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Capital Idea

By Hannah Wallace August 31, 2006

Money makes the world go round, and nowhere is that more true than in the office of a budding entrepreneur. Capital exists to fund your enterprise, but you've got a lot of work to do before you start asking for it, says Jim Parrish, a finance counselor for Florida Small Business Development Center at the University of South Florida in Tampa.

"It doesn't matter the sources," says Parrish, who has more than 30 years' experience as a bank manager, small business loan officer, financial counselor and instructor. "You'll have to show two things: that you have a concept of risk and so do your sources."

The SBDC centers, located throughout the state, provide free business counseling and resources to help entrepreneurs prove that their business is economically viable. "Don't worry about funding; it's out there," Parrish says. "Address the economic potential of your idea."

Conventional wisdom is that businesses fail because funding dries up. Parrish disputes that, saying the real cause of a business's demise is that its leaders make too many basic mistakes. Set up a good plan and then seek money to fuel it. Here are Parrish's top 10 places to seek capital:

1. Home equity loans. With home prices up 40 percent over the past year in Southwest Florida, homeowners have a source of capital under their roof. "The cheapest loan on the face of the planet is a home loan," Parrish says.

2. Credit cards. They're easy to come by and provide immediate capital. About 57 percent of all startups rely on personal credit. "Don't worry about the interest rate on small amounts," Parrish says. "It doesn't make that much difference on your monthly payment. What makes people fail is not being able to get credit at any cost."

3. Personal loans. If you've got good credit, banks may be willing to lend you small sums without collateral.

4. Private investors or "angels." Private investors provide about 25 percent of all business capital. "Finding them is the hard part," Parrish says. Most investors will come from one of three groups: people who know you, former or current industry insiders, and "true believers"-people who are emotionally connected to the idea. Forget about finding benevolent "angel investors" to fund your enterprise. "Angel is not a term I like to use," Parrish says. People invest out of "good old greed. It's not manna from heaven."

5. SBA loans. SBA loans are granted through banks and credit unions and backed with a promise by the government to pay if the borrower defaults. "They're a different form of collateral," Parrish says. To qualify for an SBA loan, businesses have to prepare a business plan, have good credit but fail to qualify for a traditional bank loan. There are a variety of loan programs depending on the business and the loan amount.

6. Bank loans. Bankers are the least tolerant of risk, Parrish says. A typical bank's net profit is about 1.5 percent compared to about 30 percent to 40 percent for an investor. "They don't benefit from the upside of investing" in your business, Parrish says, which is why they're more conservative. Bank loans are a better bet once you've been in business for a few years and have a demonstrated revenue stream.

7. Equipment leasing. Rather than securing a bank loan to buy equipment, negotiate with equipment-leasing companies. Some companies finance all types of equipment while a "captive" leasing company only finances equipment it sells. "Leasing companies can purchase equipment at a lower cost than the average independent business person, and so they often charge lower interest rates," Parrish says.

8. Factoring companies. Factoring companies provide "cash advances" for businesses with government contracts. Government agencies often take longer to pay, but there's little risk of them not paying. Factoring companies charge 2 percent to 5 percent of the invoice. "I've had clients with bad credit get financing," Parrish says. "They are looking at the strength of your customers."

9. Business associates and outside alliances. "Suppliers sell to you on credit all the time," Parrish says. Sometimes they'll invest to get a product to market, especially if it increases sales of their own product. Parrish also advises entrepreneurs to develop ways to make their customers pay up front, such as selling maintenance contracts or extended warranties. Also consider selling licensing rights or distributorships to generate capital to develop your business locally.

10. Grants. Fewer than 1 percent of businesses receive grants to fund their businesses. "Many people think that if they're a woman or a veteran all they have to do is come and pick up their check," Parrish says. "But it doesn't work that way." Most grants are for research or high-tech businesses. Two programs are the Small Business Innovative Research (SBIR) grant program and the Small Business Technology Transfer Research (STTR) grant program. They are both highly competitive, Parrish says. Eligible businesses must be American-owned and independently operated with fewer than 500 employees.

Florida does have a grant program for the disabled and Native Americans. Grants average about $5,000, but there's no formal limit. Contact the Division of Vocational Rehabilitation, Department of Education (www.rehabworks.org). "They tend to buy you things you need from approved suppliers," Parrish says.

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