Q: I am considering starting a business but need some outside financing to get started. I have some cash available, but I will need either a loan or a grant. What options do I have?
A: The economy is strong, and credit is available for well thought-out business opportunities. You are correct that you will need some of your own cash to get started — maybe a substantial amount.
“Where can I find a grant?” is a question we often get at the Small Business Development Center. As a practical matter, while there are a small number of narrowly targeted government grants available for specific technologies, grants are not widely available to private individuals to start businesses. Nor are there grants available based on one’s gender, ethnicity, disability or other protected class. The internet is full of these “grants,” but when you dig into them, most are scams.
So, after rounding up your own money, and perhaps some from friends and family, your next step is to look for a bank loan. As you investigate borrowing options, you will likely hear of SBA (U.S. Small Business Administration) loans. Just to clarify, a SBA loan is not a loan from the SBA, but rather a bank loan where the SBA provides a partial guarantee in case the borrower defaults.
The bank’s lending decision is based on whether they believe the business can repay the loan. Most young businesses do not have a long enough history to demonstrate this ability, nor do they have sufficient collateral to secure the loan. The SBA guarantee provides some comfort that the lender may be able to recover some of their losses if the business fails. Even with the SBA guarantee, a startup will need a carefully researched business plan with realistic financial projections. Lenders will also scrutinize the owner’s business experience and personal credit score and look for other income sources available if the business cash flow falls short.
If you are turned down for a loan, remember that banks make their living by lending money. They want to safely lend as much as possible, but they need to be paid back. If they are refusing to lend to your business, you should re-examine your assumptions before putting more of your own money, retirement, house, etc., into the deal.
Mike Ryan is the director of the Small Business Development Center within the Schulze School of Entrepreneurship at the University of St. Thomas Opus College of Business.