Need $10,000? $50,000? $250,000? - finding the right source for cash for a small business - includes a related article on a case study of a business obtaining financing - Cover Story

Home Office Computing, Sept, 1992 by Linda Stern

There are two fundamental truths about raising money for businesses: You really do need money to make money, and you have to know where to look for it.

Go to a venture capitalist seeking $5,000 to buy a computer and to have business cards printed, and you'll be laughed at. If you ask your suppliers for longer credit terms when what you really need are the megabucks that can take your business national, you'll waste your time collecting drops in a bucket.

It's important to think creatively when you are looking for money, but it's also important to think appropriately and go to the fight sources at the fight times. Here's a guide to finding the money you need to start, run, and grow your business--whether you need $10,000, $50,000, or $250,000.

STARTING OUT:

$10,000 OR LESS

Sometimes a few thousand dollars is all you need to make the difference between unemployment and self-employment, but the first money can be the hardest to find. Look close to home. "Most businesses don't start with a bank loan," says Bernard H. Tenenbaum, director of the George Rothman Institute of Entrepreneurial Studies at Fairleigh Dickinson University in Madison, New Jersey. "People start businesses with their money and their parents' money and relatives' money and friends' money and anything they can beg and borrow."

That's as it should be. Tenenbaum and other experts warn that many start-ups make the mistake of borrowing too much too early and get buried under the debt-servicing costs. If you need just a small amount to put you in business, don't borrow more than you need just because it's available.

Your own pocket. You have to put your own money where your mouth is, or no one else will. Start a business from your own savings account and you will be beholden to no one. You'll also run your business leaner, without any interest charges or meddling partners.

Scott and Diane Nelson were falling in love, getting married, and saving for a house. But they kept getting these entrepreneurial urges. As hotel workers in Altamonte Springs, Florida, they saw an opportunity when the only airport-shuttle business in the busy Orlando region went bankrupt. "I promised Diane that if she let me take the $10,000 we had stashed away for a down payment and put it down on a van and some business cards and insurance, we would buy a house three times as big in three years," says Scott.

She did, he did, and they will. Three years later, the two have used Gold Key Transportation, Inc., to boost their down payment to $23,000. They own three vans, employ four drivers, and have contracts with 10 travel agencies and a couple dozen corporations.

BootStrap And barter. The secret to the Nelsons' success, of course, goes beyond their initial $10,000 ante. They bootstrapped. "We lived like paupers," says Scott. For the first year, they didn't draw salaries and took only the minimum they needed to get by in their small apartment. "We were running the business from our apartment with hand-lettered signs," Scott recalls.

The Nelsons also discovered they could barter for services. "One of our best clients is a computer consultant. He set up our equipment and customized a reservations system for us. Another client is a CPA. He checks our books every couple of months and does our taxes."

Your family. Parents can be a good source of start-up money for a new business, for a variety of reasons. You can structure the arrangement so that it suits you and them--maybe giving you a lenient payback period to help you get your business off the ground, maybe giving your parems a higher interest rate than they can get at the bank. Family financing is a good idea for another reason: It will make you twice as conscientious. When you know your relatives are investing in your future, you don't want to squander the money. The drawback of family money, of course, is that relatives then think they have a fight to tell you how to run your business.

Your suppliers. The people who sell to you want you to succeed. In some cases, if you make the right impression and are in the right business, you can get them to supply you with credit. (This is not true in, say, the restaurant business, where many businesses fail before they pay their bills.) It's a technique that Susan Anderson, founder of Planna Technology, Inc., which sells cleaning kits for printers, scanners, and other electronic equipment, was able to use successfully (see "The Queen of Guerrilla Financing" on the next page). If you sell a product and intend to depend on regular suppliers, you can ask them about 60- or even 90-day terms. If you run into a period when money is tight, you can sometimes ask suppliers to further extend their credit terms.

Alternatively, if you are in a reselling business--say, clothing or furniture or computers--you can sometimes persuade your suppliers to let you display their products on consignment. You don't have to pay them until you've made the sale.

Your customers. After his three books published by regular printing houses had earned him little in the way of advances and royalties, Henry Holden decided he wanted to self-publish his fourth, Ladybirds--the Untold Story of Women Pilots in America. But even as he delivered the manuscript to the printer, he knew he had only half of the $6,000 he would need to pay the printer once the first 2,000 volumes rolled off the press six weeks later. "I would have put it on my credit card if ! had to, but I sure didn't want to do that."