Financing Your Business

In the Silicon Valley, legend has it that Gene Amdahl, founder of Amdahl Computers, launched his business on a napkin. He had a promising idea for a new business venture, and he wrote out a business plan for it on the back of a napkin at a well-known restaurant. Almost instantaneously, he received promises of millions of dollars in venture capital.
His seemingly simple miracle-story raises eyebrows and questions: How did one guy get so much cash for his new business?

The answer? Thinking and planning. The thought process underpinning his napkin-sized business plan was innovative, maybe even brilliant. His backers sniffed success on that napkin, knew the track record of the man who was describing the plan, and were willing to take a chance.

While most entrepreneurs won't find such immediate and large-scale success during the financing process, there are ways to finance a new business without tapping out five credit cards or re-financing the house. Whether your financing needs are as big as $50 million or as modest as $50,000, you can increase your chances of getting the money you need by keeping in mind the following tips.

Write a solid, innovative business plan. "One thing that distinguishes most small businesses is a lack of planning," says Howard Thomas, a CPA and president of the Thomas Consulting Group, a firm that specializes in small business consulting in Los Gatos. Entrepreneurs can put themselves ahead of the competition by writing a business plan that goes beyond perfunctory outlines and becomes a living, breathing document that's used on a daily basis to help you do business. (For more information on business plans, refer to the CPA Wire article: "Writing the Business Plan.") Banks will only offer loans to entrepreneurs who can provide a sound business plan, and those who illustrate their inexperience with poorly developed and written business plans will put out red flags to potential lenders. The message? High risk.

Consider a home equity loan or a personal loan. Very few lenders will finance 100 percent of your business. Therefore, it's important to look at other options, such as a home equity loan or a personal loan, for financing at least 25 percent of your business enterprise. If you do take out a personal loan to help finance your business, the interest you pay will be deductible at tax time.

Investigate SBA or community Development loans. Loans through the Small Business Administration are available for longer-term small business financing. Some short-term loans and loans for cyclical capital needs are also available through the SBA. For more information, visit its Web site at

Find a real person who will talk to you. While most large banks have small business programs, they may expect you to merely fill out a form, submit it to their loan review department, and wait. Entrepreneurs should avoid this impersonal, formulaic financing process and "find a real human to talk to," says Thomas, "someone who can guide you through the process."

Try a smaller, more community-oriented bank. Community-oriented banks are more likely to employ loan officers who can individually assist you with your loan request. And while few banks are likely to fund a small-business startup, local banks are often more likely to lend money to a recently formed business in their community.

Think of the financing process as part of your "small-business MBA" program. As you go through the planning and financing stages of starting your business, you will undoubtedly make mistakes. But will you have seasoned experts who can help you analyze your mistakes and learn from them? "You need people who can tell you what you're doing wrong," says Thomas. A good banker can be one of those experts.

Ask your CPA for banker recommendations. Word-of-mouth recommendations are a great way to start shopping for a personable, trustworthy banker, and your CPA is an excellent resource for such recommendations. Most likely, your CPA will know local bankers and will be able to help you start forming contacts in the banking community. "You may not get an instant loan through these contacts," says Thomas, "but they can help you figure out when -- at what stage in your business -- you should come back in to ask for a loan."

Always look to borrow money when you don't need it. When your business is running smoothly and somewhat successfully, lenders won't perceive you as a high risk for repayment. This is the time to plan ahead and to secure the money you need for the future of your business.

Let the customers pay. Think about ways your business can generate more immediate money so you can take out a smaller loan. "Be creative about customer payment," says Thomas. For instance, a consulting business that generally has to invoice a client and wait 30-45 days for payment could consider billing at a lower rate for clients who are willing to make up-front, immediate payment. "You shouldn't be lending your life savings to your customers," says Thomas. "Find ways to let them pay."

In the end, your millions won't come from lenders or benefactors. Instead, the money will stem from a solid business plan; it will come from your customers. So when your financing dreams get too big, or when your brilliant loan proposal gets rejected, Thomas suggests that you remember your business plan, and your customers, and the entrepreneurs' creed: "You're not in business until someone writes you a check."