Story Highlights

Most small businesses rely on traditional sources of capital. But special or non-traditional sources of capital could be a better option for some. SCORE of Greater Rochester can help guide business owners to best sources.

Funding is always at the top of the small business owner’s mind.

Cash is the life blood of any business. If you run out of money, you are out of business. Funding sources can be as individualized as the concepts behind the business.

Most small businesses rely on traditional sources of capital. The owner’s equity investment may come from personal savings, investment accounts, IRAs, 401k accounts, life insurance cash values, credit cards, and home equity loans. Home equity loans are popular because they are usually the least expensive form of credit. A general rule of thumb is the owner’s equity should make up 25% to 30% of estimated capital requirements of the business.

Other traditional sources of capital are friends, family and business associates. People, who have confidence in the owner and the concept, may provide capital that an outsider would be unwilling to invest. A partner can be found to share the equity investment.

Banks or credit unions often provide some of the financing as well. A bank line of credit may be obtained against balance sheet assets, such as 50% of the value of inventory and 75% of the value of accounts receivable. Loans may be collateralized with land and buildings up to 75% to 80% of current market appraisal value.

Collateral supported by equipment and fixed assets is normally no more than 50% of market value. Lenders and banks look for: good credit (a FICO score of 700 or greater is desirable), management expertise and commitment, a feasible business plan, adequate owner equity, and sufficient collateral.

The bank is going to want to know where the money is coming from to cover the interest expenses and repay the principal on the debt obligation. Clients must be convincing in how their plans and expectations are rational.

Jerry E. Boger

The bank is going to want to know where the money is coming from to cover the interest expenses and repay the principal on the debt obligation. Clients must be convincing in how their plans and expectations are rational. Banks want to see annual free cash flow equal to 1.3 times annual debt service requirements. Debt service means principal plus interest payments.

Less frequently used are special and non-traditional sources of capital, including SBA guaranteed loans through banks, grants and loans from the Department of Agriculture & Rural Development Service, grants for non-profits from the Department of Community and Economic Development, angel and venture capitalists, peer-to-peer loans, and crowdfunding.

Have more questions about funding a business? SCORE has several local workshops planned to help start your business, along with other topics like marketing, recordkeeping and more. To learn more, visit scorerocherster.org .