely to succeed because it will be more exciting, accurate and believable, and not just to your potential investors, but to you too.

Make sure your business plan is more accurate than this.

Fortunately, plenty of help is available for folks writing business plans. Here is my post with links to business resources in Colorado, including business plan help. Your plan must contain a budget covering the early stages of the business; how else will you know how much money you need to raise? This is not the time to skimp. Start-ups don’t fail because they are over-funded, but the opposite constantly happens. Some telling advice from the trenches: double your best estimate and then double it again.

Equity

A new business does not get off the ground without invested funds. First dollars come from the founders, from funds saved or borrowed. The depth of their pockets and the ambitions of the business plan determine when additional investors are needed, if ever. After founders, equity typically comes from family and friends, then from a wider circle of friends-of-friends in “private” offerings, followed by professional investors—angel investors and venture capitalists, and finally, from a public offering. Start-up investments from beyond your inner circle are going to be hard to find in today’s market.

Good for lawyers, bad for you, each stage of equity is loaded with legal issues. The private offering exemptions that will keep you out of the public company morass are complex. Even if you fit an exemption, every investor still presents twin risks of investment fraud claims and plain-vanilla business disputes with your “partners.” So, if you are going to skimp on legal fees, do it in another area of your business. Always talk to a lawyer before adding owners to your human-owned business.

While all companies require investors, most will rely on lenders, too. Founders often divide their support into investments and loans for income tax planning reasons. This step can backfire and create tax and personal liability problems if not done properly, so check with your advisors first. Lenders other than founders are your next funding source.

Borrowing

The trouble with borrowing by start-ups used to be finding terms acceptable to the founders. In the current environment, many start-ups and even established companies can’t find loans under any terms. Start-ups that do find loans often get them from lenders other than banks (banks want collateral that start-ups and their founders often lack) and end up paying very high interest rates. Interest rates reflect the lender’s risk of getting repaid. You accept your start-up’s risk because it’s a dream you believe in. The lender sees a potential nightmare and wants to be paid accordingly.

Start hunting for a business loan where you conduct your personal banking. Established relationships and trust may not seem as valuable as they once were, but when order returns to the credit markets I think they will be more important than ever. If you don’t find what you want or can afford there, expand your search to lenders specializing in loans to emerging businesses. (Some non-bank lenders in Colorado are listed in an earlier post.)

Small loans based on a compelling business plan (and a personal guarantee) can be found, but larger or longer-term loans typically require results not projections. With faith in your business plan, founder’s capital invested, and maybe a small loan, you might have to launch the business to prove your dream.

If the current crisis proved anything, it proved that attention to details counts. If you are going to borrow for your new business, you will make sure you have thoroughly read and understand the loan documents before you sign them, won’t you? A lawyer can help here, too; not to negotiate, but to make sure you understand what you are signing and to make sure the documents reflect your deal.

The Post before the Money Post

My planned how-to-finance-your-new-business post has been hard to write. My first attempt ran into so much negative data on the state of small business financing that how-to became op-ed. My opinion? Small businesses can’t access capital and deserve much more help than the meager 0.3% of the stimulus they received.

The news since has been no better. So if you are bitter from the irony of Wall Street bonuses and small business money woes simultaneously growing to record levels, then maybe you can laugh at the black humor of Kiva.org, the microlender known for funding entrepreneurs in developing countries, loaning money to U.S. small businesses.

Fortunately, troubles in the small business sector seem to be getting greater attention. I hope soon there are positive developments to highlight. The start-up financing post drops this weekend, but the troubled credit markets make it more hypothetical and vague than your usual lawyer blog post. When things settle down, I hope most of what I say is still true; otherwise I will be looking for a new career as human-owned businesses will be an endangered species.

To give you some concrete help, I updated my previous listing of funding resources to include, along with the non-profits, some of the for-profits that might not be as readily apparent as commercial banks.

I’m Working on Columbus Day, but is Columbus Day Working for Us?

On this day in 1492, the Niña, the Pinta, and the Santa Maria landed at the confluence of the South Platte River and Cherry Creek. No? The intensity of positive and negative feelings in Colorado about Columbus Day would make you think that the seminal event had occurred here. Well, in a way, it did.

The New World was “discovered” 1900 miles to our southeast, but the legal holiday commemorating it happened here. Colorado was the first state to make Columbus Day a legal holiday in 1907; the feds didn’t follow suit until 1971. Denver has the oldest and largest Columbus Day parade in the country. Even if Saturday’s weather chilled this year’s event, Denver’s parade has long been a magnet for pride, protest, and even dirty tricks, like this year’s hoax email that fooled some news outlets to report the parade cancelled for funding issues.

I started writing about “legal” holidays earlier this year. So far I’ve covered Memorial Day, Independence Day and Labor Day. Columbus Day would have been easy to miss as virtually no private employers, and increasingly fewer state and local governments, recognize it. The Columbus Day Monday holiday usually doesn’t register with me until I have to figure out why there is no mail.

So if the legal holiday is a throw- away that risks going away, Denver’s Saturday parade pits culture against culture because of its Columbus focus. Columbus’s voyage was a business venture that took advantage of increasing competition and imperialistic attitudes among European nations. If this Italian had not opened the door to Europe’s colonization of the Americas, another European would have. Exploitation, slavery and disease would have followed just the same. We can’t change how cultures collided 500 years ago, but we don’t have to accept continuing collisions.

Americans of Italian descent should be able to celebrate their heritage. St. Patrick’s Day, Cinco de Mayo, and Juneteenth are popular in Denver with folks outside of the focal ethnic group joining in, not protesting, the celebrations; and they don’t need a legal holiday to do it. American Indians can and should honor their history outside of a European frame of reference.

Changing the paradigm requires the Italian community to rename its celebration and for our state (and federal for that matter) government to decide if we need and can continue to afford a mid-October legal holiday. Tradition and pride are obstacles to changing the name, but Italian culture is among the richest in the world, surely another rallying theme can be found.

If a legal holiday is kept, it too should be re-conceived as a celebration that honors the peoples, not the conquest, of the Americas. An Americas day, plural not possessive, can honor the original peoples of the hemisphere as it reminds us, its current peoples, that we share more than a land mass, we share a future.

Casimiro Barela is an iconic figure in Colorado history. Central in the creation of the State of Colorado, he also championed that first Columbus Day holiday. In the early twentieth century, Barela, a Hispanic, saw Columbus as unifying force for Coloradans of Italian, Portuguese and Spanish heritage. Now in the early twenty-first century, can Colorado see fit to celebrate both our disparate roots and our collective future?

Taking a Stand for Small Business

I started getting worked-up as I researched the third installment of The Plunge--a post about finding money for a start-up or emerging company. I was collecting data about Colorado small business and the lack of financing available to new and small companies in this state. That data substantiated and amplified stories I hear almost daily from clients and prospective clients about their inability to borrow money. Most concering are the stories, not from new companies, but from established, profitable companies.  These small businesses are ready to take on opportunities, hire folks, and drive this economy out of the recession’s muck, but they can’t get anyone to give them a push.

That is how a planned post on how small businesses find money became an op-ed piece on why it is critical that they do. Then I decided that message deserved a bigger stage than this blog and I became a blogger for the Huffington Post. The following article was first posted there under the title Colorado’s Recovery Requires More Lending to Small Businesses. Now to get back on track and finish that finding money post for the The Plunge.

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Look to the east from Lookout Mountain and Colorado is flat. Turn the other way and Colorado soars. Small businesses in Colorado are eager to recover from the recession; they are looking west, but the trails are headed the wrong way. President Obama is correct that health insurance costs are a challenge in small businesses (mine included), but we don't need to resolve a complex national debate on health care to help small companies. There is a quick and relatively simple fix available. Easier access to cash is what will enable small and emerging companies to start hiring and our Colorado economy to start climbing.

Colorado is a land of small business. Over 98% of Colorado companies fit the Small Business Administration definition of small business, under 500 employees, and the vast majority of those are truly small, under 20 employees. Of course, the large employers clustered in the Fort-Collins-Boulder-Denver-almost-to-Colorado-Springs string city of the Front Range employ numbers disproportionate to their 2% status, but still it is small businesses that sustain our economy and feed our sense of Western individualism.

The SBA's Office of Advocacy reports that small businesses historically account for 64% of net new employment nationally. While that’s a noteworthy figure, in Colorado the “small” end of the business sector created a stunning 99.7% of the net new jobs in our state in 2004-2005. The Denver and Colorado Springs metropolitan areas together lost almost 70,000 jobs in the last 12 months; when similar data for the whole state becomes available it won’t be any brighter. How will Colorado replace those jobs? Small business.

Last week’s news of increasing unemployment rates -- chronic unemployment at 17% with the average job hunt at a record 26.2 weeks -- is disappointing but not surprising to us who work with small business. Big business economists report the problem is that firms aren’t yet willing to hire. For many small businesses “willing” is not the problem. Money is. Small companies typically lead us out of recessions because their owners are quick to recognize and act on opportunities. This time, however, small firms have depleted their cash and can’t borrow what’s needed to follow-up on emerging prospects.

The country’s primary support for small business comes in the form of government-guaranteed loans. This critical SBA program, however, made 36% fewer loans in its fiscal year ended Sept. 30 than in FY2008. Though the guarantee makes these low-risk loans, Main Street cannot convince Wall Street that small business is creditworthy. Even the nation’s emergency loan program for small business, America’s Recovery Capital (ARC), has been slow to take hold in the face of bank indifference and government red-tape.

If the lack of new jobs is hindering our recovery, then why don’t we do more to stimulate the proven engine of job creation? The resources dedicated to struggling small businesses are grossly low given the vital importance of this sector. Chuck Blakeman of Denver’s TeamNimbusWest did the math for us:

The stimulus was $787 billion dollars. This ARC program is $255 million, or three-tenths of one percent of the entire bailout. Small business is 50% of the gross domestic product but gets three-tenths of the bailout? The big businesses were given hundreds of billions of dollars in just a few weeks when not a single one of them would have been able to qualify for the $35,000 ARC loan.

I regularly meet Coloradans who own or want to own a business. Those preparing to start a new company are stymied. Sure start-ups have always been cash-challenged, but the current environment is brutal. More alarming still are the established companies with demonstrated profitability that can’t get a loan. Businesses that are ready to hire new employees are as “shovel-ready” as any big transportation and infrastructure project. We know that small businesses create jobs and do so quickly. An emphasis by politicians and banks on the nation’s small businesses that is commensurate with their large importance will create jobs in every state. Then small business-blessed Colorado, from Holly climbing to Leadville, will soar again.