By Jim Hopkins
January 10 - Hat in hand, hundreds of thousands of entrepreneurs hit the streets each year in search of financing. In Wisconsin, an electrologist needed $12,000 to open an office. Further west in Utah, a medical software dot-com scrambled for $2 million to meet a payroll.
Sometimes the search comes full circle, as when entrepreneurs use money from personal savings or credit cards to launch a start-up or expand an existing company. ''Angel investors,'' family and friends in Wall Street lingo, are a popular choice, too.
Banks are another source, although they're more likely to work with established companies. And then there are the venture capitalists -- the men and women who've invested billions in ideas that have turned tiny start-ups into today's America Onlines and Amazon.coms.
How do you negotiate this money maze? Here's a map to guide the way.
Step 1: How much do you need?
Bob Russell, counselor with the Service Corps of Retired Executives (SCORE) in Helena, Mont., first looks at the entrepreneur's business plan to see how much money the company needs -- and can handle.
He asks owners how much they can afford to lose, and how they'll deal with a cataclysmic loss. In other words, Russell says, ''What's your back door?'' From there, he and his clients settle on a hoped-for amount.
Step 2: Crediting the piggy bank.
Dawn Abel knew how much she needed to get her at-home child-care center off the ground 12 years ago when she quit selling Tupperware. Abel, 53, dipped into savings and relied on a credit card, then paid for other improvements along the way with profit from her business, Abel's Child Care Plus in Brussels, Wisconsin.
That's a common approach for new ventures, experts say. About 28% of small companies use business credit cards, and 39% use personal cards to finance business expenses, according to a Small Business Administration report this year.
While using savings costs you only the earnings lost on the money, credit cards can be very expensive if you carry a balance and your interest rate is high. Still, it's one of the easiest and quickest ways to finance debt, says SCORE counselor Dave Milling of Media, Pennsylvania.
As always, it pays to shop around. Annual percentage rates for business credit cards with a balance carried month-to-month range from about 10% to nearly 20%, according to a recent Bankrate.com survey.
Step 3: Are those wings on your shoulders?
Before hitting up a bank, Milling advises his clients to treat friends and family as possible lenders or investors first; too many entrepreneurs think solely in terms of getting financing from institutions. ''I always pursue the realistic ways of getting money,'' he says.
You'll still want to treat the transaction in a businesslike fashion, setting everything -- interest rate and other terms if it's a loan -- on paper. That's equally true if the money offered is given by an ''angel investor'' in return for an ownership stake in the company.
Step 4: Banking on a loan.
When entrepreneurs want to borrow, they overwhelmingly head to banks, which supply 83% of all small-business loans, says William Dunkelberg, chief economist for the National Federation of Independent Business, a trade group.
To judge an application, bankers want to see how the owner paid past bills and whether the company's sales and profits can support a loan, says Mike James, who's in charge of small-business lending at banking behemoth Wells Fargo in San Francisco.
That information helps predict whether a loan will be paid off and explains why banks shy away from new ventures. ''If you're a start-up, it's almost impossible to make a prediction,'' James says.
Wells' average small-business loan is $30,000. On occasion, the bank will go down to $10,000.
Banks aren't keen on making very small loans, because fixed overhead costs don't make them profitable. That's what Jeannie Bush of La Crosse, Wis., found when she decided to open an electrology (hair-removal) business last year.
Bush, 44, needed $12,000 to pay for office furniture, equipment, printing and other expenses. She visited seven banks and credit unions before she found one willing to make a small loan.
In the end, she opted for a home-equity credit line, although it meant doing something her husband hoped to avoid: putting personal property at risk. Now in her second year, Bush says business is almost 30% ahead of her plan.
Her advice to would-be borrowers: Talk to as many lenders as possible. ''I learned so much from each of those bankers, even though they laughed at the amount I needed,'' she says.
Step 5: Hello, Uncle Sam!
For entrepreneurs who don't make a bank's initial cut, there's the SBA's government-backed loans under what's called the ''7(a)'' program. The federal agency guarantees 75% to 80% of the amount, and the lender -- the bank that actually makes the loan -- is liable for the rest. The maximum guarantee is $750,000.
Because the agency is willing to work with longer-term loans, as much as 25 years, monthly payments are lower, allowing more businesses to qualify. But don't expect a discount; interest is at the market rate.
Step 6: Nothing ventured, nothing gained.
Venture capitalists -- VCs for short -- are an alternative to borrowing money. These are private investors, often working in partnerships, who invest millions in start-ups in return for an ownership stake.
VCs usually receive a seat on the board of directors and sometimes take an active role. Their goal is to make a big profit quickly when the company goes public -- sells shares to the general public in what's called an initial public offering, or IPO.
That was the route Amy Lewis took when the company she founded in Salt Lake City, PerfectPractice.MD, needed to expand quickly last year to beat the competition in the medical office software field.
Lewis, 29, started the company in 1996 with $23,000 from family investors. Last year, she hired several dozen programmers to further develop software, even though PerfectPractice didn't have cash on hand to pay them for very long. That's when she went looking for a VC after writing a business plan. Her plan wound up at Dominion Ventures of Walnut Creek, Calif., which pledged $2 million. A second VC round raised an additional $5 million in September.
Lewis believes she might have had to give up a smaller chunk of her company to the VCs had she acted earlier. ''You're not in much of a negotiating point when you put your company on the line,'' she says.
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