Startup Business Financing

The details of startup business financing schemes often vary from country to country but the overall conditions are similar internationally in the US, Europe and Asia. In Asia the Micro loan is now become very popular, although this is normally unsecured and for very limited amounts.

Bank Business Incentives

Many Banks offer smaller loans to new businesses, European Banks will possibly lend up to 25,000 Euro's for registered businesses. To apply for the loans you will have to prepare a business plan and cash flow forecast. The quality of this plan should impress the local bank people as it is their only gauge of how businesslike you are. The loan will normally not require collateral but a personal guarantee is normally required.

Asian Banks also offer various types of incentive, although usually of much lower value.

Equipment as Collateral

If you are unable to obtain a promotional or incentive loan as above, think about what you need for your business.

If you need some type of movable equipment to start your business, the bank may accept the equipment as collateral against a business loan. For example if you were to start a car repair business and have to invest in spray equipment, car hydraulic lift, air compressor etc. then the bank may agree to lend a percentage of the cost in exchange for you signing over the ownership.

If something goes wrong then the bank can sell your equipment to recover their money.

This can apply to any business that requires substantial equipment to operate. Banks will normally lend a maximum of 80% of the equipment value, less any installation cost. The equipment must be movable, that is, it must be possible to transfer the equipment to another place where it can be utilized.

Projects from a few thousand dollars to several million are often financed by this method.

Personal Asset Collateral

This method of startup business financing may involve your personal assets, be they car, home, long term investments, private pension plan or any other thing of value you may have. Of course this is arguably one of the most emotive ways of raising finance.

I strongly advise against it, much better to take a financial partner or limit you aspirations and start up costs.

It is also possible a family member may guarantee the loan, that is take on responsibility for the outstanding amount. I would argue against this method. I know of families split apart by this method.

If you do have to use a relative or friend to guarantee a loan then I suggest forming a company and giving the guarantor a percentage of the company, that way they can share responsibility in the operation of the company.

Insurance and Foreign Exchange Methods

This item covers several methods involving Insurance Policies, Endowments, Purchasing protection in one country and selling the policy in another.

Particularly in the present climate this is not the way to go. It requires a very astute financial mind and knowledge of several financial instruments. In theory these can work but in practice rarely result in secure project finance.

Some of these startup business financing schemes are close to being illegal, many involve taking out endowment insurance policies guaranteed by a life insurance policy. Or a lump sum of which the interest received pays for the insurance etc.

The best method of describing this group of financing methods is "Financing only a hit man would love"

Venture Capitalists

The Venture or "Vulture" capitalist will not be interested in a small business unless you have something very unique. If they do invest it will usually be for the short to medium term, but this is very unusual. If you are to approach a venture capitalist you should ensure your plan has an exit strategy. That is answering the question what would the Venture Capitalist receive if the company went downhill after certain periods, this is probably the most asked question by VC's.

Conclusion

My advice in getting small business loans is to first go to your bank, be as professional as possible. The bank want to know:-

Is your business plan professional and feasible.

Do you have the required expertise, (If not, involve someone who has).

Are you risking anything in this business. ( They want to know that you will lose if the business fails, however little money you have). If you have nothing to lose than they will not normally help.

Here are some more ideas of different finance scenarios

Go to your own bank first their are often startup business financing systems that are not advertised very well. Just have an informal chat with someone from the business section of the bank. I think you may be surprised.

Remember that banks make money by having long term relationships with businesses, supporting startup business financing is usually central to the banks policy. Don't worry about shopping around see which bank gives you the best offer.