“How do your get the money to start your business? Are you bootstrapping—pulling it out of yourself?”

“If you borrow from yourself, make yourself a promissory note so you can pay yourself back.” That was what we heard as Beth Holbrook from Zions Business Resource Center started her presentation on Financing Your Business. Funders you seek money from are always wanting to know, “Is your skin in the game?” She went on to tell us what key questions to ask ourselves as we seek money to finance our business. She told us about the 5 C’s of Credit that lenders want to know and gave us warnings on what to do to prepare to be the best credit worthy borrow to your lenders.

$ Self-Financing

One of the first things you must ask yourself, before you launch, is “How much money will I need?” Do a complete inventory of your assets. Assets may include: savings, equity, retirement accounts, investment accounts, life insurance, vehicles, recreation equipment, and collections. Don’t sell these to get the money, use them as collateral for a loan. Banks have always had a problem with unsecured loans, but in today’s tight money climate… even collateralized loans are hard to come by. Be careful using credit cards, as they may be a liability for a loan later. She also warned us to keep careful accounting records and to not co-mingle funds, as that will cause you grief later when you must get your accounts correct to get loans.

$ Partnerships (Friends, Family, and Associates)

Make sure you have everything in writing: the type of partnership agreement, what is expected of each partner, the relationships and duties, and how the business will be dissolved or continue upon exit or death of a partner. Get insurance on your partners. Treat family and friends who have given you loans as your banker. Keep them well informed on the progress of your business. Surprises lead to lawsuits and huge rifts between limited partners, family members, and friends. Make sure your partners have similar business building strategies or you may be butting heads over tactics to follow.

$ Individual Investors (Angels)

These people want a solid business plan. They also want to know that you have the capability and the talent to make this venture work. They will want you to make a credible presentation that is convincing to them. They won’t even look at your business plan until after you have answered their questions, finished your presentation and left the building where you met. You  need to be thoroughly familiar with your industry, know its potential, know your competition, and have a clear picture of how your business will generate revenue. And you need to be able to articulate that with confidence, conviction and passion.

$ Venture Capitalists

With the current tight lending market, these people are only looking at technology companies that have a credible start up history already—at least a year or more. They are not impossible, but very difficult to convince. Not only do you have to be within the just noted narrow niche, you have to show excellent financial documents for your year(s) in business and clearly show a projected cash flow that will support the return on the investment. Your business has to be very solid and be serving a market that will continue to grow. And you still have to do everything the borrower did for the angel investor.

$ Bankers

Bankers want to know how much skin you have in the game, how much of your own money you are putting into the venture. If it’s not enough, they will not consider your application. And your application is the crucial document here. They also want a business plan, as that is the primary document upon which they make their decision to loan to you. It must be as complete as you can possibly make it. You must write your business plan as if the underwriter knows nothing about the economy or the industry niche your business is serving. Be very thorough in your research. Know where you are monetarily.

Since your banker sits in on that committee, having a good, ongoing relationship with him or her is extremely important. Talk to your banker often, let them know where you are in your business plans, how the business is building, and whether it is making money. Take the time to get to know them well so they can get to know you well.  Treat your banker as a mentor. This relationship building will go a long way when they are asked about your ability, stability, and character by the underwriting committee. The tightening of requirements on banks has restricted their ability to loan to new businesses. They are wanting to see some business activity and revenue before they will consider you—often a full year.

$ Government Programs

Beth asked if there was anyone that thought there were government grants for business startups. I raised my hand. I believe I was the only one. She said that for all practical purposes there are not. The few that are available are for very specific, targeted purposes. I was aware of a start up business that was in line to get such grants, so I knew there were some, but was not aware of how limited they were.

She said the best program for start up businesses is the SBA (Small Business Administration).  They work with the banks by guaranteeing the loan a bank makes for any business they approve. Like other lenders, they require an extensive, comprehensive business plan. They will want to see projected financial statements for at least one year depending on the business. And that includes start up costs and the source of the money you already are planning on, besides the applied-for loans. With the tight money market, these loans are also difficult to get. But they have counselors and mentors that will work with you to get you qualified for a loan.

$ The 5 C’s of Credit

All the lending programs want to know that they are lending to a worthy and honest borrower who won’t default on them. So they all consider the 5 C’s of Credit.

  1. What is the Character of the borrower—honest, full of integrity, hard worker, able and willing?
  2. What is the Capacity of the borrower to repay the loan?
  3. How much Capital is being invested by the borrower?
  4. Who is your Competition? How well are they doing? How do you stand out from them?
  5. How much Collateral can you provide for the loan? These can be a wide variety of assets?

Make sure you have a great relationship with both an attorney and an accountant so that they can help you with the documents that will answer these credit questions.

$ Other Funding Sources

Utah Microenterprise Loan Fund (UMLF) provides funds for small business startups that have no other sources for funding. They do require an orientation meeting, a business plan (not as extensive as the bank or SBA), and a presentation to a loan committee by you, the borrower. They loan up to $25,000 with a payback period of 5 years. Mickey Adams Grames will work with you to get you ready for that loan committee presentation and will see that you have all the documents you need to qualify. They currently serve all the Wasatch Front counties and the three Wasatch Back counties. And they serve the entire state with a veteran’s disability program.

Beth Holbrook is director of Zions Business Resource Center located in their downtown building at 3rd South and 1st West in Salt Lake City. All the excellent business resources there are free. They have an extensive resource library, Internet connected computer stations, and counselors who can help you. You can access their webpage by going to https://elpnow.org/business-resources/zions-business-resource-center-sponsored-by-zions-bank/and clicking on their logo, Zions Business Resource Center, on that page.