How to get money to start a business?

April 2, 2008 8:14 AM

Some friends and I are looking at starting a business, and we need some up-front capital. About $100k. What's the best way to try and get this?

Running the numbers, it looks like we'll be able to re-pay it well within the first year of operation, anywhere from 3-4 months (if everything goes perfectly right) to 8-10 months if it gets off to a rocky start. Chances are if it doesn't take off by then, it won't and we'll be hosed.

Should we try to pitch to VC companies, and if so, how does one go about doing this? Should we just try and get a bank loan? Or an SBA loan?

Thanks in advance!

posted by frijole to work & money (10 comments total)

I think it depends greatly on the type of business you are starting. The way you word your question makes it sound as if this is some kind of start-up that is somewhat theoretical in design. Banks don't like to hear that you may not be able to repay their money, but if you have a solid business plan then a small business loan would be a good option, though you should still consider that you WILL need to pay that back somehow. Venture Capitalists can be just as finicky as banks depending on how prepared you are when you approach them.

Another option would be to form a partnership with private investors. This is likely the safest route to take.
posted by ISeemToBeAVerb at 8:36 AM on April 2, 2008

We sought the same amount for my startup, got it through 'friends & family' funding (term lifted from a Paul Graham essay). Principles together maintain a majority holding, with the remainder divvied up percentage-wise according to how much more we needed to raise to meet the initial capitalization amount.

We were told a VC won't talk to someone so small, as they look for 'big hits'.

And to add, take a very pessimistic view in your projections; i.e., take into account anything that can possibly go wrong and make sure your investors know it up-front, including the possibility of losing their investment entirely. The exercise would do well for the health of the company during your start up period.

Good luck!
posted by jma at 9:21 AM on April 2, 2008

Friends and family, or angel investors. If it's friends and family, they need to know that they're effectively throwing the money into a black hole. Angel investors will know that, but you need to be explicit when you're dealing with F&F.
posted by danhon at 9:50 AM on April 2, 2008

Thanks for the advice so far! To clarify a little more: its a rental business, that there are already several dozen of across the globe, doing extremely well, and we're looking at taking it into a new market.

My rough calculations indicate that many of the existing, established companies are bringing in 400-500k revenue per year at the bottom end of the scale.
posted by frijole at 9:52 AM on April 2, 2008

Previously. Although it's a Yoga studio, you'll be jumping through the same hoops.

Get used to "No," but don't get discouraged. You'll hear it many, many times!
posted by cdmwebs at 10:08 AM on April 2, 2008

Friends and family, or

God, no.

angel investors.

Bingo. I've done this before with a partner(open a small business). So have a couple of family members of mine. Everytime the money came from family, and everytime it was a nightmarish, hellish situation the entire time. The only point at which the tension subsided was when the money was paid back. But after that ordeal, you, and your family, will never be the same again. Money changes things; don't let it ruin a perfectly good, well functioning family.
posted by SeizeTheDay at 11:04 AM on April 2, 2008

The way the economic climate is right now, you may have a hard time successfully pitching to VC firms (and probably banks), even if your plan is incredibly strong. I'm not saying this to discourage you at all, just it's something to keep in mind if it does not happen as quickly as you would like. Once this economic downturn rebounds (which no one knows for sure how long that will take), you might find that potential investors who might not be interested now, will be very interested once the market has stabilized. Good luck!
posted by katemcd at 12:23 PM on April 2, 2008

You should just try to get loans.

Unless you have a well-developed and attractive business plan, I don't think that you are going to attract angel investors, etc. Most people in your situation end up just borrowing the money themselves if they can get a legitimate loan, or just maxing out credit cards, etc., if they can't. (Not that that's wise, but that's what people often do.) It sounds like there are at least 3 of you, so it doesn't seem unreasonable that you each take on $30k or so (or less, if there are more of you) of debt in order to make this business work.

Also, as someone who advises a lot of start-ups, I think that if you think that you only need $100k in capital to move an established-business-model rental business into an area where you will get $400-$500k in revenue a year, including enough free cash in the first year to pay back your investors, you are probably missing something in some part of your analysis and planning. If it were that easy, wouldn't someone have already done it?

Good luck.
posted by iknowizbirfmark at 12:43 PM on April 2, 2008

a restaurant that is opening up in my neighborhood is getting part of their funding by selling promissory notes to friends, neighbors, and family. the notes pay a (fairly low) fixed rate, plus a portion of profits to the folks invested this way, and they don't even have to start paying out for a period of time (so the business can get going!). and the notes are all to be paid off within five years.
posted by jimw at 3:18 PM on April 2, 2008

A couple of thoughts:

*You're more likely to get a loan from a conventional source (say, a credit union that lends to small businesses) if you've got some "skin" in the game - say, you're contributing 20% of the capital. It would be better if this were savings than (say) credit cards, but the important thing - from the bank's view - is that they aren't putting in 100%.

*You don't say what country you're in, but if the U.S., you absolutely should look at the SBA website. Your taxpayer dollars at work - helping small businesses start up, survive, and expand - for example, by loan guarantees (which make commercial banks much, much happier). And all the advice is free.

*It's a lot easier to get loans if you have collateral (e.g., in the rental business, you'll be renting out stuff - and you should plan to use that as collateral for the loan). While banks don't like to repossess things when a business fails, they feel safer if there actually is something there (as opposed, say, to a computer startup, where they may just end up with a pile of bad code).

*When angel investors do invest, there should be (and there certainly will be an expectation) of a balance of risk and return. You can either compensate them for the higher risk by promising a higher rate of return (say, 20% interest rate on loaned money) or by giving them a share of equity in the company (sometimes only an equity position; sometimes some equity plus a normal rate of return on the loan; whatever works). jimw's post is a good example.
posted by WestCoaster at 6:13 PM on April 2, 2008