ChapterHeader.eps

Chapter 7: Financing

Cash has been described as the lifeblood of a business. This analogy makes sense because when cash is cut off, a business will not survive. Cash is needed to start any business and to operate until the business turns a profit. Profit is what is left after you subtract all costs or expenses from what is taken in as income in a business. When calculating expenses, include not only the cost to you of the product sold, but also the portion of time (employee or your own) that went into preparing the product to sell and the cost of the heat, light, water, and electricity of the business establishment, called overhead. List all of your sources of financing, including your own savings and loans from family members, even if they are no-interest loans.

It is important to become familiar with the various sources of financing available to you that could provide you with the capital to successfully operate your business. Figures in a business’s first operating budget are hardly ever concrete because you are only using numbers estimated to come close to what the actual expenses or revenue may end up being. However, it gets easier as you move forward from year to year. Each year that passes gives you a better financial history to work with, and you can actually get close to accurately budgeting your revenues and expenses. The goal of this book is to not only provide all the tools and knowledge you need to open a business, but to operate a financially successful one. You would not be a typical entrepreneur if your vision was not larger than the depth of your pocket. It is easy to get caught up in the excitement and go beyond your financial means. This is where establishing a sound budget — and adhering to it — come into play. A budget is only as good as your ability to operate within it.

Obtaining financing for your new business can be accomplished by requesting a loan through banks, commercial lenders, finance companies, and government agencies designed to assist startup business and small-business owners. However, before you start looking at your options, first be familiar with the types of financing available. By knowing the difference between these types of financing, you will be in a better position to make an educated decision as to what will best fit your needs.

Before You Seek Financial Assistance

If you have all the money you need to start your business, skip this section for now. But eventually you may need to find outside sources of funding to purchase equipment or supply working capital, among other possibilities. The U.S. Small Business Administration suggests asking the following questions before seeking financial assistance:

Lending Institutions

There are four different institutional lenders you will have to choose from: commercial banks, credit unions, savings and loans, and commercial finances.

Commercial banks

A commercial bank is one of the most common forms of financial help most people are already aware of or have actually used for a loan transaction before.

Commercial banking is generally thought of as the best place to get a business loan. Commercial banks are insured by the Federal Deposit Insurance Company (FDIC) and typically have the largest selection in institutions with which a business owner can work. It is also generally true you will stand your best chances of getting a business loan through a commercial bank. A commercial bank stands to gain money from a successful business and will not turn away one they feel will offer a minimal risk with the potential of providing a maximum gain. They are in business too and are looking for smart deals to take part in.

Commercial banks offer a variety of services that include checking accounts, certificates of deposit (CDs), loans, and fiduciary services in which they will hold something in trust for another and take responsibility for its care for the other’s benefit. They also accept pay drafts and can issue business letters of credit when they are needed. Beyond these traditional loan services, today’s commercial banks also offer credit cards and mortgages to further boost your chances of obtaining funds and allowing you to spend those funds efficiently. The larger of the commercial banks are usually the better option for business. They can offer more perks such as reduced fees and more local and national branches, and their ATM services are often free, no matter where you may find yourself in your travels.

When you are approaching a bank for the first time to ask for a loan, it is almost always better for you to start off with a relatively small deal. You may think you have found the deal that is going to make you millions, but the bank will see the chance of this coming to fruition as being placed somewhere in the neighborhood of slim to none. Think of your first deal as something you can easily manage, be successful at, and turn around quickly. It will provide you a foundation of strength for future ventures and give you a lot more negotiating power for those larger deals.

During the preliminary portion of seeking financial assistance for your herb business, it is also a good idea to take a deal to the bank as a practice exercise. This is especially good because a banker will tell you exactly what he or she needs in order to make the deal happen. There is no manual out there to tell you everything about how to put together a package to present to the bank. Sometimes the best way to learn is through your initial mistakes and the gentle guidance of someone who you hope is your bank ally. You may have to hear the word “no” several times before you will understand how to get to a “yes.” Also, the economy and business practices are fluid, changing to keep up with current events and the cyclical nature of businesses.

Regardless of what is going on in the business climate, the best thing you can do is to do your research and create a plan based on what is going on in your market at the current time. There are different market types to be aware of when preparing to approach a bank for a loan: low, high, recession, and recovery. No matter which market you are in, though, banks want to see some basic guidelines met. They do not engage in risky loans simply because it is not their business model. If you or your venture looks to be a risk, they are likely to not invest, regardless of the market. The following will increase your chances of securing a loan:

1. Credit: Banks follow a traditional pattern of loaning money: If they give you a loan, they expect to be paid back with interest, a fee paid on borrowed assets. They gauge your ability to pay them back by your credit history. If you have a history of paying back your debts, they will look more favorably on giving you a loan because you have a history of taking care of your financial obligations.

2. Collateral: If lending guidelines are tightening, consider offering up something of value as collateral for the loan. This is a step to consider closely before going through with it, though. Ask yourself if you are ready to hand over your house or boat should the business be unable to repay the loan.

3. Cosigning: Depending on your credit history and any other factors a bank pulls into the equation, they may only feel confident in giving you a loan if you have someone cosign the loan.

4. History: If you have a history of doing business with a bank, they may feel more confident in working with you. Also, if you have a history of owning a business and can show a track record of success, they may also breathe a little easier in extending a loan to your new business venture.

The tighter the market, the tighter you may find a particular lender’s guidelines to be. For example, in a recession, the reins of lending can be pulled in, with loans being issued in a trickle. It may be difficult for anyone to get a loan — even those with excellent credit. Banks have their own goals and bottom lines to protect, and their guidelines will remain fluid to protect their own interests. It will give you a clear understanding of some of the main features of what comprises a solid business plan; sometimes all a bank really needs is a one-page summary. This short, one-page summary should at least offer what the business will entail, how the money will be used, and who will be running the business. Then, everything must be backed up with proof of how the plan is guaranteed to work and pay off. This is especially true if the deal you are working on is relatively small in size and can be easily managed.

There are generally two views regarding relationships with commercial bank lenders: those who believe in using only one faithful bank and those who believe you should have no fewer than three to five good, solid banking relationships in place.

The faithful banker plan

Institutional lenders are one of the most popular forms of financing new businesses, and they can become a strong ally to those with decent credit. The key thing about institutional lenders is they expect your full patronage and will work their best efforts for you if you satisfy all of your traditional banking needs through one bank alone. Some banks can be like a jealous best friend — they do not like you stepping out with other banks, seeing what kinds of deals you could get, and borrowing money here and there from a number of different sources. If you want a strong ally on your team, pick an institutional lender you really like and stick with them. Of course, if a really good opportunity comes along, you may want to try to work something out, but in general, your relationship with your bank is like a marriage in that it is best when it is a one-on-one relationship without any third parties stepping in as temptation. Business is business, but you want to conduct smart business with long-term benefits; you do not want to burn any bridges as you grow your venture.

Advantages

Disadvantages

The “more the merrier” plan

Not all banks are hesitant when it comes to sharing their customers with other banks, and if they know anything about smart business, they should probably expect it. The major branches have their own specialties and can offer large sums of money to good clients, but sometimes the smaller banks are more likely to approve a deal the bigger banks would shy away from. It is not a bad idea to have as many options at your disposal as possible.

Advantages

Disadvantages

Credit unions

Credit unions are set up as not-for-profit, and because of this, they tend to offer much better deals for their patrons. It is a cooperative-style financial institution in that it has members who have partial ownership in the institution. The earnings are actually divided between its members in the form of dividends or reduced interest rates. There are always exceptions to this general setup, but it is common for a credit union to offer higher deposit rates and lower fees. However, to get these better deals, you will have to pay a membership fee and then join the credit union by opening a savings account and “buying in” to a share of the union. Only a member is welcome to deposit or borrow money in any capacity. This is what enables the credit union to traditionally have better rates and fees because it is basically a nonprofit organization with lower operating costs than the commercial bank and is content with much more modest returns.

Credit unions are not all the same and most are not insured through the FDIC. However, the National Credit Union Share Insurance Fund (NCUSIF) insures all federal credit unions and many of the state-chartered credit unions. NCUSIF is administered by the National Credit Union Administration (NCUA). This is a federal agency responsible for chartering and supervising all of the federal credit unions, which are basically owned and controlled by their members as a co-op system. Most credit unions will offer the same services as banks, such as checking and credit cards, but they do so under different terminology. For example, where a commercial bank will use “checking account,” a credit union will call it a “share draft account” — the same service but a different name. Not all of them will have the same services, and the ones that have more limited offerings will also not be as likely to offer the perks, such as convenient banking hours for those business owners working long hours. The best thing to do is look around at the different credit unions available in your area and rate their services and fees in comparison with some of your larger commercial banks.

Savings and loans (thrifts)

Savings and loans (thrifts) are similar to commercial banks in that they are in it for profit. Although most commercial banks can only add a branch by acquiring another bank, the chartered thrift has more freedom and therefore no limits in terms of waiting to find another bank they can acquire. It is actually cheaper for them to branch out nationwide, which gives the business owner the lowest cost for services. However, one negative aspect of the federally chartered thrift is it is limited to 25 percent of assets in a business loan, a rule that remains in place as of the 2002 Office of Thrift Supervision regulatory bulletin.

Commercial financing

Commercial financing is basically a term used to describe an asset-based lending system. In this system, you are required to offer collateral in the form of personal or business assets, such as a home or other property; these assets are then used to secure the loan. The types of assets you can gain financing on include outstanding accounts receivable, certificates of deposit, bonds, contracts for import/export, purchase orders, existing inventory, major equipment, franchise development, and existing demand for product or service. It is never too late to begin fostering a positive relationship with a bank, and there are a few steps you can take in order to accomplish this:

1. Know your bank manager on a personal level, which means you are comfortable enough to invite him or her out to lunch or for coffee. He or she will be more willing to go out of the way for someone he or she knows on a personal level than someone who has just walked in from off the street. Keep in mind people do business with people they know and like.

2. Bankers are trained to recognize the signs of a snap business decision in need of quick cash. In general, they are not too keen on such requests because they know the odds are slim that any due diligence has been done to determine the feasibility of the business idea. If you start building the relationship a few months prior to needing the loan, such as by starting a business account with the institution, throw out occasional hints that you may be in the market for a loan once you get your business plan solidified, and this will greatly improve your chances of acceptance. They will know you have had time to consider your plan, and you are probably less risky than someone who has thrown something together quickly and is looking for some fast money to fund it.

3. Instead of selling yourself to the banker, try to have the banker sell himself or herself to you. You want the bank to be aware that not only are you presenting to them a great opportunity to work with an up-and-coming entrepreneur but that you are looking at other banking options as well. You are serious about your business and being selective when deciding who you think will be your best ally during your climb up the mountain of wealth and success. To aid in turning the evaluation away from you and to the bank, try asking the banker several questions during your initial meeting. Such questions might be:

This CAMEL reference is basically asking the banker what their bank’s safety and soundness rating is. This is something they may hesitate to give out as it is rarely given out in public. Do not let that deter you in asking. It will show you are serious about finding a strong bank to build a good relationship with more so than just obtaining some quick cash. Also, it will show you know what you are talking about because you have done your homework.

There is Magic in the SBA

The acronym for this section is SBA, otherwise known as the Small Business Administration, which was created in 1953. State and local government are supportive of small-business ventures, as they stimulate the economy for a region because they often create jobs. For all the complaints people have against the government and taxes, they could learn to take advantage of the money they have put into the government and let it work for them. It has become a big help over the years because the government has realized its best chance of getting a return is through the funding of small-business programs.

The SBA is not the source for your loan but rather the coordinator for the loan using a participating bank or institution. When a lending institution sees a business as unfit or too big of a risk, the SBA will step in and make as much as a 90 percent guarantee to the bank that the loan will be paid off by the SBA, regardless of what happens to the business. This handy guarantee makes banks friendlier to deal with, especially if you are getting used to being turned down. These loans are not handed over to just anyone, however; the entrepreneur must prove through an extensive application process they will be able to pay off the loan and have collateral to back it up.

The SBA loan is a good option due to its favorable terms as compared to what you may find with conventional bank financing. SBA programs do not require a large down payment, whereas 20 to 30 percent is common for the conventional lending institution. The typical down payment for an SBA loan is 10 percent, and they have the ability to offer an amortized term of up to 25 years. The SBA also does not carry balloon loans that will drop a large bomb on the business once the loan has reached maturity.

Small businesses fall prey to the balloon loans because they are initially attracted to the relatively low payoff amount over the course of the loan. This can be beneficial in terms of managing the cash flow of the business. The problem is if they do not save up for the large balloon payment at the end of the loan, they will be forced to refinance and incur the penalty of several fees on top of their balloon payment. With the typical loan amortization, the time between the initial loan and final judgment day is within five to ten years, which can be a delicate time for most new businesses.

The SBA helps keep money where it is needed — accessible and flowing in the small business — rather than the business depleting all of its own capital, which could potentially result in stifling its growth. These loans are also compatible for small businesses as well as the moderately small corporations. They offer loans for up to $5 million. This will not be sufficient for a Fortune 500 company, which works with multi-million dollar loans; these programs were not designed for the big guns that small businesses have to sometimes compete against. However, these loans can help level the field a bit. There are many different SBA programs available today, so you should be able to find one or more that relate to your business needs. To begin, talk to your bank about applying for a loan through the SBA. Again, the SBA does not extend you a loan directly but works with lenders. Supply your bank lender with any paperwork he or she requests in order to submit a loan application, such as financial statements, along with your business plan. If the bank is unable to extend you a loan, ask them to consider your loan under the SBA’s guarantee program. Be familiar with the details of all of the SBA’s programs.

SBA lenders are not all created equal. They are separated into three categories, each category participating in the programs with different verve and commitment. They are listed below from least helpful to most helpful.

Basic 7(a) Loan Program

This is SBA’s primary business-loan program. Although its maximum allowable loan is $2 million, it is the SBA’s most flexible program in its terms and eligibility requirements and is designed to accommodate a wide variety of financing needs. Most of these loans are given to serve functions, such as working capital, machinery, equipment, furniture, renovation, new construction, and debt refinancing. Commercial lenders are the ones who actually make the loans and determine who they will loan to, but the government offers a guarantee for a percentage of the loan should the borrower default or fail to meet the terms of the loan. For this particular loan program, the government can guarantee up to 75 percent of the total loan made to the business if it exceeds $150,000 and 85 percent for loans less than $150,000.

The most attractive features of the 7(a) are its low down payment, low interest rates, and an extended loan maturity for as many as ten years for working capital and 25 years for fixed assets. These are great perks. If you want to start an early payoff, a small percentage of the prepayment amount will be charged as a prepayment fee. The early payoff can come in handy when a business is experiencing fast growth and needs to refinance in order to support its expansion, and the small fee required to do this may be more than worth its while.

Microloan Program

This short-term loan offers small loans up to $35,000 to small businesses starting up or growing. Funds are made available to intermediary lenders who are nonprofit and community-based, and these lenders typically require some form of collateral for the loan. The loan can be used as working capital to fund the operations, to purchase inventory, supplies, and equipment in order to do business, or to buy furniture and fixtures for the business. For example, an herb business would use a microloan to purchase herbs for inventory, tables to display herbs, equipment for watering, soil, and pots to sell. There are intermediaries available in most states, the District of Columbia, and Puerto Rico. The states where there is no intermediary include Alaska, Rhode Island, Utah, and West Virginia; Rhode Island and a section of West Virginia are currently accessing intermediaries in neighboring states.

Prequalification Pilot Loan Program

This program allows for a small business in underserved markets to have their loan applications analyzed and receive a potential blessing from the SBA before a lender or institution takes it into consideration. It covers loan applications in which the business owner is looking for funds up to $250,000, and its deciding factor involves aspects of the applicant’s credit, experience, reliability, and to some degree, character. This makes it unique among many of the other loans, where the applicant must have assets in order to be qualified.

The main purpose in this particular program is to help you strengthen your loan application. This program can be helpful for an applicant who has relatively good credit and a semi-established business looking for expansion. The SBA will ask to see the applicant’s past financial records, ratios, history, and personal credit. The SBA will help determine which sections of the loan request are potential red flags for the bank and then recommend the most favorable terms the applicant should expect.

8(a) Business Development Program

This program was specifically designed to help socially or economically disadvantaged people (minority entrepreneurs, business leaders, or people with a disability). These loans are traditionally used for a startup or expansion business development. To qualify, a socially or economically disadvantaged person — not just a figurehead in the position — must own and control at least 51 percent of the business. Along these same lines are additional assistance programs specifically targeted to veterans, women, and handicapped persons.

Economic Opportunity Loans (EOL)

This program is for the low-income business owner who may be experiencing even more difficulty in securing financing despite having a sound business idea. As long as one business partner is considered to be living below the poverty level (determined by the federal government and adjusted annually for inflation) and owns at least half of the business, an applicant can qualify for EOL assistance. It is also an option for the small business that has already been declined by a conventional bank or institution. The best part of the EOL program is the loans are long term and offer a flexible payback rate of ten to 25 years, depending on the type of loan.

LowDoc Program

The LowDoc, short for low-document, Program is set up to make the application process much simpler, less time-consuming, and quicker than traditional methods. It does this by reducing the size of the application form to one page for loans under $50,000. For larger loans of $50,000 to $100,000, an applicant receives the same one-page application along with a request for his or her past three years of income tax returns. This program is the most popular in the SBA’s history.

CAPLines

A CAPLines loan is an asset-based line of credit that allows businesses to manage their short-term needs, such as to continue payroll and purchase equipment. Typically, a business unable to qualify for other lines of credit, such as a builder or small company, will use this type of loan. The payback terms of a CAPLine are adjusted to fit the seasonality and cash flow of a business, such as a business trying to complete a large project and waiting for payment.

CDC/504 Program (Certified Development Company)

This is a mortgage product that supports local community developments through commercial real estate. The Certified Development Company puts up 50 percent, the bank 40 percent, and you come up with the remaining 10 percent. You must occupy/lease 51 percent of the building, and you are free to lease the remaining 49 percent of the building to another business. Also, the business must create jobs, and the more jobs the business creates, the more money will be lent to the business. The terms of a CDC/504 program are attractive: a generous 25-year fixed rate.

Grants

So far, this chapter has discussed the many forms of government funding that have to be paid back. What if there was a way to dodge this aspect of borrowing money? There exists just such an excellent tool for some businesses known as the grant. Grants exist because things need to get done, which requires people to carry out the work. Grants tend to center on projects where people want to help people, and the money is intended for a specific project or purpose. You will need to meet the conditions mandated by the grant-giver and then use the funds for the mandatory purpose. Grants must be applied for; you respond to a Request for Proposal (RFP) and follow the criteria that has been issued as to what types of information is needed for the organization giving the grant to reach its decision. Proposals are reviewed, and the grant money is awarded to the winner(s). When considering grants for your herb business, consider all of the ways herbs connect to the public as possible sources for grant money, for example, agriculture and even nutrition (healthy eating, using herbs for flavor instead of relying mostly on salt).

Although the federal government is not as generous with its use of grants for most small businesses, many local state governments are. About the only small businesses eligible for a grant these days are research firms in the engineering and scientific areas because these are capable of serving the needs of the country. These grants are through the Small Business Innovation Research Program, and you can find more information online (www.sc.doe.gov/sbir). Its motto, according to the website, says it all: “Supporting scientific excellence and technological innovation through the investment of federal research funds in critical American priorities to build a strong national economy… one small business at a time.” Government entities recognized small businesses were engaging in more innovation than bigger businesses, but the funding had been tilted in favor of those larger companies. This program helps level the field, so small businesses are able to compete and continue to innovate.

Beyond these few choice financing entities that answer the need of the federal government, the small-business owner can find yet another ally closer to home than he or she may have realized: the local state government. Every state has its own rules and privileges, so contact your state’s Economic Development Center and research its website to see what it offers.

Government grants are created to fulfill specific purposes and can have very narrow qualifying requirements. You may not find a government grant you can fulfill, nor be able to fit within its stringent guidelines. But the government is not the only entity that offers grants. In addition to government grants, there are three more types of grants: foundations, corporations, and individuals.

1. Foundations: An alternative to government grants is available through the private sector via foundations. There are about 100,000 foundations that may be interested in what you do and might be willing to provide you with the cash to bring your idea to fruition. For example, if your business idea involves an eco-safe cleaning service, there may be an eco-friendly foundation willing to offer you a grant. For more information on foundation grants, go to www.foundationcenter.org.

2. Corporations: Many companies set up programs in which they offer grants or will match money for the development of products and services that match their industry and sometimes also resources such as expertise or equipment. Typically, they offer grants to nonprofit organizations within their community to show support for local causes. If your business idea is to establish a nonprofit organization, look around your community for existing businesses already involved in the type of outreach programs that align with your idea. It is possible your business might connect with a corporation interested in promoting health through herbs.

3. Individuals: Generally, wealthy philanthropists set up foundations through which they issue grants. Again, it will depend on your business idea and if it strikes a chord with someone interested in what you are trying to accomplish, especially if your endeavor is civic-oriented, such as an effort designed to get children to eat in a more healthy manner by learning to cook with herbs instead of adding salt or sugar to foods for flavor. Individual grants are competitive, and the guidelines can be specific in what the grant provider wants done with his or her money. So, if you cannot find any grant opportunities through the government, foundations, or other corporate entities, an individual philanthropist could be a viable option.

Other Ways to Finance a Business

The following overview outlines the types of financing available to businesses. Making the decision to start or expand a small business opens up a variety of considerations and options. Many burgeoning companies spend too much time chasing down funds from sources that do not mesh with their business. Making the right deal with the right investors or lenders provides the opportunity to grow in a manageable and hospitable environment. Making the wrong deal with unreliable investors can cause serious problems down the road and set you up for conflicts and even potential failure.

Give it: Your personal investment

Investors and lenders will expect you to provide a significant amount of the capital necessary to launch or expand your business. When you put your assets on the line, it sends the message that you are committed to making your herb business a success, which will make it easier to acquire supplemental funding from outside sources. It is recommended you have enough money saved to support yourself for three years, as your business most likely will not make a profit in the first year or two.

Case Study: From Family Farm to Herb Business, Learning Along the Way

Margaret Shelton

Shelton Herb Farm

340 Goodman Road

Leland, NC, 28451

910-253-5964

In 1986, Margaret Shelton began converting part of her family farm into a profitable herb business from the proceeds she was making from the original herb business rather than obtain a loan or other source of funding. “I was working full time outside of the home and wanted to do something that would allow me to be home on the farm," she said. "Herbs intrigued me. I did a lot of reading and then went and talked to Tom DeBaggio, then owner of DeBaggio Herbs in Arlington, Virginia. I went in his off-season and sat on his back patio to talk about the business of growing herbs.”

Armed with DeBaggio’s advice, Shelton started with a dozen or so different plants and now sells close to a hundred herbs retail and wholesale in the Cape Fear area of North Carolina. “We sell a lot of native herbs and vegetables in season and some herbs year round as well as lots of other kinds of herbs. We have two large greenhouses and about eight cold frames in addition to the field-grown herb space.”

Land is not a problem for Shelton; her farm has been in the family for 200 years and is 400 acres, but she uses only 5 acres for the herb business. Shelton’s knowledge of agriculture helped her start her business. For example, she did not need to add farm insurance and she already knew the rules about working the soil.

Shelton’s knowledge of herbs came from on the job experience and self-teaching. “I read articles about businesses and joined herb associations right away, the Herb Association of North Carolina and the International Herb Association,” she said. Shelton discovered DeBaggio from the herb association and was able to get a lot of information from their classes and seminars, as well as from books and articles. Of course, Shelton is also a member of the local chamber of commerce. She recommends Southern Herb Growing by Madalene Hill for people looking for information on how to grow herbs.

Shelton Herb now employs five people; two are full time and three are part time. “We increase the hours of part timers during the busier spring and summer season," she said. "Winter is my off-season, but some work goes on all the time.” Shelton prides her farm on its unique characteristics. She does not have permanent heating in the cold frames, growing beds that are outside, framed, and come with a glass cover to protect the bed. Nor does she have a permanent sprinkling setup. Herbs are so individual in their needs for water that she does not feel that she could rely on an automated system. “Watering is labor intensive,” she said.

Her business relies on sales of herbs and plants at her farm site, at markets, and to chefs. She also gives classes for the local agricultural extension service. Of course, her list of chefs she provides herbs for has been cultivated as carefully as she tends to her garden, which began when the local Agricultural Extension Service referred a chef to her almost 20 years ago. “Then, to expand, I called local chefs to see if they wanted herbs and compiled a list and started with that,” she said. Now local chefs contact her.

Of course, not all business will come to you. To market her herbs, Shelton sells fresh herbs, edible flowers, and plants at farmers markets, special events, shows, and sales — she supplies plants for the Herb Society of America’s sales. Customers at the farm site and markets rely on her for a variety of herb plants. Shelton thinks a customer who buys from her can rely on the herb’s quality. When you add your name to a brand, it is important to create a positive image toward your product.

Growing herbs is also an easy choice for a “green” activity because as Shelton says, “Herbs don’t really require a lot of pest treatment. Many have naturally pest-resistant qualities.” She washes the leaves of many plants with simple detergent soaps to get rid of many insects and finds sometimes simply rinsing with water helps.

A recent article about Shelton in the Wilmington Star newspaper (4/23/10) quotes her as addressing those who want to start their own herb gardens with this sentiment: “Frankly, anywhere (meaning any part of the country) is a great place to grow herbs.” She adds that most herbs like full sun. Any trouble taken to grow herbs is its own reward according to Shelton. The rewards are many, especially in the kitchen where fresh herbs add an “extra dimension” to good cooking.

Investing your money

Nearly 80 percent of entrepreneurs rely on personal savings to begin a new enterprise rather than take on the added expense of obtaining a loan from a bank, financial institution, or other lending source. Using personal savings secures the entrepreneur’s control and ownership of the business. Because it is your money, no debt is incurred and future profits are not shared with investors. Converting personal assets to business use is the same as giving your business cash. Not only will you avoid purchasing these items, but you will also be able to depreciate them. Your accountant will set up the conversion and depreciation schedules. For many people, their greatest personal asset is their home.

Lines of credit, refinancing, and home equity loans are often used. Raising cash this way can be risky because you are putting up your home as collateral for the loan. In case you default on the loan, the bank or lender has the right to foreclose on the home as an attempt to collect on your debt. Personal credit cards, signature loans, and loans against insurance policies and retirement accounts are other common ways of raising startup capital.

Home equity loans

You will need to know the equity you have in your home. For less than $500, an appraiser or real estate agent can locate home sale comparisons for you to use as an estimate. If you own your home outright, you can refinance without staking all of the equity you have in your home, which leaves room for future refinancing should something go wrong. If you own 20 percent or less in equity, by no means should you ever consider borrowing against that. The funds you gain will be minimal and the second lender will not hesitate to foreclose should trouble arise. The best way to determine feasibility is by following these steps:

1. Get your home appraised; if the value has gone up, you may own more equity than you think.

2. Figure out exactly how much you still owe on your mortgage.

3. Take the appraisal valuation and subtract your debt to determine the amount of equity.

4. Figure out your equity percentage by dividing your equity amount by the valuation amount. If it is less than 50 percent, you should find a different source of capital for your business.

5. If your equity is more than 50 percent, you may be in business. Now is the time to get loan quotes.

6. Figure out how your business plan will be affected by this cash infusion and make projections for how long it will take for the loan to be paid off.

Pay down the principal balance of the debt in order to get out of debt faster and regain the equity on your home.

Leveraging your credit

Leveraging your personal credit worthiness is another way to support your business. A new business has no established credit. Your signed personal guarantee will help establish credit for your business. Ask your attorney about personal liability issues for all business debts. Protecting your personal credit and financial health is a key reason to incorporate.

Borrow it: Loans from family and friends

A primary source of cash, if you do not have your own pool of funds to dip into, is your family and friends. Asking friends and family to help fund your business venture is not as formal as approaching a bank for a small-business loan, but you should treat money you borrow from people you know as a business transaction. Negotiate the terms and conditions of the loan, including the interest rate you will pay, the length of the loan, the monthly payments, and payment due date. Put the agreement in writing and make sure you stick to the agreement you have made with your “lender.”

When considering these investors, ask yourself five questions:

1. Will this person panic about money after investing?

2. Does this person understand the risks and benefits associated with investing?

3. Will this person want to take control or become a nuisance?

4. Would a failure ruin your relationship?

5. Does this person bring something to the table, besides cash, that can benefit your company?

Borrowing from friends and family can be beneficial for a couple of reasons. First, you can typically negotiate a lower interest rate than you would be able to obtain from a small-business bank loan or by using your credit cards to fund your startup. Second, it tends to be an easier process to borrow money from your friends and family because you do not have to complete a loan application and supply supporting documents such as tax returns and a business plan.

Venture Capitalists

A venture capitalist is a professional investor. He or she invests heavily in businesses in the hopes of earning a large return on their investment in the shortest time possible. Venture capitalists want to work with companies trying to launch into the top ranks as quickly as possible by offering a product or service a large number of people may be interested in buying. They are out to make money, which is how they became rich in the first place. They are not angel investors, who offer money to help a fledgling business get started while gaining capital in return. They are in the deal to make big money, and that is where the stakes in such an arrangement increase compared to working with angel investors.

You can expect their relationship with your business to be hands on, so be prepared for this if you look to a venture capitalist for financial support. Your business venture may be your personal dream, but a venture capitalist will want to share that dream with you. Again, this is their profession, and they like to be involved, which can be a benefit to you as a new company because these investors have a great deal of experience and a network of support you will have access to as you grow. Also, because they invest large amounts of money, it only makes sense they want to be close by to keep their eye on things and help steer the business toward success.

Understand that a venture capitalist has only one goal: to get a huge return. The only way venture capitalists can create the best advantage for themselves in helping an entrepreneur is to take the largest percentage as possible of the venture. The problem is if the entrepreneur is not careful, the source of money can end up owning more than 49 percent of the company and become the main decision maker.

It is common for a venture capitalist to have a charter stating he or she will not invest in anything unless there is at least an opportunity for a return that is 40 to 80 times their investment. With this level of expectation involved, it is easy to foresee the kinds of problems that can brew during the growth of any business. These investors expect big results, and they expect them quickly, or they can become rather unhappy just as quickly. Using the venture capitalist as your source of funds may mean you have a partner who is dropping the hammer on you constantly and working to ensure that enormous return on their investment is being created. You must decide if you want that type of pressure in exchange for the funding and whether you can handle having someone question your every business decision.

Because timing is everything with venture capitalists and due to these high expectations, it is always best to be in a position of them asking to be a part of your project as much as you are asking them to be. You would do better to build your business as far as you can take it before you invite venture capitalists to get in on your deal. Coming from the decidedly stronger position of a business that is already growing will give you better negotiating power than if your business is one you are trying to start from the ground level.

What to look for

Attainable and realistic terms are one of the most important factors of any venture capitalist deal. Many new entrepreneurs get so excited over the prospects of a successful company they accept any amount of money on any terms. What they sometimes do not understand is there are no shades of gray with a venture capitalist — only black and white. You are either making them the profit they asked for, or you are not. They are not interested in hearing excuses or giving you second chances. The minute you sign a deal, they expect things to go just how you described in your business plan, and if it does not, they consider that a breach to what you had agreed. You will now have to work on growing your business while dealing with those repercussions.

The schedule you are given by venture capitalists is important to them. You have to understand a venture capitalist has to have an exit plan at some point. This is what venture capitalists do. They usually never stay with any one company, but instead, work with many different companies, build them up, receive a profit, and then move on to another venture. With this in mind, you are going to want to design an exit plan for them that will not leave you without your own company in the end. You have to make sure you have thought of a way for them to exit the business and still allow you to either keep control of the business or sell it and make enough profit to start another business.

You will probably never find a venture capitalist who does not want an exit strategy for at least five years, but some may want an even shorter time frame. An exit strategy in this case refers to the time period in which the venture capitalist wants to earn their money back and their profit and move on to another business investment. The key here is to give yourself enough time to present a profitable exit strategy to them while still keeping your business intact and profitable for yourself and your employees. The more time you can buy for yourself, the better off you will be, so look for venture capitalists who allow the greatest leeway in their expectations of an exit time. You will learn what those expectations are when you meet with them and have a better idea of what is negotiable.

Angel Investors

Angel investors are individuals who are high net-worth investors. They invest in business by looking for the highest return possible to compensate them for their risk. The actual term “angel” is usually misconstrued as a term of endearment for a caring individual who drops in from the sky to make all of your money problems go away and your business succeed. Although this may indeed occasionally work out to be the case, the term actually comes from the early 1900s when it was common for wealthy businessmen to invest in Broadway productions. These investors were referred to as “angels” for their willingness to make a high-risk investment others would shy away from by making those theatrical productions possible. Today, it is more accurate to think of your “angel” as being an experienced businessperson who deals in nontraditional investments that offer the greatest, albeit most risky, rates of return. They generally have strong connections to several industries and know all the ins and outs of business negotiation, including various laws and contract negotiation. These are private investors, generally wealthy individuals who do not advertise that fact and deal with business people who find them mostly through word-of-mouth.

The angel investor is indeed taking a large risk when they decide to help fund a project. If something goes wrong, or the business fails, they could be out of much, if not all, the money they lent to the business venture. To compensate for this risk, the angel investor usually asks for a high rate of return on the money lent to the business and hopes for its success so they can collect a tremendous profit. This return may be in the form of a cash reward and bonus, stock and ownership in the company, which equals shares in profit, or possibly in trade for other goods and services the business can provide the investor. Unlike the traditional forms of loans, commercial banks, thrifts, etc., that generally deal in smaller loans for the small business, the angel investor prefers to offer large sums of money that can offer them the most rate of return. It is quite typical for the angel investor to supply $150,000 to $1.5 million of a new business’s initial startup costs. Obviously, that is a large sum to dole out to any business, and they expect to profit beyond average expectations when the business deal works out.

What does an angel investor expect?

To get a better idea and a visual of who these angel investors are, the Center for Venture Research at the University of New Hampshire has done extensive research to provide some common generalities that give an average description of these investors. According to the results, below are some characteristics that describe who they are, the typical patterns of investments they share in common, why they reject certain deals, and where they tend to invest their money.

Angel investors tend to be:

The patterns of investment for an angel investor follow these trends:

The reasons why angel investors reject proposals include:

Where the angel investor tends to invest are:

This last trend should get you thinking about who may be in your city or nearby that invests locally. Angel investors are more than likely going to be interested in becoming a part of the business in some way. There could be a number of details an angel investor is looking for when considering a proposal by a business entrepreneur. They expect to have weekly and official quarterly updates and to be kept abreast of all new obstacles and accomplishments as they happen. Although some of the smaller investors prefer less and some of the larger ones much more, in general, an angel will ask for a 25 percent stake in a business with some securities (stock) in the business. This includes rights to liquidation funds, should the business come to the point where it has failed and there be anything of value left to liquidate. Liquidating is settling a company’s debts and conversion of any remaining assets to cash.

For their return on investment, the kinds of numbers that grab the attention of an angel investor are a 30 percent return on total investment for the term of five years, with a net income projection of $20 million. It is possible to gain interest with a smaller return, especially with beginning, less-risky investors, but in general, the large dollar signs capture attention. Think big when you sketch out your business idea but not so big you are being unrealistic. This is especially true when you make a proposal to an angel investor. They are looking for large returns over the shortest possible time, which often means more initial investment and an aggressive and progressive business plan.

The angels are not so angelic today

It is hard to deny the risk that can be associated with a wealthy investor. The business world is filled with high expectations, so much so that even the angels have begun to expect a lot with their investment funds. Many so-called angel investors today are family members, but even they expect a high return and are sometimes harsher to deal with than venture capitalists.

An angel investor is able to build a company up with the use of their kind contributions. Historically, sometimes these investors would make money and other times lose it, and it was always considered to be a bit of a gamble.

Today, this term has spread to mean many different business ventures, and an angel investor is simply an individual who has lots of disposable income and therefore has the ability to put large amounts of cash into something without the worry of being thrown out on the street or going bankrupt if things do not go right. With that said, however, if these people did nothing but throw away their money to every entrepreneur with a grand plan, they would certainly be broke in no time, no matter how much disposable income they may have to play with. For this reason, these individuals are not a free source of cash. They will expect something out of the deal, and it will be up to you to outline exactly what they can expect in return if they decide to provide you the use of their money. Probably the greatest difference in angel investors today is some of them do not have the patience they have had historically. In this respect, they have developed the mindset of a venture capitalist and have clear expectations that they want to meet within a certain time.

Joint Ventures

Sometimes one of the best ideas for accessing a source of money will be to partner with another business entity. This alliance between the two interested parties is not a merger as such because there is no actual transfer of ownership between the two parties. Instead, it is a decision to share assets, knowledge, market shares, and profits. The companies involved are allowed to keep what is theirs, but they combine resources in a common interest to create potentially more profit than what could be generated individually.

Joint ventures have two primary needs: helping the business learn new technology that will make the company function more efficiently and enabling new markets to be opened to their product they would not have otherwise had access to. If you are partnering with a large company interested in expanding in your operating area, this could mean you have just found a great source of both other people’s money (OPM) and other people’s resources (OPR). A joint venture can be a great opportunity as long as you are able to find the right company with which to align your company.

A joint venture can create a rather large business out of a very small one. Sometimes, a small business can insert itself into a larger corporation in a market it would like to saturate. The larger business can engage in a joint venture with the smaller company and profit through its success, while the small business can become a rather large force in the market in a very short period of time. Small entrepreneurs need to understand that even they have things to offer that a larger company may want, such as an area of specialty, and if they can convince them of that, it will be as good as obtaining OPM from them.

One problem that can occur is one of the companies will be afraid to share its technology with a potential competitor, while the other company is afraid to share its market area. If both businesses cannot find a measure of trust between one another, they will not be able to give each other the support they need in order to assure the success of the venture, therefore crippling its potential. Also, a joint venture can mean while you will be gaining power and OPM within your business-marketing area, you may also lose a portion of the control you have over your business as a whole. In other words, you have to decide whether it is more important for you to own 100 percent of a $1 million company, or only 10 percent of a $100 million company.

Not all joint ventures are created equal

Both parties must share equally in order for an initial agreement to work effectively. Such a plan is accomplished with due diligence by checking the credentials of the other business. If both businesses can agree on a fair trade of services, then this is well worth the effort. If the parties cannot agree, then this will only lead to lost money and time — neither of which a new business has the luxury of squandering — ultimately defeating the initial intent: to strengthen their position.

The key to the acquisition of a successful joint venture arrangement is to find a need a similar business may have and find a way that you could fill that need for them in a way that can be spelled out within a partnership agreement. Many joint ventures involve the combined efforts of two businesses targeting two different market areas. It is not uncommon for one business in the United States to want to partner with a business in, for example, Asia. This could be a piece of a market that would be very costly to get into without the combined efforts of a couple of businesses that form a joint venture to tackle it.

As good as this can look on paper, it is certainly not a fix-all for a business either stagnating or new and looking for an alternative market or technology. Out of 100 such joint ventures, only 40 percent of them will be successful by the end of five years. The other 60 percent would have dissolved long before that five-year period. Do your homework to find a qualified, developed company to venture with, and your chances of success will go up exponentially.

The most important part of any joint venture, besides negotiations, is the contract itself. Every joint venture you consider must have an agreement so both parties know what is expected and the parameters of what will be involved. These are generally standard and straightforward agreements. They are fairly easy to come by on the Internet, but in general, there are a few important aspects you will want to make sure get covered. The biggest concern is in what form payment will take. Will it be cash? Will it be part ownership of the business? Other aspects to consider include who is responsible for making decisions and operating the business day to day, who will be responsible for expenses, and under what terms the joint venture will dissolve.

Although there are a variety of options you can investigate to find the money you need to start your herb business, not every option is right for you or your personal and professional financial situation. Investigate each option available to you, weigh the pros and cons of each option, and then make an educated decision as to which option or options are the most viable options for you. This makes you are smart consumer and an educated business owner.

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