Asheesh Advani: Startup Financing
If you're young and in love with the idea of starting a business, these tips will help you in your search for startup financing.
All entrepreneurs have to overcome hurdles when it comes to finding capital for their new business. When customers are few, earnings are scarce and business assets are immaterial, it takes energy and creativity to locate the necessary funds. And these challenges are heightened for entrepreneurs in their 20s, who are often involved with their first formal business venture or just out of school with limited work experience.
In previous columns, I've advised entrepreneurs how to get bank loans guaranteed by the SBA, how to make a "kitchen table pitch" to relatives and friends, and how to approach angel investors. Much of this advice applies equally well to young entrepreneurs; however, there are typically a few extra hurdles that make these sources of financing more difficult to attain for the younger generation of business owners. Some of this difficulty is simply perception, but some of it is a reality.
When it comes to bank loans, you're required to have a good credit history, submit a personal financial statement, and sometimes make an equity investment in your business--all of which may not be easy for most young entrepreneurs to accomplish. For example, a few stains on your credit report from late payments in college could hurt your loan application. And since most twenty-somethings don't own a home or have much equity built up, relying on home equity lines of credit is also not an option.
So the fallback position for many young entrepreneurs is to get bank financing in the form of credit card debt. As I've written in previous columns, this is a dangerous path to go down if your business is in its startup stage and your earnings are unpredictable. Instead, I would recommend getting a debit card rather than a credit card for the first few months of business startup until you're confident that you can forecast earnings and until you develop the habit of making your payments on time. I'd also caution young entrepreneurs from using more than $5,000 per month on their debit or credit card. Anything over that will put you in a different risk category with most credit card companies and, if you end up in delinquency, could really impact your ability to get future financing.
Financing from relatives and friends is also a bit more difficult to obtain for twenty-somethings rather than thirty- or forty-somethings with more extensive networks. Typically, I hear young entrepreneurs tell me that their "family and friend" circle consists of their parents and a handful of close friends--all of whom are either too poor or too uninterested in funding their business venture.
My advice for these entrepreneurs? Open your mind and expand your circle; think about all the different people you know, including friends of friends, who could help fund your business. Many of the country's most well known businesses, including Atlantic Records, Walmart and Subway, were funded after the entrepreneur expanded his financing circle beyond his parents. The founder of Atlantic Records, for instance, landed a loan from his family dentist!
Private investors, or so-called "business angels", are more likely to invest large sums of money with an experienced business owner than with a young entrepreneur. However, there are some business angels who prefer to spread their wealth in smaller investment amounts to young entrepreneurs with promising ideas. So raising $25,000 from business angels is a very achievable goal for most twenty-somethings with a good business concept and solid business plan (though raising $100,000 would be considerably more difficult).
When raising money from high-net-worth investors, young entrepreneurs should aim to pull together small rounds of funding in succession (for instance, $100,000 to $500,000 per round) rather than trying to complete their total capital raise in one fell swoop. Fair warning: It takes longer to close smaller investors than larger investors mainly because the investment isn't a very high priority for the investor (even though it might be your highest priority).
One well-regarded organization that teaches younger entrepreneurs about small-business financing is the National Foundation for Teaching Entrepreneurship. Their website has some good books on the topic of youth and entrepreneurship, many of which are written by their founder, Steve Mariotti, who is a guru in this field. The Entrepreneurs' Organization, formerly the Young Entrepreneurs Organization, is a great networking resource with more than 6,000 members and 120-plus chapters worldwide. Finally, I'd also recommend spending some time on the SCORE website to get financing advice from more experienced entrepreneurs who've lived through the ups and downs of life as a young entrepreneur.
Asheesh Advani is Entrepreneur.com's "Startup Financing" columnist and president of CircleLending, a loan administration company that facilitates loans among friends, relatives and business associates. Get a copy of Circle Lending's freeSmall Business Financing Guidefor startups.
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