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So, as some of you may or may not have seen, I've made a few posts on the forums over the last half or year or so about a business I'm attempting to startup. I've reached a point where I'm looking for funding, but most of the options seem outside my reach. I've looked at different types of loans from banks, but at the current time they're quite tight on loans. You need roughly 20-30% down for a SBA loan, which sort of negates the purpose of such. Even if I came up with the 30% down, SBA loans are also up to the discretion of the creditor who will give them out, even though they're almost completely and fully backed by the government.

I'm trying to stay away from looking for an angel investor, but that's starting to look like the only option. They usually end up taking not only an arm and a leg, but an arm and a leg of any sort of arm and a leg you somehow spontaneously regenerate over the next 10-20 years. Usually you end up having to give them 51% or more stock in the company and a seat as a CEO, which means you really aren't running your business anymore.

The amount of funding I am looking for was around the $247,000 range. 47k would be provisionary in case my business would do absolutely horrible for the first 3-4 months and generate absolutely 0 income. This still falls under SBA loan allotments, but I would have to come up with 75k on my own, which is a lot of money even for someone who worked hard for the last 10 or so years.

I've already spent quite a bit of time in contact with SCORE and the Small Business Department at my local U, but when it comes to actually finding funding they can't do a whole lot. Unless you fall under very specific categories they don't really have anything they can help you with. Microloans, female business owners, minorities, disaster victims, technology investments (actual technology development), or farm subsidies. Pretty much all these niche categories can be found on the SBA website as well.

I've already started putting together a website on GUST as that seems to be the place of choice for investors.

Those of you that are entrepreneurs or investors, where would you suggest I go to look into funding? Has anyone else had any experiences in this are and if so what have you pursued or done?


(Please spare me cynicism and/or obvious rhetorical responses. I'm well aware of how hard is to start a business and money doesn't grow on trees.)

If you are doing cutting-edge technology work, you can get SBIR/STTR grants from various agencies (NIH, NSF, DOE, DOD, EPA, etc.). If you are doing fundamental work you can compete for "academic" funding in many agencies. To date I leveraged a modest personal investment into many hundreds of thousands of grant funding. Note that these are not loans and do not dilute you existing equity. It helps that I am in biotech.

The traditional source for early funding is a "three Fs" round -- friends, family and fools. Are these available? If those don't work for you, look for local angel money. The amounts you want are small, and angels often are willing to offer reasonable valuations. You have to have a good business plan for this to work.

The last option is to self-finance. Work a normal 40 hr/week job, and run your business in your remaining 60 hours per week.

Sorta seems like you're waiting to give me a link and ask for my SSN. XD

Friends aren't friendly enough to help with any sort of financial investment, my family isn't really an option due to various reasons (I've already explored it), so I suppose that just leaves fools. I've looked into some local angel networks, but they all seem to use Gust. No one seems to be local or has contact information available. I've seen a lot of sandbox type startup companies that will get you on your feet, but take like half your business away after it, the same as angel investors seem to do (from what I've read). Those aren't local either.

Yeah, unfortunately I'm not opening a business for any sort of bleeding edge technology. It's a entertainment venue for technology oriented crowds. Like an internet cafe, only new age in many ways and not focused around sipping coffee for the elite.

I do have a good business plan and the SBD rep I worked with said it was one of the best and most complete she has seen, but once investors see it the crap hits the fan. Since I don't have large amounts of equity to brace against it that puts me in a spot where people generally don't give me a second glance, at least banks.

I would self-finance if I could, but my business and business model doesn't really work well with that. Having a physical location and needing someone to be present. I'm not really worried about income after the business gets going, that should work out break even to really well, it's the startup costs that I need to work out to get the business on its feet in the first place. I've contemplated starting smaller too, but those types of places don't work out all that well in the niche I'm going for. They end up as a hole in the wall no one visits. It's one of those 'go big or go home' sort of things.

I've contemplated crowdsourcing too, but Kickstarter forbids startups from trying to find funding on the website even though my business is very socially oriented, new age, and based around gamers.

Kickstarter might be a challenge in terms of audience as well, since it sounds like your business is gong to be pretty local. Have you considered pre-selling memberships or perk packages directly to your target audience? A nice high-gloss pitch could bring in eager would-be customers and help build some buzz. The buzz might also loosen up the pockets of more traditional lenders to get you the rest of the way to your goal.

It's a entertainment venue for technology oriented crowds. Like an internet cafe...

So what is the liquidity event where an investor can get out his money? Remember you are competing with all of the other young companies, and early-stage investors want to get out 10x or more of their investment after 3-5 years. If you can't do that, forget about equity investors.

You don't say where you are located, but in most places angels invest their own money. Usually your business plan is screened, and if it is solid, you are invited to pitch the larger group. Individuals then can choose to invest or not. As a rule, it is *local* money. And contrary to what you say, angels do not seek over 50% of the equity unless their potential for return is very small.

Since I don't have large amounts of equity to brace against it

This makes no sense. Right now (or very shortly) you should own all of the equity in the company in exchange for you initial capitalization. You set the terms for an equity offering, though of course you may not get it.

But you really have to address the liquidity event. If you are looking at sharing profits down the road, that is not a proposition that I would take as an investor. You'll either have to find someone who would buy it from you, or take it public. If you can't do that, then you have to self-finance if friends and family won't work for you.

Just because something is a good idea does not mean it is a good investment.

Have you approached your local chamber of commerce to see if there are any tax breaks, special grants, etc. available for this business?

Another possibility would be to join-venture the project with a related business entity and then share shop space and related overhead costs, although this has its own set of risks.

Bensam123:

Day job talking here (state-level banking/financial regulator). Start up funding that is not SBA-related or vulture-capital related is essentially non-existent in today's economy unless you can crowd-source or family/friend-source. It doesn't matter how gold-plated the business plan is, all of the traditional lending sources have become so risk-adverse (and to some extent us regulators are at fault for that) so as not to fund anyone who won't put up the first 30% or more of the initial equity contribution so as to meet SBA lending criteria. To be brutally honest, in today's economy no bank will finance a start-up business without SBA backing.

If you want to start this business without personally investing a good chunk of the start-up costs, your only avenue is the vulture capitalists and the inevitable sale and loss of control of your idea to make them whole. If you want to build something you can keep through traditional lending programs, you need to pony up the first 30% of the start-up costs to meet SBA requirements.

Harsh? No doubt, and I apologize for being blunt. I've been in the regulatory business for 16 years and have reviewed countless loans granted to start-ups. The single point of failure in start-up businesses is inadequate capitalization, as most start-ups severely underestimate the timeframe it will actually require to reach profitability and thus deplete their capital before they reach that point. That is why the traditional lending sources are looking for 30% capital injections on your part.

I'd like to be more helpful, but in this market it's really difficult. About the best advice I can offer is to see what state-level programs might be available for start-ups.

Put yourself in the investors' shoes. You're asking complete strangers to give you lots of money for something that will be perceived as pretty high risk. In exchange for taking that risk, they will want a large potential payoff and the ability to liquidate any remaining assets if they decide (for whatever reason) to bail -- i.e., they will want ownership and/or control of the business.

Since some one mentioned Kickstarter, if you feel you've got enough interest (based on your market research), you could look at how this guy is doing:

Bare Knuckle Pizza

It's a local thing, but you may be able to get support from outside your area, depending on your pitch, what you offer, and other benefits..

Captain Ned is right: there practically is no money available from banks to the small business community. Start-ups are even more of a challenge. For example, I'm trying to get a line of credit for my company. The company has tangible assets far in excess of the line, but I still have to back it personally anyway. What a deal!

Back to the putative investor(s): what sort of profit will they make on their investment? How do they get their money back?

If a 3Fs round is not in your future, then the traditional alternatives you have are to refinance your home (if you have one and it is not underwater), have your spouse or significant other support you while you work for nothing, max out your credit cards and pray that the cash flow will cover payments, drain your retirement accounts, or some combination thereof. Personally I liquidated all of the 401(k)s and 403(b)s and worked for nothing for four years while I built the business. I have not yet earned that amount back yet, but it is close, and we are up and running.

If you are not willing to invest in your own business, why should someone else?

DrJ wrote:

Captain Ned is right: there practically is no money available from banks to the small business community. Start-ups are even more of a challenge. For example, I'm trying to get a line of credit for my company. The company has tangible assets far in excess of the line, but I still have to back it personally anyway. What a deal!

Well, commercial lending standards since I got in the business (around 1986 as a lender) pretty much require personal guarantees from owners/principals. It's the banks' way of making sure you're paying attention both to the business and to repaying the loan. Also, us regulators really look closely at loans not carrying personal guarantees to make sure the bank performed the additional underwriting necessary to justify not taking the guarantee.

SBA loans not only require guarantees, they also require owners of closely-held corporations (i.e. Mom & Pop owning the corporation owning the store) to pledge their stock in the corporation to secure the loan as well as requiring them to execute what's known as a "stock power" form which allows the SBA to transfer ownership of their stock to the SBA in the event of default, allowing the SBA to move into a position of control. They're rarely executed (state law judges take a dim view of them) but it functions as a reminder that when you take out an SBA loan, you better pay.

It's alright. I already knew most of what is being said here. I was just hoping there was an alternative route lined with gum drop buttons I hadn't heard of yet. The SBD counselor I talked to said a lot of what you guys are saying too.


I've been looking at alternative routes, such as crowdsourcing. It is a really cool idea and I wish I could leverage it more, but since my business is on a local level I can't really up sell that to a bunch of people. I could sell advanced memberships as some of you are suggesting, but that wouldn't generate nearly enough money to cover the 30% down and I would more then likely be over selling my services.

I agree Ned, I'm trying to stay away from scraping together the bare minimum to start my business. 47k of which is for pure non-profitability in the first four months. I wouldn't even take that out unless I completely dive bomb. I have plans to attempt to grab a foothold when my business first opens (a local cash prize tournament) to grab a foothold and get people in the door to start things out. But I do also have about 30k worth of padding I could potentially scrape off that, so I could potentially get away with around 170k if I had no provisioning.

The busienss I'm trying to start has huge potential for social impact and could potentially turn into a national chain if everything works out (which I'm sure it wont). It sounds lofty, but there really is very little competition in what I'm doing and no one is trying to capitalize on it besides little 'mom'n'pop' style establishments. The few of which I've seen are poorly managed and have no direction.

I am unfortunately quite early into my life, so I don't have the assets I can liquidate as you suggest DrJ. If I had a house, car, yacht, 401k I could put up against the loans then I would and banks would be more then likely to fund me, but I don't. About the best and seemingly only option I have is to work for the next 3-5 years to save up the 30% down just to get my business off its feet and then go from there. This is all eventually to fund another business, with even loftier goals, but of which there is no hope of me ever finding funding for unless I do it myself.

Ludi I've looked into such options and my local city had a fund setup for tourism, but that was recently abused. There was supposed to be a golf course resort put in, the city dumped quite a bit of money into infrastructure upgrades and the resort backed out. So now there is infrastructure in the middle of no where that no one uses. Needless to say, they aren't too interested in funding something else.

I will have to look more into local services as it's been awhile, but it doesn't really look all that promising. It doesn't really help that I'm like in a no mans land between a smaller business and a medium size business, where the funding I'm looking for seems to be quite a lot for a local investor or funds (such as local microloans through government services), but isn't really a whole lot for anyone on a larger scale. 247k is and isn't a lot of money depending on how you look at it.

Yup, I do have a contingency plan. Pretty much all of what I'm trying to borrow will go into equipment, with the only real sunk costs in rent and manpower. It is technology, which does depreciate quite fast, but if I go belly up in the first year it should still be possible to get 50-75% of the costs back, as long as the bank doesn't do the liquidating. Computer tech usually depreciates with every update cycle of products, which is roughly every two years or so.

I have considered the option of getting as many credit cards as possible, taking out whatever I can get in loans, finding companies that give out equipment credit (buying equipment on in house credit), maxing it all out and praying, but that's something I rather stay away from as it may not be conducive to my future.

Bensam123 wrote:

I will have to look more into local services as it's been awhile, but it doesn't really look all that promising. It doesn't really help that I'm like in a no mans land between a smaller business and a medium size business, where the funding I'm looking for seems to be quite a lot for a local investor or funds (such as local microloans through government services), but isn't really a whole lot for anyone on a larger scale. 247k is and isn't a lot of money depending on how you look at it.

Well, is it possible your current business plan is actually too big, and should evolve out of something more basic? For example, suppose you started out as a very small Internet/gaming cafe, say a coffee shop in the front with and an eight-machine, by-the-hour LAN in the back. You can capture revenue from an older crowd in the morning and a younger crowd in the evening while leasing a much smaller chunk of commercial real estate, and your startup capital for that should be more in the $100-120k range.

If it passes the break-even point, you can start accumulating savings toward your next step and have the business reputation and accumulated assets to backstop the next loan cycle. If it doesn't, then your other, bigger idea probably wasn't going to succeed at your time and place either, but t least you don't have $50k+ of unrecovered debt weighing you down like an alimony payment for the next n years.

The riskiest part of your business model is your sense that the market is untapped. Odds are good that a large chunk of your potential client base (teen gamers) has already established itself at the local public library, where they may not have enough computing horsepower or access rights to install Crysis 2, but they are most definitely getting their social gaming experience fulfilled for the low, low price of F-R-E-E. As such you might want to have a business model that can sustain the basic overhead costs from a more reliable range of goods and services regardless of how popular the computer gaming experience turns out to be, then build out progressively.

Bensam123 wrote:

II agree Ned, I'm trying to stay away from scraping together the bare minimum to start my business. 47k of which is for pure non-profitability in the first four months. I wouldn't even take that out unless I completely dive bomb. I have plans to attempt to grab a foothold when my business first opens (a local cash prize tournament) to grab a foothold and get people in the door to start things out. But I do also have about 30k worth of padding I could potentially scrape off that, so I could potentially get away with around 170k if I had no provisioning.

Every estimate you have of the required level of capital to survive until profitability is low. It's simply endemic to start-up businesses. Four months to profitability sounds exceedingly aggressive.

Bensam123 wrote:

Pretty much all of what I'm trying to borrow will go into equipment, with the only real sunk costs in rent and manpower. It is technology, which does depreciate quite fast, but if I go belly up in the first year it should still be possible to get 50-75% of the costs back, as long as the bank doesn't do the liquidating. Computer tech usually depreciates with every update cycle of products, which is roughly every two years or so.

I've been doing this from both sides of the banker/regulator table for 25+ years. The bank is never going to allow a start-up to self-liquidate. After all, it's their pledged collateral and unless you can wave a check in their face for more than they could sell it for, they won't release the lien. If it's an SBA loan not even that option is available. If you try to liquidate assets on the side without notifying the bank, you'd best spend the rest of your life savings on a good attorney as such actions are criminal fraud (specifically "conversion") and don't sit well with lending institutions.

The point I'm trying to make is that if you really think you have a winning idea you need to be willing to back it to the point of filing Chapter 7 personally. Lenders to today's start-ups expect nothing less.

So if I'm approaching the point of going under, I can't choose to liquidate my business and pay back the majority of the loan, then work off the rest of it on my own? I'm prepared for bankruptcy, that's pretty much given as that is what this would turn into if it doesn't work out. I would just rather have a solution that works out for me and the bank then simply giving up and taking the easy way out (not to mention axing my credit for like 10 years).

"Every estimate you have of the required level of capital to survive until profitability is low."

What do you mean by that? The funding I have set aside for the first four months isn't inlieu of four months of non-profitability, it would last for four months if I had zero sales in general. That could easily be stretched out over a years worth of time if I'm under estimating my cash flows. But essentially I listed four months operating with zero income.


Yup, I've considered the option like that Ludi. I'm trying to stay away from the coffee house with a couple computers attached to the side. My overall plan isn't just to expand one location and make it grow, but start a chain. That remains quite a ways down the road though and only after the pilot business takes off. I'm not going to give out my secret sauce though as there are tons of businesses that have tried doing what you're suggesting and they always end up going under. That's part of why the market looks so lucrative to me is because no one is doing it right and I'm pretty sure I know how to fix existing problems and stretch it far beyond how people currently view it.


If I were capable of coming up with the 30% down on the loan, how would I proceed? Do I just contact any bank with SBA backed loans and apply for one? Is there secret sauce?

Bensam123 wrote:

So if I'm approaching the point of going under, I can't choose to liquidate my business and pay back the majority of the loan, then work off the rest of it on my own? I'm prepared for bankruptcy, that's pretty much given as that is what this would turn into if it doesn't work out. I would just rather have a solution that works out for me and the bank then simply giving up and taking the easy way out (not to mention axing my credit for like 10 years).

Not if the assets you're liquidating are collateral for the loan and the bank knows you're in liquidation mode. They might well let you sell them, but all the cash will go directly to them in return for the lien releases.

Bensam123 wrote:

"Every estimate you have of the required level of capital to survive until profitability is low."

What do you mean by that? The funding I have set aside for the first four months isn't inlieu of four months of non-profitability, it would last for four months if I had zero sales in general. That could easily be stretched out over a years worth of time if I'm under estimating my cash flows. But essentially I listed four months operating with zero income.

There's no such thing as an overcapitalized start-up

Bensam123 wrote:

If I were capable of coming up with the 30% down on the loan, how would I proceed? Do I just contact any bank with SBA backed loans and apply for one? Is there secret sauce?

You want to find an SBA lender that advertises themselves as a "Certified" or "Preferred" SBA lender. Banks with this designations are trusted to make SBA-compliant underwriting decisions without having the SBA separately underwrite the loan. That alone takes a few months off the process. Yes, months. Remember, this is the Federal gov't at work here and it moves slowly. Cutting it out as much as possible through the right choice of lender will be to your benefit.

Sort of interesting that the SBA does most of the work and the loans themselves are pretty much backed completely by the SBA, so the lender takes little to no risk, yet they're the ones who capitalize on it...

Do lenders pay a fee to the government in order to offer SBA loans?

What lenders would you recommend too?

Bensam123 wrote:

Sort of interesting that the SBA does most of the work and the loans themselves are pretty much backed completely by the SBA, so the lender takes little to no risk, yet they're the ones who capitalize on it...

Do lenders pay a fee to the government in order to offer SBA loans?

What lenders would you recommend too?

No, you pay the fee, usually 2% (or more) of the loan amount. The amount of the guaranty (expressed as a percentage of the loan) varies. Loans directly underwritten by the SBA, so-called 7a loans, can carry guarantees of up to 90%. Max guarantee on CLP/PLP loans is 75%. There's a separate low-doc SBA program limited to $100,000/loan, but that caps out at a 50% guarantee.

The risk to the lender is both the unguaranteed portion of the loan and the inordinate time and paperwork needed to process a claim against the SBA guarantee.

As for recommending lenders, I can't name names. I will say that you should look for a lender whose decisions are made in your home town or close to that. If the decisions are made 4 states over, you'll never get the same level of service. I'd usually say to look to smaller rather than larger banks, but the additional overhead of the SBA process means you should start with the mid-sized players in your area.

I was just pointing out that it seems odd that all the risk associated with it is shoved onto a government service, yet the government doesn't make any real money back on it...

I agree about looking for a local bank. If you have 30%, what are the chances of actually getting a loan? Should I look around? Does my business plan even matter if I have a 30% down payment? Is it possible to get a loan with less then 30%?

Bensam123 wrote:

I was just pointing out that it seems odd that all the risk associated with it is shoved onto a government service, yet the government doesn't make any real money back on it...

I agree about looking for a local bank. If you have 30%, what are the chances of actually getting a loan? Should I look around? Does my business plan even matter if I have a 30% down payment? Is it possible to get a loan with less then 30%?

30% and a good business plan (and yes, both are critical) should get you face time with most lenders. Once there, it's up to you.

Anyone have any more helpful advice? Perhaps a little less gray areaish...

There's one other approach you might consider: take on a partner. You sound like a technical guy, and seem not to know the world of business. So stick to that. Let you partner provide the $250K cash and handle the business side of things: the bookkeeping and taxes, worker's comp, payroll, paying vendors, property and liability insurance, ADA certification, negotiation of the rental agreement, drafting the association documents (LLC or Corp), benefits, hiring, financial controls and the like. You would handle the day-to-day things, including the hardware you describe. Split the company 50% for each.

This would limit you upside gain, but it would also limit your risk drastically -- it is his money at risk. You also could stick to what you like and have someone capable handle the details. If you've not done it before, you really have no idea how much work this all is. It is critical to get the right people -- lawyers, bookkeepers, CPAs and the like -- and without experience in the local community it often is hard to find the right ones.

You've never said where you live, but there has to be a good transactions attorney in your area. Look for ones who have done buy-outs or acquisitions, equity placements, licensing, financing or some combination thereof (like a small local version of Wilson Sonsini). They usually know who the local investors are, and can help you identify them. And your area simply has to have one. I live in the country outside of a town of 12,000, and there is one here who is very capable and who has the right background and connections. The people at the University you mentioned might have some suggestions too, but in my experience most Universities have no clue about the sort of thing you describe unless they are an established center for entrepreneurs like Stanford or MIT.

If it works -- great! -- sell it in four or five years, make some money, and move on to the next idea. (Or bring in a venture round of some millions to do the geographical expansion.) You will have learned an incredible amount, and you may be able to go for a straight equity investment the next time around, handling the business side of things yourself. You will have other ideas, and with a track record raising money the second time round will be a lot easier.

You won't get anything if the idea does not get off the ground. And remember the goal is for everyone involved (and not just you) to get rich

There's no such thing as an overcapitalized start-up

I forgot to add: take this advice seriously, as it is right on.

Yes, you have a business plan. But you have to realize that this is a living document that will be thrown out and revised very early after you get going (two months?). Everything takes longer, is more convoluted and is more expensive than you expect. Ask me how I know! While $250K sounds like a lot of money, you will be amazed at how quickly you burn through it. In my line of work that's on the small end of a 3Fs round, and it is expected to buy you a year or so if you live on a severe shoestring (like drawing no salary).

If you can, get more cash. You likely will need it.

Yup, I'm no stranger to throwing things out and starting over or at least doing major revisions. My business plan went through a few of those already and is continuing to do so as I see fit. I'm currently out of central wisconsin, but I'm contemplating moving to Minneapolis as the grass is greener and I have family there I can live with until I get on more stable ground.

I would consider a business partner, but I don't really know of any that would be able to handle such burdens. Most of the business guys I know want to make fast money with no risk associated to themselves. Unfortunately I didn't hook up with any business tycoons in college. Honestly if I could do a 50/50 split I would or 51/49 split in my favor. Thanks for the advice.