Small Businesses and Contractors Have Sources to Raise Financing to Launch a Part-Time Start-Up

By Chris E. Talis, CPA, MBA and Senior Partner at Hedgerow Mergers Acquisitions
 
An economy in turmoil, such as the one we are in today, creates tremendous challenges to raise capital: the life blood of any business operation. This has brought fear throughout the marketplace, which, in turn, creates further uncertainty. Government intervention has created some temporary relief, but will its programs spur a rebound and will its effects be felt in the near future? 

In the meantime, starting a home business part-time around a day job may be the answer. With a part-time home business, one doesn’t have time to put together a financial plan and spend time locating funds. In times like this, the focus should be on obtaining easy financing, small amounts, from under $5,000 to $10,000. 

Tightened Lending
     There has been a significant tightening in the lending environment as a result of this economic contraction. Whatever lending is going on today seems to be focused on larger firms, but in reality the lending problems affect all businesses; most notably small and part-time businesses and independent contractors that don’t have as many options for raising required capital as larger publicly traded companies possess. When small and part-time home businesses and independent contractors need to make required purchases, hire qualified staff, or make capital expenditures, where can they turn to receive access to the funds they require?    

In order to create an environment to begin some sort of recovery, banks will need to ease their lending requirements in order to help alleviate the credit crunch currently being felt. Because the small and part-time home business owner will play a vital role in this recovery, it is important that there is a concerted effort to boost consumer confidence and increase incentives for the entrepreneur.

Government policies must also encourage entrepreneurship. These policies must promote innovation, provide capital, and spur employment. Until these government policies and programs are implemented, it is important for small and part-time home business entrepreneurs to be creative and seek every available source of financing to keep their business flush with cash during difficult times. Here are some of the available options the entrepreneur should consider.
 
1. Friends and Family
Many times the simplest way to raise capital is to go to friends and family and ask them for help. It may be a short-term loan; it may be to make an equity investment in your business. If you would like their dollars in the form of equity but would not like them to have any sort of voting power, perhaps you can create a second level of stock (preferred stock, for example) which would give them preference should the company need to liquidate but no voting rights. Don’t go beyond those whom you know will give you a yes and a small amount.

2. Using Personal Assets such as Home Equity as Collateral
          Many times small and part-time home business entrepreneurs in need of immediate capital will borrow from their home’s equity until traditional financing sources become available again. This can be a precarious choice in that you are risking the home to benefit your business, but many times it is the only choice. Be careful. They can be easy to obtain with little hassle, but set a maximum amount to draw from home equity. Budget carefully.

3. Credit Cards
            Credit cards are very costly, but in reality are unsecured loans and should be used only for short-term credit purposes. One’s business card should be a separate credit card from one’s person credit card. It is important that any business owner speak to their financial advisor to make sure that whatever choice they make is the correct one for their unique situation.

4. Asset Based Lending
Some banks will lend monies based on a company’s assets. Whether it is equipment, real estate, inventory, accounts receivable, or vehicles, banks will lend using the company assets as collateral. The advance rates will vary usually based on liquidity of the assets (accounts receivable and inventory being more liquid and therefore would have a greater advance rate), and the cost to this type of financing can be costly as well as the reporting requirements being somewhat cumbersome.
 
 Creativity and resourcefulness are paramount during times of economic hardship, and it is vital that you use all available sources to keep your small or part-time home business flush with cash while the government attempts to create programs designed to ease the lending environment and improve our economy’s conditions. HBM
 
Chris E. Talis, Hedgerow founder and Senior Partner, holds an MBA in finance and taxation, and is a New Jersey licensed Certified Public Accountant. He has personally refinanced troubled companies, directed a management buyout and his diverse background includes business consultancy; debt and equity placements; business valuation; mergers, acquisitions and divestitures; financial analysis; succession planning; and exit strategies. For more information: www.hedgerowma.com.
 
Previously published in the October 2009 issue of HOME BUSINESS® Magazine, an international publication for the growing and dynamic home-based market. Available on newsstands, in bookstores and chain stores, and via subscriptions ($19.00 for 1 year, six issues). Visit www.homebusinessmag.com