Ask SCORE: New businesses in tough spot when it comes to financing


Question: I'm starting a business and I was interested in the previous discussion about getting bank financing for an existing business. But I'm brand new, with no track record, so what's the deal for me?

Answer: Getting financing for a startup business is a very different (and considerably more difficult) situation from an existing business wanting to expand. You'll have to be very creative in finding alternative financing sources. Also, realize that you are in a pretty weak bargaining position. However there are several ways to pull it off. Let's talk about this.

Today and in a future column we'll look at 15 ways to finance a business startup. These don't all apply to every business; you will need to be opportunistic. We'll look at some funding possibilities, and also note the downsides associated with each.

Remember, every business decision is a tradeoff of plusses and minuses. You're probably eager to get the business up and going, but don't let that rush you into a risky or unsuitable financial arrangement.

First off, you should get a handle on where you are now financially. The best way to do this is to step back and look at your personal financial statement. Of most interest is the "balance sheet," which is basically a listing of your financial assets and liabilities. For a blank form, go to any bank or go online to and enter "form 413" in the search box. Spend a while filling in estimates of the values of all your assets and any amounts you owe.

With your financial data in hand, let's look at some common forms of business startup financing, and their hidden costs.

Invest personal equity. Of course the most desirable source of startup capital is your own money. If you have savings or other similar liquid funds, you're literally "in business." It doesn't have to be big money if you're starting out small. On the downside, it's obvious that if your business fails, the money is gone.

Use the Three Fs. This is a bit of a joke in the business finance community; it stands for "family, friends, and fools." A great many business startups get funding from family members. This is fine, but be sure you have a written agreement (a promissory note, with repayment terms and an interest rate) so everyone agrees about whether it's a loan, a gift, or a purchase of part of the company. This is especially important with friends or others, where blood is not so thick. The downside is that you risk damaging a personal relationship if things go south.

Sell some assets. You might find that you have some items you could sell, like a coin collection or a classic car. This frees up cash to put into the business. Of course, you won't have the asset anymore.

Use credit cards. A good way: You can buy resale merchandise and supplies, with the ability to pay later. This lessens your need to put in big money up front. A bad way: Take large cash advances. You'll pay a high interest rate; 20 percent or more.

Dip into a retirement plan, like an IRA. It seems to be a ready source of cash, but be very careful. Two traps: under common circumstances, you'll get hit with income taxes and a hefty penalty. Get advice before you do this.

Ask someone to co-sign for a loan. This may be a possibility if you have a supporter with good credit who is willing to step up. Of course the co-signer becomes personally liable if you default and can't repay.

Use a home-equity loan. If you or a backer has home equity, this may sound like a good idea. Interest rates on home equity loans are very low, because the lender is a secured creditor. But here's the problem: The backer is securing your loan with their personal home. If your business fails, they are on the hook to repay it.

We'll look at some more ideas for financing a startup or early-stage business next week.


To learn more about managing cash flow, and other small business matters, contact SCORE, "Counselors to America's Small Business." SCORE is a nonprofit nationwide organization with more than 13,000 volunteer business counselors who provide free, confidential business counseling and low-cost training workshops to small business owners. Call the local SCORE chapter at 360-685-4259 to schedule an appointment. For details about the organization,visit

Ask SCORE is prepared for The Bellingham Herald by Bob Dahms, a business counselor with the Bellingham chapter of SCORE. Submit questions for this column to

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