Adequate financing is crucial to the success of any business in both the start-up phase and in later stages of development.The following section lists types of financing, ranging from the most common and informal sources to the most formal and complex sources, which tend to be used only rarely by firms.
INFORMAL FINANCING SOURCES
Personal Sources--Personal assets and investments by family and friends provide a major share of financing--an average of one-third of all funds--for business start-ups. Personal sources of funds may include savings, sales of assets, personal loans, second mortgages, and credit card borrowings, to name a few. As your own investor, you should analyze the risk and return of the venture when considering these options, just as other lenders and investors in your business will do. Family, friends, and colleagues can also be sources of financing. Remember that persons with financial interest in your business may want to have a voice in how it is managed.
Seller Financing-- A common way of obtaining financing when purchasing an existing business is to ask the seller to finance all or pat of the purchase price. The interest rate paid may be lower than other types of financing. It is usually well worth your while to pursue this option if it is available.
Other Financing Sources-- Other sources of financing can include trade credit from inventory suppliers, equipment leasing, and customer advances/prepayments. Trade credit is especially easy to use, but the effective interest rate can be high, given that most suppliers offer substantial discounts for prompt payment. Equipment leasing lowers debt burdens and may be less expensive than ownership, though tax consequences should be considered. Customer advances can be pursued when completing projects that proceed in various "stages".
DEBT FINANCING
Commercial Banks, Savings and Loans, and Finance Companies--
Although informal sources account for a good share of business start-up financing, formal business loans also play a part. Banks are the primary providers of these formal loans for business starts. Finance companies and savings and loans provide much of the rest. These institutions will require collateral, personal and otherwise. Banks will be concerned with your character and reputation, the cash flow of the business, the amount of collateral available, and your willingness as the borrower to risk money of your own.
How do you determine from which institution to seek financing? The best resources to assist you, based on your needs and their knowledge of the industry, are your attorney and your accountant.
When you meet with a lender, you should have the following in hand: a resume; a listing of your personal assets; credit references for all partners in your firm; and your business plan. If your business is already established, you should provide documents stating the history of the company; tax returns of the last three years; a cash flow analysis; a summary of proposed business changes; a description of the business assets; a listing of major equipment; and the replacement cost and market value of the assets. Much of the financial information should be prepared in consultation with an accountant, and should appear in the form of a balance sheet and income statement.
Remember these important points: the request should be for as much money as the project will require and support; interest rates are negotiable; and you should present your request to more than one bank. Also, you may stand a better chance of receiving a loan if you go to a bank in your own community.
The WISCONSIN HOUSING and ECONOMIC DEVELOPMENT AUTHORITY (WHEADA) provides funding programs for small expanding or start up businesses. Contact WHEADA at 1-800/444-6873.
The LINKED DEPOSIT LOAN (LiDL) offers women and minority owned and operated businesses a two-year interest rate subsidy on the portion of a new bank loan of $10,000 to $99,000 that covers land, building, and equipment.
The SMALL BUSINESS GUARANTEE can be used to expenses of land, buildings, equipment, and inventory associate with the expansion or acquisition of a small business (50 or less full-time employees). The guarantee is limited to 80% or $200,000. This program can finance a mixed-use project if the business occupies at least half of the building. This program can also be used to start a day care business including cooperative ownership or nonprofit status.
The AGRIBUSINESS GUARANTEE provides loan guarantees for projects developing products, markets, and methods of processing or marketing for a Wisconsin-grown commodity. The maximum guarantee of 80% on loans up to $1750,000 can be used for equipment, land, buildings, working capital, inventory, and marketing expenses.
The WISCONSIN WOMEN'S BUSINESS INITIATIVE CORPORATION (WWBIC) offers micro loans to businesses owned by women, minorities, and low-income individuals. WWBIC also offers training and technical assistance. For information, contact WWBIC at 414/263-5450.
The U.S. SMALL BUSINESS ADMINISTRATION provides loan guarantees that are used in conjunction with bank financing to improve loan terms. The SBA can provide information on authorized micro-lenders that make loans of $25,000 or less, and certified development corporations that make fixed rate, long-term loans for the acquisition of business assets. The SBA offers a simplified application loan guarantee program called Low Doc to small businesses. Contact the Madison office at 608/264-5261, or the Milwaukee office at 414/297-3941.
The SBA 502-504 LOANS program provides fixed-rate long-term financing with lower-than-market rates, and low down payments for business, land, buildings, or equipment. Financing is mainly available for established firms, but some start-up or early-stage situations may be financed. Usually, projects below $100,000 will not be financed under the program. These loans are available from designated development corporations in your area.
GREAT LAKES ASSET CORPORATION serves Brown, Calumet, Kewaunee, Manitowoc, Marinette, Oconto, and Shawano counties.
1/800-281-6444
U.S.D.A. offers Business and Industrial Loans to firms located in an area outside the boundary of a city of 50,000 or more and immediate adjacent urbanized areas. There is an up to 90 percent loan guarantee offered. Full collateral is usually required. Priority is given to projects in communities of 25,000 or less. You must apply to a participating lender, who applies to U.S.D.A. for the guarantee. For more information, contact:
U.S.D.A. Rural Development
4949 Kirschling Ct.
Stevens Point, WI 54481
715/345-7600
The Calumet County Revolving Loan Fund, is available to all businesses located in Calumet County. The website link is http://wwwcalumetbusiness.com/loan_fund.iml
DEPARTMENT OF COMMERCE PROGRAMS
Through the BUSINESS DEVELOPMENT INITIATIVE (BDI), entrepreneurs with disabilities, organizations, and businesses interested in hiring persons with disabilities can receive grants and technical assistance. Call 414/220-5360.
The BDI MICRO LOAN PROGRAM helps entrepreneurs with permanent disabilities and rehabilitation agencies finance business start-ups or expansions. Call 414/220-5360.
The BDI SELF-EMPLOYMENT PROGRAM helps severely disabled Division of Vocational Rehabilitation (DVR) clients start micro-businesses. Call 414/220-5360.
The COMMERCE/DVR JOB CREATION PROGRAM is designed to increase employment opportunities for DVR clients by providing equipment grants, technical assistance grants, and customized assistance to companies that will hire persons with disabilities as part of a business expansion. Call 414/220-5360.
The MINORITY BUSINESS DEVELOPMENT FUND offers low-interest loans for start-up, expansion or acquisition projects. To qualify for the fund, a business must be 51 percent controlled, owned, and actively managed by minority-group members, and the project must remain or increase employment. Call 608/297-9550.
The MINORITY BUSINESS EARLY PLANNING GRANT PROGRAM provides seed capital to minority entrepreneurs for feasibility studies, business plans, and marketing plans. Contact 608/297-9550.
The DEVELOPMENT ZONE PROGRAM is a tax-benefit initiative designed to encourage private investment and job creation in economically-distressed areas. The project offers tax credits for such activities as hiring disadvantaged workers and undertaking environmental remediation. Tax credits can be taken only on income generated by business activity in the zone. Call 608/267-2045.
The WISCONSIN TRADE PROJECT PROGRAM can help small export-ready firms participate in international trade shows. The business covers its own travel and lodging expenses. COMMERCE can then provide up to $5,000 in reimbursements to a business for costs associated with attending a trade show, such as booth rental or product brochure translation. Call 608/266-0393 or 1-800/976-7894.
For more information on these programs contact:
Department of Commerce
P.O. Box 7970
Madison, WI 53707
1-800-HELP-Business
(1-800/435-7287)
or Fax Request Hotline, 608/264-6154
or Website http://www.commerce.state.wi.us
MICRO LOAN PROGRAMS
Loans to entrepreneurs interested in starting or expanding a business. The following are the approved SBA Micro Loan sources.
Statewide Wisconsin:
Wisconsin Women's Business Initiative Corporation
1915 N. Martin Luther King Jr. Dr.
Milwaukee, WI 53212
414/263-5450
VETERAN LOAN FUND
These funds provide assistance to the veteran in the purchase of, or an investment in a business that will provide the necessary income to the veteran and that appears likely to succeed. The loan may be used to purchase supplies, fixtures, or equipment; or for operating capital. Funds can also be used to purchase motor vehicles that are used exclusively for business purposes.
For further information:
Department of Veterans Affairs
P.O. Box 7843
Madison, WI 53707-7843
608/266-1311
EQUITY INVESTMENT
Businesses in fast-growing markets often need large infusions of capital to meet new opportunities and gain market share. Businesses with extraordinary growth potential may seek outside equity (ownership) investment to meet their targets for growth.
The vast majority of companies will find success through the predominant forms of finance for smaller businesses--personal savings and business loans. For those seeking outside equity capital, informal investors, venture capital, and "going public" are the most common routes.
ACE-NET
ACE-Net is a new Internet-based listing service for accredited investors and qualified corporations seeking equity capital in the range of $250,000-$5,000,000. For more information on ACE-Net, visit the ACE-Net home page at http://ace-net.sr.unh.edu/ or contact the Wisconsin Department of Commerce at 1/800-TECHLINe or 608/267-0313 or 608/266/9384.
VENTURE CAPITAL
Venture capital firms are interested in investing in businesses with especially high-growth potential. Venture capital firms expect to recover three to five times their investment in five to seven years. They are typically interested in projects requiring an investment of $250,000 to $1,500,000. A venture capital firm may receive 1,000 proposals annually and reject 90 percent of them initially. Ten percent will receive serious consideration, and only a few of these will actually be accepted. If a decision is made to invest, the venture capitalist will take active interest in the operation of the firm.
Venture capital is expensive and venture capitalists will expect a say in the operation of the enterprise. However, most venture capital investors are reputable business persons. The terms and conditions of investment are negotiable, to some degree. More important, a rational decision about accepting venture capital investment needs to explicitly balance the costs of venture capital against the costs of foregoing the business opportunities or market share that can be gained from moving quickly and gaining an adequate scale of operation.
You should present a professionally-produced business plan, realizing that venture capital firms will be particularly interested in a strong and realistic financial plan that derives from the marketing plan and not vice-versa. They will also closely examine the qualifications of the management team.
For more information on venture capital, call the Department of Commerce at 1-800/TECH-LINE.
SELLING STOCK
The average firm selling stock for the first time is a growing company with sales of approximately $20 million. The costs involved in selling stock are substantial--upwards of $500,000. Stock issues require extensive assistance from attorneys, accountants, and investment bankers.
There are special securities provisions for sale of stock and partnership shares for smaller businesses (private offerings/Regulation D offerings). These options can also be expensive, but may be worth exploring for companies seeking capital in the $500,000 to $10 million range. Consultation with an attorney is imperative in these instances.
If you have a specific question on a particular aspect of securities law, contact:
Department of Financial Institutions (DFI)
Securities Division
P.O. Box 7846
Madison, WI 53701
608/261-9555
1/800-472-4325
or visit the DFI website at: http://www.wdfi.org/sbic
