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

Your retirement fund. This is not a cheap way to borrow money, and it's not risk-free, because you could crack your nest egg if your business doesn't work as well as you plan. If you've left a job, you can roll over your savings from a retirement plan--such as a 401(k) plan or a Keogh account--into an IRA, without penalty. You can also use the funds, but if you are under 591/2, you'll have to pay a 10 percent penalty as well as tax on the money you take out.

If your spouse is employed while you are starting a business, you have an alternative. Some companies allow employees (but not self-employed workers) to borrow against their own retirement plans without considering it a distribution, so the employed spouse can borrow against his plan and contribute it to the business; however, employees generally must show "hardship" in order to borrow money.

DANCING WITH THE ANGLES:

$50,000 to $250,000

It's in this territory that banks get interested, independent investors show up, and factors (companies that buy receivables) consider you a potential customer. Here are some possibilities:

Factors. If you have a lot of outstanding bills, you can sell them to "receivables financing firms." But unless high-quality customers owe you a lot of large, recent bills, expect to pay a hefty fee for the privilege. Brad Wright, a northern Virginia regional representative for the Commerce Funding Corporation, explains that his company will buy invoices that are about $300 each, but the firm typically lines up clients who can offer a steady volume of invoices running about $15,000 a month.

If you are desperate for cash, you can always find a "spot factor" to buy your invoices at a discount, says Tenenbaum, but that's hardly the best way to raise cash.

Aside from the expense, your clients might view you in a less favorable light if they suddenly start getting billed by a factor.

Some industries, however, rely on factoring. Clothing companies, for example, deliver their seasonal products to retailers, and then immediately sell all the invoices for money to start working on the next season's clothes. Firms like this, dealing with big-name retailers in large amounts, may pay as little as five cents on the dollar to get cash on their invoices. The Commercial Finance Association ([212] 594-3490) lists member factors.

Associations and organizations. The National Association for Female Executives, which funded Anderson's cleaning-kit business, is one of many organizations that focus on women, minorities, or other underrepresented sectors of the population. Another is the Manhattan-based Business Consortium Fund, which makes loans to minority-owned companies on the basis of purchase orders or contracts from companies on a participating list. There are more than 3,000 participating companies, says vice president John Tear, including about one-third of Fortune 500 companies. The SBA's Office of Women's Business Ownership ([202] 205-6673) has a list of alternative financing organizations.

Angels. These entrepreneurial benefactors are the answer to many a small-business owner's' prayers. Angels typically are wealthy individuals who built and sold their own companies and like investing their money in promising businesses and ideas. An angel will invest anywhere from $25,000 to $150,000 in exchange for interest or a piece of your company. If you are looking for an angel, personality is very important--a bad mix can make the money seem like a ransom fee.