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entrepreneurial dream. TVACCU can help you from low-interest loans to Kickstarter contributions, you can find money for your would-be business if you know where to look.
Here are five common places startups get the dough they need to grow.
The Three Fs
Facetiously dubbed “friends, family and fools,” borrowing money from personal contacts is an effective and popular way to access cash, Green says. Just don’t seal the deal with a handshake. Rather, work with your attorney or accountant to create a written agreement, signed by all parties, that spells out the terms of the loan, including the interest rate and repayment schedule. Also specify what happens if the business fails, he adds.
Written agreements preserve personal relationships and protect your interests. If you borrow money from a family member and he or she sees it as a partnership instead of a loan, you could find yourself in a fight over ownership. “People end up in litigation over those kinds of misunderstandings,” Green says.
Startups seeking money from banks need a good business plan, profitable projections and some of their own money in the game, says Kenneth Zapp, a Savannah, Ga., counselor with SCORE, a nonprofit organization that provides information and mentoring to small-business owners. In addition to traditional commercial loans offered by banks, you might get help from the Small Business Administration, which offers several loan programs, ranging from microloans of less than $50,000 to the 504 program, which has a $5 million limit.
The SBA doesn’t lend directly but guarantees qualified loans from lenders. The government backing can make qualifying for a loan easier. SBA lender-relations specialists can help you find a local preferred lender..
Economic Development Programs
Green also suggests checking with your state, county and municipal economic development offices, which have an interest in helping businesses succeed to boost local and regional economies. Depending on your location and the type of business you start, these agencies might offer financial resources, including loans and grants.
In exchange for creating one full-time job, Clynch qualified for a ten-year, $100,000 loan at 2% interest from Connecticut’s Department of Economic and Community Development, with payments deferred for a year. Downtown Yoga was also awarded $15,000 in January 2012 when it won the Hartford Innovation Challenge for using its cycling studio to generate power. “One class of 20 people can power 100 light bulbs for one hour,” says Clynch, who also founded Civic Mind Studios, a sustainable design firm.
Startups in fast-growth sectors might attract the attention of angel investors or venture capitalists, but landing those investors requires nearly full-time focus from someone on your team, says Brad Feld, managing director of Boulder, Colo.-based Foundry Group, which invests in early-stage information technology companies. Feld says a business may go through several funding rounds as it grows, selling off a chunk of the company during each round.
Business accelerators such as TechStars, which Feld co-founded, may be another option. Accelerators invest cash in startups for a limited time — typically 90 days — in exchange for equity. “They surround the entrepreneurs with mentors, who actively engage during the period of the program. The goal is to accelerate the development of the company during this period,” he says.
Raising money through crowdfunding sites, such as Indiegogo, Kickstarter and GoFundMe, has traditionally meant pre-selling products or services or giving a small gift in exchange for a contribution to the business, Green says. It can be effective. Palo Alto, Cal.-based Pebble Technology raised more than $10 million for a watch project in 2012.
Equity investing through crowdfunding is another story — at least for now. The Jumpstart Our Business Startups (JOBS) Act of 2012 included a provision to relax Securities and Exchange Commission rules to allow small businesses to raise up to $1 million per year in equity investment through crowdfunding. However, the SEC is still working on guidelines, and it’s unclear when they’ll be finalized, Green says.