By Gina Blitstein

Financing of any kind is hard to come by these days as we slowly rebound from a significant economic downturn. No one is bending over backwards to loan money to anyone but the economy needs to keep forging ahead and that means, among other things, new business development. What are some avenues to explore to get your small start-up business the financing it needs to hit the ground running?

According to John Reddish of Advent Management International, Ltd., who provides financial consulting, coaching/mentoring, speaking, capital formation, and training, “Most small start-ups don’t hold much interest for venture capitalists, angel investors or, frankly, most banks - who will steer you to a home equity loan or often offer their low-end personal loan option which is usually limited to $10K.” John provided some suggestions for traditional financing options (and a few exotic ones) which include:

1. The usual suspects - The most obvious places you may have money available to you without jumping through a lot of hoops:

• Your savings
• Your home equity
• 401k and retirement funds
• Your credit cards (Beware of high interest rates and "sin" fees if you go over your credit limit. Even if the bank reduces your credit limit arbitrarily this can be expensive money.)
• Your relatives and friends (Be certain to keep the relationship on a professional level - execute loan documents that detail how much interest will be earned and when they get paid, just like any other lender would receive.)

With the exception of the 401k and the home equity, the other resources are relatively easy and fast to obtain.

2. Local and regional micro-loan funds - These are available to stimulate local business formation. Some women-directed funds exist and amounts for loans usually range from $35K to as much as $50K. An Internet search will identify many such sources.

3. Customer funding - This is a form of pre-selling. If you have a key customer (or non-competing customers) targeted and a really unique, one-of-a-kind business, you can often negotiate with the customer to "float" part of their initial and ongoing purchase price as an advance (or series of advances/deposits). That may be enough to get you up and running.

If you are starting a service business, a long-term contract from a customer can be enough to get you started if you can set your bare-bones budget within the limits of the contract. The potential danger is if the customer sees a decline in sales and cuts your contract back - or cancels it - you are without income. While not always possible in actual practice, John recommends as the safest arrangement that no client represent more than your gross profit margin.

4. Licensing - John suggests the following when your product/idea is at least at the "prototype" stage where you can identify customers/markets: Identify a supplier who makes similar products and instead of approaching them as your manufacturing source, propose a licensing arrangement. If they are already marketing similar products, they have both manufacturing and distribution. If you have pre-sales or targeted customers, (see #2 above) so much the better. A royalty with only ongoing administrative costs costs less to operate than a full-blown business - and you can get on to your next product. Bear in mind, however, with royalty rates ranging from 3% to 15% on most products, you have to make sure there is enough potential for both you and the supplier to make it worth while.

5. State and Local government, SBDCs and private foundations - Often there is money available as grants and/or loans available from a variety of governmental or NGO sources for start-ups. These could include SBIR (Small Business Innovation & Research) grants tied to State Funds or policy initiatives that will make money available for training, operations and other costs. Small business incubators and some Enterprise Zone funding are tied to these sources. This is a fertile source of funding and definitely worth investigating.

In these times when financing is tight, you may have to look outside the box to find the capital you need to get your business off the ground. It’s out there - it’s just a matter of doing the necessary legwork to secure it. Research, resourcefulness and creativity will serve you well as you seek the money you need to set your start-up off on a strong financial footing.

What are your best suggestions for financing a start-up in the current economic climate?

Edited: 07/29/2010 at 08:32 PM by Gina