Many entrepreneurs can relate to NH’s motto, “Live Free or Die,” because, they need to channel that spirit to be both self-reliant and innovative to fund their businesses so they can start, grow, and be successful.
Many banks and other funding sources, including angel and venture capital investors, consider a business to be a startup for the first two years and are unlikely to make loans to businesses until at least the third year. This means that other options for startup funding need to be identified and pieced together by the business owner.
So, where should a newbie business owner start?
Step 1. Develop a Business Plan: A business plan is essential to determine how much money is needed to start the business, how the funding is allocated or spent, whether the business owner wants to retain full ownership or not, and when and how much money an owner can take out of the business.
Step 2. Review Possible Sources of Funding: New business owners need to determine which options are the best for the business. If you are overwhelmed, the U.S. Small Business Administration’s Resource Partners (NH Small Business Development Center (SBDC), SCORE, NH Center for Women & Enterprise, and Veterans Business Outreach Center) are available to help a business owner with business planning, identifying funding sources, and many other business advising and education topics—all at no cost. Below are potential funding options to consider.
Bootstrapping
Otherwise known as self-funding, bootstrapping includes creative, inexpensive ways to get the business off the ground. Sometimes this will include leasing equipment or buying used equipment instead of new and relying on a DIY approach to the many tasks required to launch.
It is not uncommon for bootstrapping to include using personal credit cards. However, owners should avoid using a personal credit card to start a business at all costs. If used as a last resort, owners need to be careful and plan how to pay off balances, because interest rates can be extremely burdensome.
Common approaches to bootstrapping include avoiding rental space, avoiding unnecessary hires, and building a strong network to gain support and visibility. Other possible bootstrapping measures are:
- Work from home to save on office rent.
- Use personal or borrowed equipment.
- Trade or barter for services or products with other businesses.
- Use freelancers or contractors rather than hiring employees.
- Use free or low-cost software for business operations (such as Google Workspace, Slack, or Trello)
- Create social media marketing campaigns on free platforms.
- Create content (blogs, videos, podcasts) to attract and engage customers.
- Attend local business meetups and events to find potential partners and clients, and to grow your network.
- Participate in online forums and communities related to your industry to gain insights and visibility.
- Use low-cost options for website creation for a professional affordable
website.
The Three Fs
Funds from the Three F’s (affectionately referred to as friends, family, and fools). This investment comes from people who have faith that the entrepreneur can launch successfully and are willing to risk their funds to support someone they believe in. Be sure to have an agreement on paper as to whether funds are gifts or loans, and in the case of loans, include the expected payback plan so that relationships are not damaged.
Banks
Some banks have small lending programs for startups (up to $25,000) if they have been able to create a revenue stream. Explore what your bank and others offer. Also, some banks may suggest a home equity line of credit (HELOC) as it is faster and cheaper than a traditional business loan, and available to entrepreneurs who own a home.
Banks are a great source of funding because the owner does not have to give up a portion of their company (equity) and they often have the lowest interest rates. A typical small business startup loan of less than $25,000 will require the borrowers have a credit score of 640 or higher. Typically, the bank will ask for a concise business plan, two-year cash flow projections and a personal financial balance sheet. Businesses less than two years old, or that have yet to produce revenue, are considered riskier bets. Also, banks like to see that the business owner has invested their own money in the start-up, otherwise known as having “skin in the game.” Although a business loan may be processed in as little as two weeks, it often takes several weeks or more. Though it is good to know your options, keep in mind that submitting multiple applications may negatively impact your credit score.
SBA Micro Financing
If the borrower has a credit score that a bank finds unacceptable, SBA Micro Financing is available through Ascendus. These loans are typically for small businesses that have bootstrapped their operation for six months with some revenue. Credit Scores can be as low as 575 and a credit counseling program is available. Ascendus is selective about loans and often collaborates with the borrower to ensure they have a solid business plan and repayment plan in place. (ascendus.org)
KIVA
KIVA is a nonprofit organization that hosts a crowd-sourced, national lending platform. Loans up to $15,000 are made with no interest for three years. No collateral or credit score is needed, but potential borrowers need to work with the local KIVA office to be eligible. A KIVA representative and KIVA trustee are located at Regional Economic Development Councils (REDC) and NH SBDC, respectively. Prospective borrowers must share their back story along with a photo for the national KIVA platform. Individuals from all over the country can read the borrower’s story and make a small loan through PayPal directly to the borrower’s campaign. If the campaign is fully funded, then the borrower receives their loan. (kiva.org)
Economic Development Councils
Economic Development Councils (EDCs) in NH are agencies that have federal funds to lend to promote economic development. Borrowers must contact their local EDC to determine if they are a good fit for funds.
The NH Community Loan Fund
The NH Community Loan Fund (CLF) is funded by individuals that want to invest their money locally. The CLF then lends it to small businesses in the area who are on a path to growth. CLF has a special interest in food businesses, but they will lend to any small business that meets their qualifications. Recently, they implemented a grant program that gives $5,000 awards to qualifying small businesses. (communityloanfund.org)
Capital Access Program
The Capital Access Program is a loan guarantee program that NH Business Finance Authority (BFA) offers for NH startups. The business must put in a minimum cash equity of 20% of the total project to be eligible. (nhbfa.com/loans/cap/)
Factoring and Lines of Credit
Startups can use factoring and lines of credit to increase cash flow. Factoring, or accounts receivable financing, is when a business sells its accounts receivable to a third party at a discount and the third party pays the owner upfront and then collects on the invoices.
Lines of credit from financial institutions give you access to funds for operations. Both options provide greater access to capital, but be sure to understand the interest rate and terms of repayment.
Online Lenders
Online lenders do sometimes offer legitimate products, but owners must be cautious. Some online lenders are predatory, charging exorbitant interest rates that are automatically deducted from the business operating account. Confirm that the online lender is legitimate by checking with the Better Business Bureau and stay away from predatory lenders.
Grants and Competitions
Grants and business plan competitions can be wonderful funding options. However, they also take a great deal of preparation and are restrictive, competitive, and few and far between.
Launching
- It is often an anxious and exciting time for entrepreneurs as they anticipate launching and operating their business. Here are some things to remember:
- First things first. Develop your business plan.
- Consider free or less expensive ways to accomplish the same goal (used vs. new equipment, for example).
- Check the legitimacy of every possible lender and know the terms you are agreeing to.
- Leases and contracts should not be entered into until the business plan is written and the funding is truly secured.
- An attorney should be consulted prior to signing any legal documents including leases, contracts, offers for employment, or any agreement that will be legally binding for the new business owner.
Use ingenuity and persistence to identify only the essential components needed to get the business off the ground. Look at all your options and maybe pair minimizing expenses with owner’s savings, some help from family and friends, and choosing one or two of the other options to solve the financial puzzle of getting a business up and running.
John Clemente is a business advisor with the NH Small Business Development Center (NH SBDC). Andrea O’Brien is director of sustainability and a business advisor with NH SBDC. The NH SBDC has professional business advisors who deliver individualized, confidential advising at no charge to NH businesses. For more information and for assistance, visit nhsbdc.org.