To make capitalism work, entrepreneurs need capital

Many people wanting to buy, start or grow a business don’t have the cash they need to do so.
I wish I could say that I have money or have access to money for these business people. I don’t. But I do know about how to steer people toward sources of money.

The very first rule in the search for capital is this: Don’t expect anyone to loan or give you money if you don’t have a clear business plan that demonstrates a feasible business purchase, idea or expansion. Not only does this plan have to express a good idea, it also has to demonstrate to a lender that the borrower will be able to pay the lender back. If a person wants a grant, the granting agency may not want to know how the business will pay it back, but it will want to know that it’s funding a viable, sustainable enterprise.

The best source for cash needed to buy, start or expand a business is personal savings. Not “other people’s money” (OPM) but “your own money” (YOM). Which brings me to a bit of advice. Anyone thinking about starting or buying a business should start saving money. Yesterday.
Another great source of cash for such ventures is friends and family. If an aspiring entrepreneur doesn’t have enough in savings to make a deal work, then ask around to people you know. You’ll have to convince these people of the merit of your venture (hence the business plan), but usually these “lenders” are easier to deal with than traditional financial institutions. In other words, they might not want an extensive application filled out and they might be a little bit more lax if times get tough.

And then there are grants. When people ask about getting grant money to start or fund their businesses I always say that yes, there are grants out there. But grants are difficult to get and usually they aren’t for a normal, for-profit business venture. Yes, there are programs out there for woman, various ethnic groups and the financially challenged, but the truth is that those grants are extremely difficult to get for a for-profit business.

Then there are loans from established lending groups or institutions. There are eight banks or lending outfits in the county who would love to make money by lending money. That’s what they do. There are also other outfits (Northwest Colorado Loan Fund, Colorado Lending Source, etc) that specialize in working with businesses in the mountains. These are excellent sources of capital.

But they don’t just “give” money away. First, they’ll want to know the acquisition or business is a good idea (back to the business plan). Second, they are going to want some good assurance the borrower will be able to pay them back (business plan, again). And they will want collateral or protection for what they lend, usually at a percentage that is lower than market value. These institutions then charge an interest rate that is higher if the risk is higher and usually closer to the market rate if it’s a well-protected and “safe” loan.

Another source of start-up or acquisition funds can be gotten through partnerships. In its simplest terms, this means giving a percentage of ownership in a company to someone who buys in.

And then there’s the new trend of  â€œcrowd-funding” or Internet begging. This is worth considering, I suppose, but if people are donating to a business that’s going to make the owner lots of money, then those people who are “donating” may really think of that as “investing” and then they’ll want returns on their money and the situation gets very complicated.
And so-called “Angel” investors usually don’t contribute a dime without having at least a 51% ownership stake in the venture. Beware of such “angels.”

Capital is one of the most important ingredients needed for starting or expanding a business. It’s not always easy to get, but with a good idea, a will to work, decent collateral and a good business plan, it can be acquired. Then it’s time to put the capital to work and succeed.
After all, that’s why we call it capitalism.

Patrick Brower can be reached by calling 970-531-0632 or at patrickbrower@kapoks.org.