At the National Council on Disability, one of the most common inquiries we receive from the public concerns what resources and opportunities are available to facilitate entrepreneurship by people with disabilities. Accordingly, I am distributing the following compilation of information obtained from the U.S. Small Business Administration (SBA): (1) announcement about SBA on the information superhighway; (2) directory of programs and services; (3) catalog of publications; (4) description of the Handicapped Assistance Loan (HAL) program; (5) eligibility criteria for assistance to minority-run businesses; (6) answers to the most asked questions about small business; and (7) guide to financing a business. The HAL program has not been funded in recent years. Entrepreneurs with disabilities, however, can qualify for minority assistance by providing evidence of social and economic disadvantage (as explained in the included information on such eligibility). To help one browse these materials, I've inserted a line of 10 dashes between sections. Since the compilation is about 175K in size, I've put "End of Document" at the bottom to indicate whether you received it completely. If not and you want it, let me know and I'll send it on disk. Jamal Mazrui National Council on Disability Email: 74444.1076@compuserve.com ---------- SBA ON THE INFORMATION SUPERHIGHWAY 9/96 The U.S. Small Business Administration puts you on the information superhighway with SBA OnLine (an electronic bulletin board) and the Internet. These services help you find the resources you need to start and expand your business, 365 days a year. Easy-to-use menus help you access information, training, shareware applications you can download, data from other federal agencies, special-interest groups, and other on-line services. It also provides global links to other resources. Information and Assistance Specific services include: General Information * Guides to starting and operating a business * Sources of financial assistance * Help for minority-, women- and veteran-owned businesses * International trade information * Government laws and regulations for small business * State small business profiles * Government procurement assistance * Quick searches * Property for sale * Business cards * And more... Business Education * Developing a business plan * Financing your business * Marketing * Franchising Local Information * Calendar of SBA-sponsored events * State business profiles and indicators * Certified and preferred Lenders * SBA District Offices * SBA Disaster Area Offices * BICs -- Business Information Centers * SBDCs -- Small Business Development Centers * SBICs -- Small Business Investment Companies * SCORE -- Service Corps of Retired Executives Downloadable Files * SBA publications * Training-course workbooks * Business contacts * Business-specific shareware Data from Other Agencies * U.S. Patent Office * U.S. Census Bureau * U.S. Internal Revenue Service * U.S. Senate and House of Representatives * Chambers of commerce * Gateways to over 60 other on-line services SBA OnLine SBA OnLine is a bulletin-board system, or BBS, that offers simple menus, hotline technical support and on-line help. It is easily accessed by anyone with a computer, modem, phone line and communi- cation software. A toll-free number provides access to: * SBA and other government agency information * Downloadable files For a small user toll, you can access: * Downloadable application software * Gateways * Personal mailboxes * Internet mail and news groups * Searchable data banks E-mail and Special-Interest Groups Mailboxes are available for: * the SBA chief counsel for advocacy * SCORE counselors A special-interest group, or SIG, provides a forum for businesses with a common interest to communicate and exchange information. Examples of the many SIGs available are: * Advertising * Agriculture * Aviation * Communications * Computer services * Construction * Desktop publishing * Education * Home-based businesses * Mail-order businesses * Internet news groups * And more... SBA on the Internet The SBA offers a number of Internet services. Through the SBA Home Page, you can get information on starting, financing and expanding your business. The SBA Home Page offers detailed information on SBA and other business services available to you, access to SBA OnLine, and links to outside resources on the World Wide Web. The SBA Home Page also provides: * SBA gopher * File transfer protocol (FTP) * Wide-area information server (WAIS) Global links to outside resources include: * White House Home Page * U.S. House of Representatives and Senate * U.S. Business Advisor * State resources * Worldwide business resources * Links to numerous other federal agencies How to Access SBA OnLine and SBA on the Internet SBA OnLine had the SBA's Internet WWW access provide a fast and easy way for the small business community to access up-to-the-minute, relevant information and assistance 365 days a year. SBA OnLine BBS Number Access Usage (800) 697-4636............SBA and other government agency information ............Downloadable files (900) 463-4636 (14 cents per minute).....SBA and other government agency information (202) 401-9600............Washington, D.C., metro area (toll charge varies by local service provider) ............Downloadable application software files ............Gateway ............Mail ............Internet mail and news groups ............On-line searchable data banks (202) 205-6400............Technical support SBA on the Internet using uniform resource locators (URLs) Home Page: http://www.sba.gov Gopher: gopher://gopher.sba.gov File transfer protocol: ftp://ftp.sba.gov Telnet: telnet://sbaonline.sba.gov U.S. Business Advisor: http://www.business.gov For More Information Make it your business to know what is available, where to get it and, most importantly, how to use it. Sources of information include: U.S. Small Business Administration * SBA District Offices * Small Business Development Centers (SBDCs) * Service Corps of Retired Executives (SCORE) * SBA OnLine (electronic bulletin board) * Business Information Centers (BICs) The SBA has offices located throughout the United States. For the one nearest you, look under "U.S. Government" in your telephone directory, or call the SBA Answer Desk at (800) 8-ASK-SBA. To send a fax to the SBA, dial (202) 205-7064. For the hearing impaired, the TDD number is (704) 344-6640. You also may request a free copy of The Resource Directory for Small Business Management, a listing of for-sale publications and videotapes, from your local SBA office or the SBA Answer Desk. Other Sources * State economic development agencies * Chambers of commerce * Local colleges and universities * Libraries * Manufacturers and suppliers of small business products and services * Small business or industry trade associations All of the SBA's programs and services are provided to the public on a nondiscriminatory basis. FS0065 (9/96) ---------- PROGRAMS AND SERVICES 2nd Edition FY1996 U.S. Small Business Administration Championing America's Entrepreneurs Owning a business is an exciting - and sometimes frightening - experience. You give it everything you've got and still, at times, you need some help. The SBA has been championing America's entrepreneurs since 1953. Together, we have a partnership that works for America. We help you to start and to build a stronger business. You create the jobs that strengthen the economy and the nation. We are pleased to present this new, comprehensive guide to the SBA's programs and services. It contains information on all of our resources that can help you start or expand your business. Together, we can help make your dreams a reality. Philip Lader Administrator Discover the Power of Partnership with the SBA Helping You Start Your Business The SBA's programs can assist you with every aspect of starting your business, from developing a business plan to obtaining financing, from marketing products and services to managing your company. The SBA helps your business start strong and stay strong. Helping You Expand Your Business The SBA's programs and services can guide you through each stage of growing your business. We offer management assistance, business planning, financing, access to federal contracts, and much more. On the following pages, you will find a summary of our programs and services. Many of our counseling and assistance services are free-of-charge. For more information on how the SBA can help your business, call us - we have an office in every state. Access to Information SBA Answer Desk The Answer Desk is a toll-free information center that answers questions about starting or running a business and how to get assistance. A computerized telephone message system, the Answer Desk is accessible 24 hours a day, seven days a week. Answer Desk operators are available Monday through Friday from 9 a.m. to 5 p.m. ET. Call (800) 8-ASK-SBA. SBA OnLine SBA OnLine is an electronic bulletin board that provides concise and cur- rent information about programs and services that can assist in starting and running a business. It also includes many SBA publications. Accessed by modem (9600, n, 8, 1), it operates 23 hours a day, seven days a week, and is updated daily. To access SBA OnLine, dial (800) 697-4636 or (900) 463-4636. The SBA OnLine number for the D.C. metro area is (202) 401-9600. On the Internet The SBA Home Page offers detailed information on SBA and other business services, access to SBA OnLine, and links to outside resources on the World Wide Web. For information on how to access the SBA Home Page, see the section titled "For More Information." U.S. Business Advisor When it is completed, this World Wide Web site will be a one-stop electronic link to all the business information and services the federal government provides. With the U.S. Business Advisor, small businesses will no longer have to contact dozens of agencies and departments to access applicable laws and regulations, or figure out on their own how to comply. They will be able to download business forms and conduct a myriad of other business transactions. Currently on the World Wide Web, the U.S. Business Advisor is still being developed. You are welcome to participate in this process through a feedback mechanism at the web site. For information on how to access the U.S. Business Advisor, see the section titled "For More Information.". Management-Assistance Aids The SBA produces and maintains a library of management-assistance publi- cations and videos, which are available at nominal costs. A complete listing is available in the Resource Directory for Small Business Manage- ment. To obtain a copy, call your SBA field office or the SBA Answer Desk. Many of these publications are also available through the SBA OnLine 900-number. Business Counseling and Training Service Corps of Retired Executives (SCORE) One of our most valuable resources is the Service Corps of Retired Execu- tives. Nationwide, 13,000 SCORE volunteers in nearly 400 chapters provide expert advice, based on their many years of firsthand experience and shared knowledge, on virtually every aspect of business. SCORE counselors are located at SBA field offices, business information centers and some of the SBA's small business development centers. Call your local SBA office to find the SCORE chapter nearest you. Small Business Development Centers (SBDCs) Funded and administered by the SBA, SBDCs provide a variety of management and technical assistance to small businesses and would-be entrepreneurs. They are a cooperative effort among the SBA, the academic community, the private sector, and state and local governments. Together with the SBA's certified development companies, they can help you prepare SBA loan applications. Over 900 SBDCs, located primarily at colleges and universi- ties, are in all 50 states. For the SBDC closest to you, please call your local SBA office. Business Information Centers (BICs) Supported by its local SBA office, a business information center can assist you in two ways - through access to state-of-the-art computer hardware and software and through counseling by SCORE volunteers. To find out if there is a BIC near you, call your SBA field office. You can also access a list of BIC locations by dialing SBA OnLine. Tribal Business Information Centers (TBICs) There are currently 20 TBICs serving Native American reservation com- munities in the states of Montana, North Dakota, South Dakota, Oregon and the Navajo Nation. TBICs are SBA resource partners which offer entrepreneurs access to state-of-the-art computer and software technology, one-on-one business counseling services and business management workshops. For location information contact the SBA Office of Native American Affairs or dial SBA OnLine. One-Stop Capital Shops (OSCSs) The OSCSs are the SBA's contribution to the Empowerment Zones/Enterprise Communities program, a federal interagency initiative that targets resources to selected distressed communities to address an array of social and economic needs. OSCSs provide access to a full range of SBA financial and technical assistance programs as well as those of other federal agencies, state and local governments, and the private sector. Note: For special-focus business counseling and training, see the section on Special-Focus Programs. Lending Programs The SBA provides financial assistance in the form of loan guaranties, rather than direct loans. The SBA does not provide grants to start or expand a business. 7(a) Loan Guaranty This is the SBA's primary business loan program. Under 7(a), the SBA guarantees loans to small businesses that cannot obtain financing on reasonable terms through other channels. This program generally is used to meet the varied short- and long-term needs of small businesses. Lenders, not the SBA, approve and service the loans and request SBA guaranties. The guaranties reduce risks to the lenders, expanding their ability to make small business loans. Loan proceeds from the 7(a) Program may be used for business start-ups, expansion, equipment purchases, working capital, inventory or real-estate acquisition. Generally, the SBA can guarantee up to $750,000 of a private- sector loan; as much as 80 percent on loans of $100,000 or less and 75 percent on loans of more than $100,000. The interest rate may not exceed 2.75 percent over the prime lending rate except for loans under $50,000, where the rates may be slightly higher. Maturities can extend to 10 years for working capital and 25 years for fixed assets. For further information on the 7(a) Program, contact your local SBA office. There are a number of loan programs under the 7(a) Program that address specific needs: * Low Documentation Loan (LowDoc) For small business loans of $100,000 or less, LowDoc features a one- page SBA application, cutting the paperwork burden for both small businesses and lending institutions. Once the applicant has satisfied the lender's requirements, the lender and applicant together complete the SBA's one-page guaranty application. If approved, the SBA guarantees up to 80 percent of the loan, with a quick turnaround to the lender. * Women's Prequalification Loan This program enables the SBA to prequalify a loan guaranty for a woman business owner before she approaches a lender. The program focuses on an applicant's character, credit, experience and reliability rather than her collateral. An SBA-designated nonprofit intermediary, such as an SBDC, works with a woman business owner to review and strengthen her loan application. The review is based on key financial ratios, credit history, business history and the proposed use of the proceeds. The Women's Prequalification Loan Program is available through a number of SBA district offices nationwide. To find out if this program is available in your area or to find the SBA-designated nonprofit inter- mediary nearest you, call your local SBA office. * Minority Prequalification Loan This pilot program is administered like the Women's Prequalification Loan (see above). However, this program is designed for qualified minority-owned companies and allows the use of for-profit intermedi- aries. Contact your local SBA office to find your nearest SBA- designated intermediary. This is a pilot program available at a limited number of locations. * CAPLines CAPLines offers five types of loans to finance the short-term, cyclical working-capital needs of small businesses. Under this program, loan proceeds generally will be advanced against a borrower's existing or anticipated inventory and/or accounts receivable. * FA$TRAK A new loan program, piloted with selected banks nationwide, FA$TRAK provides additional incentive to lenders to make small business loans. Participating banks use their own documentation and procedures to approve, service and liquidate loans of up to $100,000. In return, the SBA guarantees up to 50 percent of each loan. * Export Working Capital Program (EWCP) The EWCP provides short-term financing to small businesses for export- related transactions. Proceeds from the export sales are the primary source of repayment. Under the EWCP, the SBA guarantees up to 90 per- cent of a secured loan or $750,000, whichever is less. Typically, maturities match a single transaction cycle with a term of up to 18 months or support a line of credit with a term of up to 12 months. * International Trade Loan (ITL) This program provides short- and long-term financing to small businesses involved in exporting, as well as businesses adversely affected by import competition. The SBA can guarantee up to $1.25 million for a combination of fixed-asset financing and working capital. * Defense Loan and Technical Assistance (DELTA) The DELTA Program provides both financial and technical assistance to help defense-dependent small firms adversely affected by defense cuts diversify into the commercial market. Loans must be used to retain jobs of defense workers, create new jobs in impacted communities, or to modernize or expand in order to remain in the national technical and industrial base. Loans may be made under the 7(a) and/or 504 programs. For information on the 504 Program, see below. The maximum loan amount under DELTA is $1.25 million. The SBA also leverages federal, state and private-sector resources to provide a full range of management and technical assistance. 7(m) MicroLoan The MicroLoan Program provides short-term loans ranging from under $100 to $25,000 for small-scale financing purposes such as inventory, supplies and working capital (but not to pay existing debts). Loans are made through over 100 SBA-approved nonprofit groups, which also provide the counseling and educational assistance needed for success. Call your local SBA office to locate the nearest SBA-designated group. This is a pilot program available at a limited number of locations. 504 Certified Development Companies The 504 Program provides long-term, fixed-asset financing through certified development companies. These nonprofit organizations are sponsored by pri- vate interests or by state and local governments. The SBA can guarantee debentures covering as much as 40 percent of a 504 project, up to $1 mil- lion. DELTA funding is also available under this program. For information on the DELTA Program, see the section on Defense Loan and Technical Assistance. Certified and Preferred Lenders The most active and expert lenders qualify for the SBA's Certified and Preferred Lenders Program. Certified lenders receive a partial delegation of authority to approve loans. Preferred lenders enjoy full delegation of lending authority. A listing of participants in the Certified and Preferred Lenders Program is available through the SBA's field offices. Other Financial Assistance Main Street Investment Main Street Investment is a public/private partnership between the SBA and state governments to make capital more available to lenders who, in turn, make loans to small businesses. Participating states invest tax revenues in those community banks that agree to make LowDoc loans. For information on the LowDoc Program, see the section on Low Documentation Loan. Small Business Investment Companies (SBICs) Unique economic-development tools, SBICs put risk capital, in the form of debt and equity financing, into small businesses for growth, modernization and expansion. SBICs are privately owned and managed, for-profit investment firms licensed by the SBA. They make equity investments and long-term loans to small firms, using their own capital supplemented with SBA-guaranteed debentures or participating securities. Surety Bonds By law, prime contractors to the federal government must post surety bonds on federal construction projects valued at $100,000 or more. Many states, counties, municipalities, and private-sector projects and subcontracts also require surety bonds. The SBA can guarantee bid, performance and payment bonds for contracts up to $1.25 million for eligible small businesses that cannot obtain surety bonds through regular commercial channels. The SBA's guaranty goes to the surety company, and contractors must apply through a surety bonding agent. When Business Problems Arise When a small business encounters difficulties, the SBA is ready to help with expert business counseling and assistance. In the event that a borrower is unable to meet the obligations of an SBA loan, the SBA works closely with the lender and/or borrower to negotiate a feasible solution. Only if a loan workout is not possible will the SBA work to liquidate the loan. Advocacy The Office of Advocacy serves as a direct link to the small business community and as an advocate of small businesses. It identities perti- nent issues, develops policy and legislation, and monitors their effect. The Office of Advocacy produces numerous publications, including an annual report to Congress, "The State of Small Business: A Report of the President," as well as technical books and statistical and economic reports. It compiles and interprets statistics on small business and is the primary agency within the federal government that disseminates small business data. Advocacy staff provides congressional testimony as well as public informa- tion and outreach. It served as a policy resource for the 1995 White House Conference on Small Business. Special-Focus Programs International Trade Assistance U.S. Export Assistance Centers (USEACs) USEACs combine in single locations the trade-promotion and export-finance resources of the SBA, the U.S. Department of Commerce and the Export-Import Bank of the United States to deliver their services to small- and medium- sized businesses. They also work closely with other federal, state and local international trade-assistance partners. To find out if there is a USEAC near you, call your SBA field office. Export Legal Assistance Network (ELAN) ELAN provides free initial legal advice to exporters and would-be exporters. To consult with an experienced trade attorney, contact your SBA field office. Export Access This international market-research tool delivers free market-data reports to your computer screen. Export Access provides both product and country reports: The product report ranks the top 35 import and export markets for a particular product; the country report identifies the top 20 import and export products by country for the last five years. An on-screen graph allows for easy identification of trends. Export Access is easily reached via the Internet; it is found through the SBA Home Page. For information on how to access the SBA Home Page, see the section titled For More Information. Export Access is also available at local SBA offices nation- wide. Note: For information on loans for exporters, see the section titled Export Working Capital Program (EWCP). Research & Development Assistance Small Business Innovation Research (SBIR) Under the SBIR Program, small businesses propose innovative ideas that meet the specific research and R&D needs of the federal government. The program also promotes commercialization of the results generated. Awards are made on a competitive basis. Small Business Technology Transfer (STTR) This pilot program requires the small firm competing for the R&D project to collaborate with a nonprofit research institution from submission of the proposal to completion of the designated effort. STTR awards are made on a competitive basis. Development of Disadvantaged Small Businesses 8(a) Business Development The 8(a) Program assists the development of small firms owned and operated by individuals who are both socially and economically disadvantaged. By extending government contracting preferences and other business development support, it helps these firms gain access to the economic mainstream. Note: For information on the Minority Prequalification Loan, see the section titled Minority Prequalification Loan. Women Business Owners Women's Demonstration Program This program provides women with long-term training and counseling in all aspects of owning or managing a business. There are 54 women's business centers located in 28 states and the District of Columbia. Each center tailors its services to the needs of the local business community. To find the women's business center nearest you, contact your local SBA office. Women's Network for Entrepreneurial Training (WNET) Under WNET, seasoned women business owners serve as mentors to protges ready to expand their businesses. Mentors share their knowledge and skills, and provide support in a year-long, one-on-one relationship. The WNET Roundtable provides mentoring and support for women business owners in a group setting. Sponsors include small business development centers, local business leaders, government representatives and SCORE. Note: For additional information, see the section titled Women's Prequali- fication Loan. For details on Women-Owned Business Procurement, see the section titled Women-Owned Business Procurement. U.S. Veteran Business Owners Veterans' Entrepreneurial Training (VET) The VET Program provides long-term (up to 12 months) in-depth entrepre- neurial training to veterans. Workshops include accounting, marketing, computer training, business-plan preparation and loan packaging. Up to three workshop locations are funded each year. Transition Assistance Program for Veterans (TAP) Through this nationwide program, the SBA assists all military personnel who are about to be discharged. The SBA provides in-depth business assistance and guidance to those who wish to become entrepreneurs. Note: For information on federal procurement opportunities for veterans, see the section titled Opportunities for Veterans. Conferences Business opportunity conferences help veteran-owned companies and firms impacted by military downsizing sell to federal government agencies and prime contractors. Technology transfer conferences assist defense-dependent firms adversely affected by reductions in defense spending and non-defense-dependent small firms interested in buying or selling technology. Native American Business Owners The SBA's Office of Native American Affairs (ONAA) develops initiatives that ensure native individuals have access to business-development resources, training and services in their communities. ONAA's main focus is economic development and job creation through small business ownership and education. ONAA works with individual and tribally owned organizations; other federal, state and local agencies; nonprofit organizations; and national Native American organizations. Note: For additional information, see the section titled Tribal Business Information Centers (TBICs). Federal Government Procurement Prime Contracting This program increases opportunities for small businesses in the federal acquisition process. It initiates small business set-asides, identifies new small business sources and counsels small firms on how to do business with the federal government. It also conducts surveillance reviews of federal purchasing facilities to assess compliance with the Small Business Act. Subcontracting Assistance This program ensures that small businesses receive the maximum practical opportunity to participate in federal contracts as subcontractors and suppliers. (By law, certain percentages of large federal contracts must be subcontracted to small businesses.) Breakout Procurement This program promotes, influences and enhances the breakout of historically sole-source contracts for full and open competition in order to effect significant savings to the federal government. Procurement Automated Source System (PASS) PASS is a nationwide computerized database of small businesses seeking federal procurement opportunities. Information includes a summary of each company's capabilities, ownership and qualifications. PASS applications are available at your local SBA office; registration is free-of-charge. Women-Owned Business Procurement This is a multifaceted program aimed at teaching women to market to the federal government. It also works to increase the pool of qualified women business owners through procurement conferences held at major buying sites. Opportunities for Veterans This nationwide procurement program assists veteran-owned businesses. It provides them (especially those impacted by defense downsizing) opportuni- ties to sell products and services to the federal government and to federal prime contractors. Certificate of Competency (CoC) The CoC Program provides an appeal process to low-bidding small businesses that have been denied contracts with the U.S. government for a perceived inability to perform satisfactorily. Disaster Assistance The SBA's Disaster Assistance Loan Program is the primary federal program for funding long-range recovery for private-sector, nonagricultural disaster victims. Assistance is available to businesses of all sizes and to individuals. Eligibility is based on an individual's financial criteria; interest rates fluctuate according to statutory formulas. A low interest rate (not to exceed 4 percent) is available to applicants without credit available elsewhere. A higher rate (not to exceed 8 percent) is available for those with credit available elsewhere. The program provides disaster loans when a declaration is made by the President or the SBA Administrator. There are three disaster loan programs: Loans for Businesses Physical Disaster Business Loans: Loans are available to qualified applicant businesses of any size, for uninsured losses up to $1.5 million, to repair or replace business property to pre-disaster conditions. Loans may be used to replace or repair real estate, equipment, fixtures and inventory, and leasehold improvements. Economic Injury Disaster Loans (EIDLs): Loans of up to $1.5 million are available for small businesses that sustain economic injury as a direct result of a disaster. These working-capital loans are made to businesses, without credit available elsewhere, to help pay ordinary and necessary operating expenses that would have been payable barring the disaster. Note: The maximum loan amount is $1.5 million for EIDL and physical- disaster business loans combined, unless the business meets the federal criteria for a major source of employment. The $1.5 million limit can be waived for businesses that employ 250 or more people in an affected area. Loans for Homes and Personal Property Real Property: This is the major long-term recovery program for individual disaster losses. Loans are available to qualified homeowners, for uninsured losses up to $200,000, to repair or restore a primary residence to pre- disaster condition. Personal Property: Loans are available to qualified homeowner and renter applicants for uninsured losses up to $40,000 to repair or replace personal property, such as clothing, furniture, cars and so forth. Loans are not intended to replace extraordinarily expensive or irreplaceable items, such as antiques, pleasure crafts, recreational vehicles or fur coats. For More Information The SBA has offices located throughout the United States. For the one nearest you, look under "U.S. Government" in your telephone directory, or call the SBA Answer Desk at (800) 8-ASK-SBA. To send a fax to the SBA, dial (202) 205-7064. For the hearing impaired, the TDD number is (704) 344-6640. To access the agency's electronic public information services, you may call the following: SBA OnLine: electronic bulletin board - modem and computer required (800) 697-4636 (limited access) (900) 463-4636 (full access) (202) 401-9600 (D.C. metro area) Internet: using uniform resource locators (URLs) SBA Home Page: http://www.sba.gov SBA gopher: gopher://gopher.sba.gov File transfer protocol: ftp://ftp.sba.gov Telnet: telnet://sbaonline.sba.gov U.S. Business Advisor http://www.business.gov You also may request a free copy of The Resource Directory for Small Business Management, a listing of for-sale publications and videotapes, from your local SBA office or the SBA Answer Desk. Other Sources * State economic development agencies * Chambers of commerce * Local colleges and universities * Libraries * Manufacturers and suppliers of small business products and services * Small business or industry trade associations SBA Customer-Service Standards As one of the first initiatives of this administration, President Clinton and Vice President Gore challenged us to "reinvent" the SBA, to create an agency that not only works better, but is smaller and costs less. The best possible customer service is a key element of reinventing government, and we at the SBA are committed to providing quality service at all our service delivery points and to all our customers - small businesses, lenders and resource partners, among others. We are establishing "benchmarks" from the best of the business community and applying these standards to our programs, monitoring our success and eliciting regular feedback from our customers on our performance. Specifically, we are committed to the following customer-service principles: 1. We will provide prompt, courteous and accurate responses to requests for information received by telephone, in writing or in person. 2. We will continue to look for cost-effective and user-friendly ways to make information easily accessible to the small business community. 3. We will continue to streamline and reinvent processes to make conduct- ing business with the SBA easier for both our resource partners and small business owners. 4. We will provide the small business owner with specialized technical assistance through a variety of programs in a variety of locations. 5. We will continue to work to relieve the regulatory burden on small business. 6. We will continue to facilitate and strengthen working relationships between small contractors and federal procuring agencies. Some Facts About The SBA And Small Business Did You Know The SBA ... * Has a portfolio guaranteeing over $27 billion in loans to 185,000 small businesses that otherwise would not have had such access to capital? * Guaranteed over 60,000 loans totaling $9.9 billion to America's small businesses in fiscal year 1995? * Last year extended management and technical assistance to nearly one million small businesses through its 950 Small Business Development Centers and 13,000 Service Corps of Retired Executives volunteers? * Provided more than 45,000 loans totaling $1.2 billion to disaster victims for residential, personal property, as well as business losses in fiscal year 1995? * Has 7,000 private sector lenders as partners providing their capital to small business? * Has increased its venture capital program with more private capital in the past two years than in the previous 15 years combined? * Provides loan guaranties and technical assistance to small business exporters through U.S. Export Assistance Centers in 15 cities? * Can respond to written small business questions through the U.S. Business Advisor on the Internet (http://www.business.gov)? Did You Know That America's 22 Million Small Businesses ... * Employ more than 50 percent of the private workforce, * Generate more than half of the nations's Gross Domestic Product, and * Are the principal source of new jobs? All of the SBA's programs and services are provided to the public on a nondiscriminatory basis. Alphabetical Listing of SBA Field Offices by State and City: AK Anchorage AL Birmingham AR Little Rock AZ Phoenix CA Fresno Glendale Sacramento San Diego San Francisco Santa Ana CO Denver CT Hartford DC Washington, D.C. DE Wilmington FL Coral Gables Jacksonville GA Atlanta HI Honolulu IA Cedar Rapids Des Moines ID Boise IL Chicago Springfield IN Indianapolis KS Wichita KY Louisville LA New Orleans MA Boston Springfield MD Baltimore ME Augusta MI Detroit Marquette MN Minneapolis MO Kansas City St. Louis Springfield MS Gulfport Jackson MT Helena NC Charlotte ND Fargo NE Omaha NH Concord NJ Newark NM Albuquerque NV Las Vegas NY Buffalo Elmira Melville New York City Rochester Syracuse OH Cincinnati Cleveland Columbus OK Oklahoma City OR Portland PA Harrisburg King of Prussia Pittsburgh Wilkes-Barre PR Hato Rey RI Providence SC Columbia SD Sioux Falls TN Nashville TX Corpus Christi El Paso Fort Worth Harlingen Houston Lubbock San Antonio UT Salt Lake City VA Richmond VT Montpelier WA Seattle Spokane WI Madison Milwaukee WV Charleston Clarksburg WY Casper In addition to the above listing of SBA field offices, there are over 900 small business development center locations and nearly 400 SCORE offices to help you start and/or strengthen your business. CO 0002 (10/96) ---------- RESOURCE DIRECTORY FOR SMALL BUSINESS MANAGEMENT 12/96 DIRECTORY OF SBA PUBLICATIONS NOW AVAILABLE FOR PURCHASE EMERGING BUSINESS SERIES TRANSFERRING MANAGEMENT/FAMILY BUSINESSES Help your family business successfully survive the transfer of ownership from generation to generation. Proper planning is the key. Item # EB01 $3.00 MARKETING STRATEGIES FOR GROWING BUSINESSES Unravel the mystery of marketing -- putting the customer first -- and discover practical marketing approaches to budgeting, layout and design, copy-writing, media analysis and more. Item # EB02 $4.00 MANAGEMENT ISSUES FOR GROWING BUSINESSES Learn to examine the marketplace environment and create employment and profit opportunities that provide growth and financial viability to your business through effective management. Item # EB03 $3.00 HUMAN RESOURCE MANAGEMENT FOR GROWING BUSINESSES Uncover the characteristics of an effective personnel system and training program. Learn how these functions come together to build employee trust and productivity. Item # EB04 $3.00 AUDIT CHECKLIST FOR GROWING BUSINESSES Designed with the small business in mind, this audit checklist helps the entrepreneur conduct a comprehensive search for existing and potential problems and opportunities. Item # EB05 $4.00 STRATEGIC PLANNING FOR GROWING BUSINESSES Strategic planning is not just for big business. Learn to effectively match your business' strengths to available opportunities by developing a clear mission statement, goals and objectives. Item # EB06 $3.00 FINANCIAL MANAGEMENT FOR GROWING BUSINESSES Develop a comprehensive financial plan outlining the assets, debts and current and future profit potential of your business through effective financial management. Item # EB07 $4.00 FINANCIAL MANAGEMENT ABC's OF BORROWING This best seller tells you what lenders look for and what to expect when borrowing money for your small business. Item # FM01 $3.00 ElEMENTOS BASICOS PARA PEDIR DINERO PRESTADO Esta publicaci¢n le da a conocer lo que los prestatarios buscan y lo que esperan de usted cuando pide dinero prestado para su pequeno negocio. Item # FM01s $3.00 UNDERSTANDING CASH FLOW The owner/manager is shown how to plan for the movement of cash through the business and thus plan for future requirements. Item # FM04 $3.00 A VENTURE CAPITAL PRIMER FOR SMALL BUSINESS Learn what venture capital resources are available and how to develop a proposal for obtaining these funds. Item # FM05 $2.00 BUDGETING IN A SMALL SERVICE FIRM Learn how to set up and keep sound financial records. Study how to effectively use journals and ledgers and charts to increase profits. Item # FM08 $3.00 RECORDKEEPING IN A SMALL BUSINESS Need some basic advice on setting up a useful record keeping system? This publication describes how. Item # FM10 $3.00 PRICING YOUR PRODUCTS AND SERVICES PROFITABLY Discusses how to price your products profitably, plus various pricing techniques and when to use them. Item # FM13 $3.00 FINANCING FOR SMALL BUSINESS Learn how , when and where to find capital for business needs including step-by-step instructions. Item # FM14 $3.00 MANAGEMENT AND PLANNING PROBLEMS IN MANAGING A FAMILY-OWNED BUSINESS Specific problems exist when attempting to make a family-owned business successful. This publication offers suggestions on how to overcome these difficulties. Item # MP3 $3.00 BUSINESS PLAN FOR SMALL MANUFACTURERS Designed to help an owner/manager of a small manufacturing firm, this publication covers all the basic information necessary to develop an effective business plan. Item # MP04 $3.00 BUSINESS PLAN FOR SMALL CONSTRUCTION FIRMS This publication is designed to help an owner/manager of a small construction company pull together the resources to develop a business plan. Item # MP05 $3.00 PLANNING AND GOAL SETTING FOR SMALL BUSINESS Learn proven management techniques to help you plan for success. Item # MP06 $3.00 BUSINESS PLAN FOR RETAILERS Business plans are essential road maps for success. Learn how to develop a business plan for a retail business. Item # MP09 $3.00 BUSINESS PLAN FOR SMALL SERVICE FIRMS Outlines the key points to be included in the business plan of a small service firm. Item # MP11 $4.00 CHECKLIST FOR GOING INTO BUSINESS This is a must if you're thinking about starting a business. It highlights the important factors you should know in reaching a decision to start your own business. Item # MP12 $3.00 LISTA PARA COMENZAR SU NEGOCIO Esta publicaci¢n es necesaria si usted est pensando en comenzar un negocio. Demuestra los factores importantes que usted debebe de conocer antes de tomar la decisi¢n de comenzar su propio negocio. Item # MP12s $3.00 HOW TO GET STARTED WITH A SMALL BUSINESS COMPUTER Helps you forecast your computer needs, evaluate the alternatives and select the right computer system for your business. Item # MP14 $3.00 BUSINESS PLAN FOR HOME-BASED BUSINESS Provides a comprehensive approach to developing a business plan for a home-based business. Item # MP15 $4.00 HOW TO BUY OR SELL A BUSINESS Learn several techniques for determining the best price to buy or sell a small business. Item # MP16 $3.00 DEVELOPING A STRATEGIC BUSINESS PLAN This best seller helps you develop a strategic action plan for your small business. Item # MP21 $3.00 INVENTORY MANAGEMENT Discusses the purpose of inventory management, types of inventories, record keeping and forecasting inventory levels. Item # MP22 $2.00 SELECTING THE LEGAL STRUCTURE FOR YOUR BUSINESS Discusses the various legal structures that a small business can use in setting up operations. It identifies types of legal structures and the advantages and disadvantages of each. Item # MP25 $2.00 EVALUATING FRANCHISE OPPORTUNITIES Evaluate franchise opportunities and select the business that's right for you. Item # MP26 $2.00 SMALL BUSINESS RISK MANAGEMENT GUIDE This guide can help you strengthen your insurance program by identifying, minimizing and eliminating business risks. Item # MP28 $3.00 CHILD DAY-CARE SERVICES An overview of the industry, including models of day-care operations. Item # MP30 $3.00 HANDBOOK FOR SMALL BUSINESS Handy information for getting started - in a new publication developed by the SBA's Service Corps of Retired Executives (SCORE). Item # MP31 $4.00 HOW TO WRITE A BUSINESS PLAN What you need to know to write a good plan at the start. It can save your business dow the line. Item # MP32 $3.00 MARKETING CREATIVE SELLING: THE COMPETITIVE EDGE Explains how to use creative selling techniques to increase profits. Item # MT01 $2.00 MARKETING FOR SMALL BUSINESS: AN OVERVIEW Provides an overview of marketing concepts and contains an extensive bibliography of sources covering the subject of marketing. Item # MT02 $2.00 RESEARCHING YOUR MARKET Learn inexpensive techniques that you can apply to gather facts about your customer base and how to expand it. Item # MT08 $3.00 SELLING BY MAIL ORDER Provides basic information on how to run a successful mail order business. Includes information on product selection, pricing testing and writing effective advertisements. Item # MT09 $3.00 ADVERTISING Advertising is critical to the success of any small business. Learn how you can effectively advertise your products and services. Item # MT11 $3.00 PRODUCTS/IDEAS/INVENTIONS IDEAS INTO DOLLARS This publication identifies the main challenges in product development and provides a list of resources to help inventors and innovators take their ideas into the marketplace. Item # PI01 $3.00 AVOIDING PATENT, TRADEMARK AND COPYRIGHT PROBLEMS Learn how to avoid infringing the rights of others and the importance of protecting your own rights. Item # PI02 $3.00 PERSONNEL MANAGEMENT EMPLOYEES: HOW TO FIND AND PAY THEM A business is only as good as the people in it. Learn how to find and hire the right employees. Item # PM02 $3.00 VIDEOTAPES Each VHS videotape below comes complete with a workbook. MARKETING: WINNING CUSTOMERS WITH A WORKABLE PLAN Take advantage of this easy-to-follow course and develop the marketing plan designed to meet your goals. Developed by two of the country's leading small business marketing experts, this hands-on program offers a step-by-step approach to writing the best possible marketing plan for your business. Item # VT01 $27.00 THE BUSINESS PLAN: YOUR ROAD MAP TO SUCCESS Learn the essentials of developing a business plan that will lead you to capital, growth and profitability. This video teaches you what to include, what to omit, and how to get free help from qualified consultants when developing your business plan. Item # VT02 $27.00 PROMOTION SOLVING THE PUZZLE Master the components that make a successful promotional campaign -- advertising, public relations, direct mail and trade shows. This videotape shows you how to put the pieces together. Learn how to choose the best advertising medium for your needs, and much more. Item # VT03 $27.00 HOME-BASED BUSINESS: A WINNING BLUEPRINT This practical program examines the essentials of operating within a productive and profitable home-based business -- from designing your home office and avoiding isolation to networking strategies and building an image that gets you taken seriously. Item # VT04 $27.00 BASICS OF EXPORTING This videotape shows you how to open the doors to international markets. This tape provides information on: getting your goods overseas, payment mechanisms, selling and distributing overseas, international marketing and sources of financial assistance. Item # VT05 $27.00 For more information about SBA economic development programs and services or for a free copy of the "The Small Business Directory," consult the U.S. government section in your telephone directory for the SBA office nearest you. Small Business Answer Desk 1-800-827-5722 All of SBA's programs and services are extended to the public on a nondiscriminatory basis. Complete the order form below. Please allow 4-6 weeks to receive your order. SHIP TO: __________________________ NAME __________________________ STREET ADDRESS __________________________ CITY, STATE, ZIP CODE __________________________ DAYTIME PHONE NUMBER INCLUDING AREA CODE PAYMENT REQUIREMENTS: Return this order form with a CHECK or MONEY ORDER to: SBA Publications P.O. Box 46521 Denver, Colorado 80201-0030 Make CHECK or MONEY ORDER payable in U. S. dollars to: U. S. Small Business Administration - U. S. DOLLARS ONLY - NO FOREIGN FUNDS - NO CASH - NO PURCHASE ORDERS - NO INVOICES Revised October 1996. Former versions obsolete. This Directory Expires: January 30, 1998 ---------- Handicapped Assistance Loan Program Note: The SBA has not been provided funding for direct handicapped assistance loans, but such individuals are eligible for all SBA loan guaranty programs. SBA has special loan programs for businesses owned and operated either by or for handicapped individuals. A handicapped individual is defined as one who has a physical, mental or emotional handicap which is of a permanent nature and which limits the individual from engaging in the proposed business activity on an even basis with non-handicapped competitors. The HAL-1 Loan Program provides direct loans and guaranteed loans to public and private nonprofit sheltered workshops which operate in the interest of handicapped individuals. At least 75 percent of the business operation's staff hours must be provided by handicapped individuals. There is no size standard for this program, but the workshop must demonstrate the experience and capability to provide a marketable service or product and to repay the loan. The HAL-2 Loan Program provides direct loans and guaranteed loans to profit-making small businesses which are 100 percent owned and operated by handicapped individuals. The business, as well as the handicapped individual, must also meet SBA's other size and policy requirements. The interest rate on direct HAL loans is set by law at 3 percent; on guaranteed HAL loans it is the same as for all other guaranteed loans. ---------- SECTION 8(a) PROGRAM ELIGIBILITY CRITERIA 6/95 SOURCE: 13 CODE OF FEDERAL REGULATIONS Part 124 Public Law 100-656 Public Law 100-574 The Office of Minority Enterprise Development (MED) Program was created to assist socially and economically disadvantaged business persons to gain access to the resources necessary to develop small businesses and improve their ability to compete in the mainstream of the American economy. The most well known element of the MED program is the 8(a) Program, named from Section 8(a) of the Small Business Act. The 8(a) Program is a business development program that provides its participants access to a variety of business development services, including the opportunity to receive federal contracts on a sole-source or limited competition basis. Under the 8(a) Program, SBA enters into prime contracts with federal departments and agencies and subcontracts the performance of work to disadvantaged small businesses that are certified participants in the program. THE SECTION 8(A) PROGRAM SMALL BUSINESS: A firm must qualify as a small business as defined in Part 121 of SBA Rules and Regulations. The particular size standard to be applied will be based on the primary industry classification of the applicant firm. OWNERSHIP: A firm must be at least 51 percent unconditionally owned by an individual(s) who is a citizen of the United States and who is determined by SBA to be socially and economically disadvantaged. a. In the case of a partnership, 51% of the partnership interest must be unconditionally owned by an individual(s) determined by SBA to be socially and economically disadvantaged. Such unconditional ownership must be reflected in the firm's partnership agreement. b. In the case of a corporation, 51% of each class of voting stock and 51% of the aggregate of all outstanding shares of stock must be unconditionally owned by an individual(s) determined by SBA to be socially and economically disadvantaged. c. SBA does not consider a firm to be unconditionally owned if socially and economically disadvantaged individual(s) claim ownership of a firm based on unexercised stock options or other arrangements. d. When determining ownership of a firm for 8(a) program eligibility, SBA considers options to purchase stock held by non-disadvantaged individuals or entities. The right to convert non-voting stock or debentures held by non-disadvantaged individuals or entities into exercised voting stock is also be considered. However, potential ownership interests (such as options or warrants) held by investment companies licensed under the Small Business Investment Act 1958 shall not be treated as ownership interests until exercised. e. The individual(s) upon whom eligibility is based must receive at least 51% of the annual distribution of dividends paid on the voting stock of a corporate applicant firm. In the event that the stock is sold, the individual(s) upon whom eligibility is based must be entitled to receive 100% of the value of each share of stock in his/her possession. In the event of dissolution of the corporation, the individual(s) upon whom eligibility is based must be entitled to receive at least 51% of the retained earnings of the firm and 100% of the value of each share of stock in his/her possession. f. One 8(a) firm may not hold more than a 10% equity ownership interest in any other 8(a) firm. g. An individual in an 8(a) firm, whether or not disadvantaged, is prohibited from simultaneously holding an equity ownership interest exceeding 10% in another 8(a) firm. An entity who/which is a partner, stockholder, officer and/or director is also prohibited. Partners or shareholders that are financial institutions licensed or chartered by Federal, state or local government, including investment companies licensed under the Small Business Investment Act of 1958, shall not hold ownership interest in an 8(a) firm exceeding 49%. h. A non-8(a) firm in the same or similar line of business is prohibited from having an equity ownership interest in an 8(a) firm which exceeds 10%. i. With prior SBA approval, an 8(a) firm may continue participation in the program after a change of ownership. Prior SBA approval is not required when the change in ownership represents less than a 10% interest in the firm or results from the death or incapacity due to serious or long-term illness or injury of a disadvantaged principal. However, the firm shall notify SBA as soon as possible. j. A program participant's request for SBA's approval for the issuance of a public offering is treated as a request for a change in ownership and SBA examines the firm's continued need for access to the business development resources of the 8(a) program. CONTROL AND MANAGEMENT: The management and daily business operations of a firm must be controlled by an owner(s) of the firm who has (have) been determined to be socially and economically disadvantaged. For disadvantaged individual to control the firm, that individual must have managerial or technical experience and competency directly related to the primary industry in which the firm is seeking 8(a) certification. The firm must be managed on a full-time basis by one or more individuals who are socially and economically disadvantaged. Such person(s) must possess requisite management or technical capabilities as determined by SBA. For those industries requiring professional licenses, SBA determines that the firm or individuals employed by the firm hold(s) the requisite license(s). At least one socially and economically disadvantaged full- time manager must hold the position of President or Chief Executive Officer. This precludes outside employment or other business interest by the individual which conflicts with the management of the firm or hinders it in achieving the objectives of its business development plan. (1) A non-disadvantaged individual as an officer or member of the Board of Directors of the 8(a) firm, or through stock ownership, has the power to control day- to-day direction of the business affairs of the firm. (2) The non-disadvantaged individual or entity provides critical financial or bonding support or licenses to the 8(a) firm which directly or indirectly allows the non-disadvantaged individual to gain control or direction of the 8(a) firm. (3) A non-disadvantaged individual or entity exercises voting control of the participant through a nominee(s). (4) A non-disadvantaged individual or entity controls the corporation or the individual disadvantaged owners through loan arrangement. (5) Other contractual relationships exist with non- disadvantaged individual or entities, the terms of which would create control over the disadvantaged concern. SOCIAL DISADVANTAGE: Socially disadvantaged individuals are those who have been subjected to racial or ethnic prejudice or cultural bias because of their identities as members of groups without regard to their individual qualities. The social disadvantage must stem from circumstances beyond their control. In the absence of evidence to the contrary, the following individuals are presumed to be socially disadvantaged: Black Americans, Hispanic Americans, Native Americans (American Indians, Eskimos, Aleuts or Native Hawaiians); Asia, Pacific Americans (person with origins from Burma, Thailand, Malaysia, Indonesia, Singapore, Brunei, Japan, China, Taiwan, Laos, Cambodia, Kampuchea, Vietnam, Korea, the Philippines, U.S. Trust Territory of the Pacific Islands, Republic of Palau, Republic of the Marshall Islands, Federated States of Micronesia, the Commonwealth of the Northern Mariana Islands, Guam, Samoa, Macao, Hong Kong, Fiji, Tonga, Kiributi, Tuvalu, or Nauru); Subcontinent Asian Americans (persons with origins from India, Pakistan, Bangladesh, Sri Lanka, Bhutan, the Maldives Islands or Nepal); and members of other groups designated from time-to-time by SBA. An individual seeking socially disadvantaged status as a member of a designated group may be required to demonstrate that he/she holds himself/herself out and is identified as a member of a designated group if SBA has reason to question such individual's status as a group member. An individual who is not a member of one of the above-named groups must establish his/her individual social disadvantage on the basis of clear and convincing evidence. A clear and convincing case of social disadvantage must include the following elements: 1. The individual's social disadvantage must stem from his or her color, ethnic origin, gender, physical handicap, long-term residence in an environment isolated from the mainstream of American society, or other similar cause not common to small business persons who are not socially disadvantaged. 2. The individual must demonstrate that he or she has personally suffered social disadvantage, not merely claim membership in a non-designated group which could be considered socially disadvantaged. 3. The individual's social disadvantage must be rooted in treatment which he or she has experienced in American society, not in other countries. 4. The individual's social disadvantage must be chronic and substantial, not fleeting or insignificant. 5. The individual's social disadvantage must have negatively impacted on his or her entry into and/or advancement in the business world. SBA considers any relevant evidence in assessing this element of an applicant's case. SBA particularly considers and places emphasis on the following experiences of the individual, where relevant: Education. SBA considers, as evidence of an individual's social disadvantage, denial of equal access to institutions of higher education; exclusion from social and professional association with students and teachers; denial of educational honors; social patterns or pressures which have discouraged the individual from pursuing a professional or business education; and other similar factors. Employment. SBA considers, as evidence of an individual's social disadvantage, discrimination in hiring, promotions and other aspects of professional advancement; discrimination in pay and fringe benefits; discrimination in other terms and conditions of employment; retaliatory behavior by an employer; social patterns or pressures which have channelled the individual into nonprofessional or non-business fields; and other similar factors. The socially and economically disadvantaged individual(s) upon whom eligibility is based shall control the Board of Directors of a firm, either in actual numbers of voting directors or through weighted voting. All voting rights of the Board of Directors must comply with applicable state law. Individuals who are not socially and economically disadvantaged may be involved in the management of an firm and may be stockholders, partners, officers, and/or directors of such firm. Such individual(s), their spouses or immediate family members who reside in the individual's household may not however: 1. Exercise actual control or have the power to control the applicant or 8(a) firm. 2. Be an officer or director or more than a 10% owner, stockholder, or partner of another firm in the same or similar line of business as the applicant firm. 3. Receive excessive compensation from the applicant or 8(a) firm as directors, officers or employees. Individual compensation from the firm in any form, including dividends paid to a non-disadvantaged owner, his/her spouse or immediate family member residing in the same household, is deemed excessive if it exceeds the compensation received by the Chief Executive Officer or the President. However, with SBA's approval, the Chief Executive Officer or President may elect to the take a lower salary than such a non-disadvantaged individual if it is demonstrated to be in the best interest of the applicant or 8(a) firm. 4. Be former employers of the disadvantaged owner(s) of the applicant or 8(a) firm unless it is determined by the AA/MED that the contemplated relationship between the former employer and the disadvantaged individual or firm does not give the former actual control or the potential to control the individual or 8(a) firm and such relationship is in the best interests of the 8(a) firm. 5. Have an equity ownership interest of more than 10% in another 8(a) firm. Non-disadvantaged individuals or entities may be found to control or have the power to control in any of the following circumstances, which are illustrative only and not all inclusive: Non-disadvantaged individuals control the voting Board of Directors of the 8(a) firm. Control can be directly through majority voting membership or indirectly if the by-laws allow non-disadvantaged individuals to block any action proposed by the disadvantaged individuals through negative control. For example, any equal number of disadvantaged an non-disadvantaged voting directors could create negative control. ECONOMIC DISADVANTAGE: For purposes of the 8(a) program, economically disadvantaged individuals are socially disadvantaged individuals whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities. In determining economic disadvantage for purposes of 8(a) program eligibility, SBA compares the firm's business and financial profile with profiles of businesses in the same or similar line of business which are not owned and controlled by socially and economically disadvantaged individuals. In determining the degree of diminished credit and capital opportunities of a socially disadvantaged individual, SBA considers factors relating both to the firm and to the individual. An individual whose personal net worth exceeds $250,000.00 is not considered economically disadvantaged for purposes of 8(a) program entry. When SBA calculates the personal net worth of an individual claiming disadvantaged status for purposes of the 8(a) program, SBA excludes the individual's ownership interest in the applicant or participating 8(a) firm and the equity in his/her primary personal residence. However, any portion of such equity in his/her primary residence attributable to excessive withdrawals from the applicant or participating 8(a) firm is not excluded. POTENTIAL FOR SUCCESS: A firm must demonstrate that it has been in business in the primary industry classification in which it seeks 8(a) certification for two full years prior to the date of its 8(a) application by submitting income tax returns showing revenues for each of the two previous years. To determine whether a firm has the potential for success, SBA evaluates technical and managerial experience and competency of the individual(s) upon whom eligibility is based, the financial capacity of the applicant firm and the firm's record of performance on previous Federal and private sector contracts in the primary industry in which the firm is seeking 8(a) certification. ADDITIONAL REQUIREMENTS: Individual character review of the applicant(s). Standards of conduct applies to SBA employees and former employees. Manufacturers and regular dealers must meet the requirements of the Walsh-Healey Public Contracts Act in its primary industry classification. Immediate family members living in the same household may not each use their individual disadvantaged status to qualify more than one business firm for 8(a) Program Participation if the firms are in the same or similar line of business. INELIGIBLE BUSINESSES: Brokers and Packagers Franchises Debarred or suspended person or firm Non-profit Organizations Concerns owned by other disadvantaged firms TWO-YEAR RULE Public Law 101-574 allows a waiver of the two-year in business requirement for participation in the 8(a) program when the following criteria are met: A. The individual(s) upon whom eligibility is based have substantially demonstrated business management experience; B. The applicant has demonstrated technical expertise to carry out its business plan with a substantial likelihood for success; C. The applicant has adequate capital to carry out the business plan; D. The applicant has a record of successful performance on contracts from governmental and nongovernmental sources in the primary industry category in which the applicant is seeking program certification; and E. The applicant has, or can demonstrate the ability to obtain the personnel, facilities, equipment, and any other requirements needed to perform such contracts. ---------- THIRTY MOST ASKED QUESTIONS ABOUT SMALL BUSINESS 1. Do I have what it takes to own/manage a small business? You will be your own most important asset, so an objective appraisal of your strengths and weaknesses is essential. To determine if you have what it takes, YOU need to answer some questions about yourself: Am I a self-starter? How well do I get along with a variety of personalities? How good am I at making decisions? Do I have the physical and emotional stamina to run a business? How well do I plan and organize? Are my attitudes and drive strong enough to maintain motivation? How will the business affect my family? 2. What business should I choose? Usually, the best business for you is the one in which you are most skilled and interested. For example, if you are trained as an auto mechanic, you may want to consider opening a shop related to auto repair. As you review your options, it is advisable to consult local experts and business persons about the growth potential of various businesses in your area. Matching your background with the local market characteristics will increase your chance of success. NOTE: If you don't have an idea of what type of business you wish to start, consider visiting with one of SBA's major training and counselling resources: * SCORE -- Service Corps of Retired Executives * BICs -- Business Information Centers * SBDC -- Small Business Development Centers. Locations of these resources are found under the Local Information Section of SBA ONLINE. 3. What is a business plan and why do I need one? A business plan precisely defines your business, identifies your goals and serves as your firm's resume. Its basic components include a market study, marketing/promotional strategy, current balance sheet, an income statement and a cash flow analysis. It helps you allocate resources properly, handle unforeseen complications, and make the right decisions. Because it provides specific and organized information about your company and how you will repay borrowed money, a good business plan is a crucial part of any loan package. Additionally, it can tell your sales personnel, suppliers and others about your operations and goals. NOTE: A complete online training module on how to develop a business plan can be found in the TRAINING MENU of SBA ONLINE. 4. Why do I need to define my business in detail? It may seem silly to ask yourself, "What business am I really in," but some owner-managers have gone broke because they never answered that question. One watch store owner realized that most of his time was spent repairing watches while most of his money was spent selling them. He finally decided he was in the repair business and discontinued the sales operations. His profits improved dramatically. Clearly defining your business or your purpose will give a true sense of direction as your venture develops. 5. What legal aspects do I need to consider? Licenses, permits, zoning laws and other regulations vary from business to business and from state to state. You will need to consider requirements of the Americans With Disabilities Act in order to accommodate needs of your customers and your employees. Your local Small Business Administration (SBA) office and/or chamber of commerce can provide you with general information, but you will need to consult your attorney for advice specific to your enterprise and area. You also must decide about your form of organization (corporation, partnership or sole proprietorship). 6. What do I need to succeed in a business? There are four basic needs for success in small business: *Sound management practices. *Industry experience. *Technical support. *Planning ability. Few people start a business with all of these bases covered. Honestly assess your own experience and skills; then look for partners or key employees to compensate for your deficiencies. 7. Would a partner(s) make it easier to be successful? A business partner does not guarantee success. If you require additional management skills or start-up capital, engaging a partner may be your best decision. Personality and character, as well as ability to give technical or financial assistance, determine the ultimate success of a partnership. A successful partnership usually occurs when partners compliment each other so that one's weakness is another's strength. If you decide a partner is a good idea, make certain each of you has a clear, written understanding of your responsibilities and your rights. 8. How can I hire qualified employees? Choose your employees carefully. Decide beforehand what you want them to do. Be specific. You may need flexible employees who can shift from task to task as required. Interview and screen applicants with care. Remember, good questions lead to good answers. The more you learn about each applicant's experience and skills, the better prepared you are to make your decision. 9. How do I set wage levels? Wage levels are calculated using position importance and skill requirements as criteria. Consult your trade association and accountant to learn the most current practices, cost ratios and profit margins in your business field. While there is a minimum wage set by federal law and by some states for most jobs, the actual wage paid is entirely between you and your prospective employee. 10. What other financial responsibilities do I have for employees? You must withhold federal and state income taxes from all wages and salaries, contribute to unemployment and workers compensation systems, and match Social Security contributions. You may also wish to inquire about key employee life or disability insurance. Because laws on these matters vary from state to state, you should consult local information sources and/or SBA offices. NOTE: A list of all SBA offices can be found under the Local Information section of SBA ONLINE. 11. What kind of security measures must I take? Crimes ranging from armed robbery to embezzlement can destroy even the best businesses. You should install a good physical security system. Just as important, you must establish policies and safeguards to ensure awareness and honesty among your personnel. Because computer systems can be used to defraud as well as keep records, you should check into a computer security program. Consider taking seminars on how to spot and deter shoplifting and how to handle cash and merchandise; it is time and money well spent. Finally, careful screening when hiring can be your best ally against crime. Also consider developing a plan for coping with disaster as part of your security measures. It is impossible to predict when fire, flood, earthquake, tornado, explosion or other disaster will strike. Being prepared -- with a spare set of essential, regularly updated business records kept off premises -- can spell the difference between WHEN or IF you will reopen for business after the emergency is controlled. 12. Should I hire family members to work for me? Frequently, family members of the owner "help out in the business." For some small business owners it is a rewarding experience; for others it can cause irreparable damage. Carefully consider their loyalty and respect for you as the owner-manager. A question of paramount importance that you must be able to answer: Can you keep your family and business decisions separate? 13. Do I need a computer? Small businesses today face growing inventory requirements, increased customer expectations, rising costs and intense competition. Moreover, if you plan to do business with the federal government you will need electronic commerce capability. Computers can provide information that leads to better returns on investment. At the same time, they help you cope with the many other pressures of your business. Computers are not cure-alls, however, and considerable care should be given to: (1) deciding if you need one, (2) selecting the best system (or personal computer) for your business, (3) selecting the most relevant software for your needs, and (4) ensuring that you can easily operate the system. 14. What about telecommunications? All small businesses share some common functions: sales, purchasing, financing, operations and administration. Depending on your individual business, telecommunications can support your objectives in any or all of these areas. The telephone (the terminal) and the network (local or long distance or INTERNET) make up the basic components of a telecommunications system. These are effective tools that can easily adapt to changes in seasonality and growth. How you use telecommunications can affect how efficiently and profitably your company grows in the future. 15. How much money do I need to get started? Once you have taken care of your building and equipment needs you also must have enough money on hand to cover operating expenses (fixed and variable costs) for at least one year. These expenses include your salary, as the owner, and money to repay your loans. One of the leading causes of business failure is insufficient start-up capital. Consequently, you should work closely with your accountant to estimate your cash flow needs. Writing a business plan will provide you with accurate information on your needs for capital. 16. What are the alternatives in financing a business? Committing your own funds is often the first financing step. It is certainly the best indicator of how serious you are about your business. Risking your own money gives confidence to others who may invest in your business. You may want to consider family members or a partner for additional financing. Banks are an obvious source of funds. Other loan sources include commercial finance companies, venture capital firms, local development companies and life insurance companies. Trade credit, selling stock and equipment leasing offer alternatives to borrowing. Leasing, for example, can be an advantage because it ties up less of your cash. Ask your local SBA office for information about these various sources as well as materials produced by SBA including business management publications. NOTE: A list of banks which frequently work with SBA in providing loans to small businesses can be found in the Local Information section of SBA ONLINE. 17. What do I have to do to get a loan? Initially, the lender will ask three questions: *How will you use the loan proceeds? *How much do you need to borrow? *How will you repay the loan? When you apply for a loan, you will be asked to provide projected financial statements along with a cohesive, clear business plan which supplies the name of the firm, location, production facilities, legal structure, marketing and sales goals, financial analyses and operating plan. A clear description of your experience and management capabilities, as well as the expertise of other key personnel, will also be needed. 18. What kind of profits can I expect? Not an easy question, and you need to consider income and expenses before you even start to think about profits. However, there are standards of comparison called "industry norms and ratios" which can help you estimate your profits. Return on Investment (ROI), for example, estimates the amount of profit gained on a given number of dollars invested in the business. These ratios are broken down by Standard Industrial Classification (SIC) code for assets and size, so you can look up your type of business to see what the industry averages are. These figures are published by several groups, and can be found at your local library. Help is also available through the SBA, through SBA's Business Information Centers and the trade associations that serve your industry. 19. What should I know about accounting and bookkeeping? The importance of keeping adequate records cannot be stressed too much. Without financial records, you cannot determine how well your business is doing or where it is going. At a minimum, records are needed to substantiate: 1. Your tax returns under Federal and State laws, including income tax and Social Security laws; 2. Your request for credit from vendors or a loan from a bank; and 3. Your claims about the business, should you wish to sell it. But most important, you need them to run your business successfully and to increase your profits. 20. How do I set up the right record keeping system for my business? The type of records and how many you need depend on your particular operation. The SBA's resources and an accountant can provide you with many options. When deciding what is and is not necessary, keep in mind the following questions: 1. How will this record be used? 2. How important is this information likely to be? 3. Is the information available elsewhere in an equally accessible form? 21. What financial statements will I need? You should prepare and understand three basic financial statements: (1) the balance sheet, which is a record of assets, liabilities and capital at a specific point in time; (2) the income (profit and loss) statement, which is a summary of your earnings, expenses and net profit (or loss) over a given period of time; and (3) the cash flow projection, which shows the actual inflows and actual outflows of cash into and out of your business. 22. What does marketing involve? Marketing is your most important operational concern. There are four basic aspects of marketing, often called the "four P's": *Product: A description of the item or service you sell. *Price: The amount you charge for your product or service. *Promotion: The ways you inform your market as to who, what and where you are. *Place: The distribution channels you use to offer the product to the customer. As you can see, marketing encompasses much more than just advertising or selling. For example, a major part of marketing involves researching your customers: What do they want? What can they afford? What do they think? Your understanding and application of the answers to such questions play a major role in the success or failure of your business. 23. What is my market potential? The principles of determining market share and market potential are the same for all geographic areas. First, determine a customer profile (who) and the geographic size of the market (how many). This is the general market potential. Knowing the number and strength of your competitors (and then estimating the share of business you will take from them) will give you the market potential specific to your enterprise. 24. What about advertising/promotion? Your business growth will be influenced by how well you plan and execute an advertising program. Because it is one of the main creators of your business' image, it must be well planned and well budgeted. Contact local advertising agencies or a local SBA office to assist you in devising an effective advertising/ promotional strategy. 25. How do I set price levels? The price of a service or item is based on three basic production costs: Direct Materials, Labor and Overhead (the share of facilities, utilities, taxes, insurance, security and other general operating costs of the business attributable to the product or service -- for example, if one product accounts for 10 percent of your business, 10 percent of your overhead is assigned to it). After these costs are determined -- the "break-even" cost -- you factor in the profit desired. Because pricing can be a complicated process and you must remain competitive as well as profitable, you may wish to seek help from an expert. 26. Are some locations better than others? Time and effort devoted to selecting where to locate your business can mean the difference between success and failure. The kind of business you are in, the potential market, availability of employees, the number of competitive establishments and customer accessibility all determine where you should put your business. Location is critical to small retailers where traffic flow spells the difference between success and failure. Home-based businesses initially operate out of the founder's home and, as they grow, the issue of location becomes vital to their continued success. 27. Is it better to lease or buy the store (plant) and equipment? This is a good question and needs to be considered carefully. Leasing does not tie up your cash; a disadvantage is that the item then has no resale or salvage value since you do not own it. Careful weighing of alternatives and a cost analysis will help you make the best decision. 28. Can I operate a business from my home? Yes. In fact, experts estimate that as many as 20 percent of new small business enterprises are operated out of the owner's home. Local SBA offices and state chambers of commerce can provide pertinent information on how to manage a home-based business. 29. How do I find out about suppliers/manufacturers/ distributors? Most suppliers want new accounts. A prime source for finding suppliers is the Thomas Register, which lists manufacturers by categories and geographic area. Most libraries have a directory of manufacturers listed by state. If you know the product line manufacturers, a letter or phone call to the companies will get you the local distributor-wholesaler. In some lines, trade shows are good sources of getting suppliers and looking over competing products. 30. Where can I go for help? The U.S. Small Business Administration has offices in nearly every major city in the country. SBA operates the toll-free "Answer Desk" at 1-800-8-ASK-SBA, to give callers direct referral to appropriate sources of information. Sponsored by SBA are a variety of counselling, training and information services including the Service Corps of Retired Executives (SCORE), Business Information Centers (BICs) and Small Business Development Centers (SBDCs). In addition, procurement center representatives can be found at each major military installation. More than 2,700 chambers of commerce are located throughout the country to provide additional assistance. The bulletin board, SBA ONLINE and SBA's World Wide Web page sba.gov on the Internet are excellent areas to get pertinent information. 31. What do I do when I'm ready? You have done your homework: you have a complete business plan; you know where you want to operate; you know how much cash you will need; and you have specific information on employee, vendor and market possibilities. You now may want someone to look over your plans objectively. Contact the business department at a local college for another opinion. A SCORE representative at the Small Business Administration can also review your work and help with the fine tuning. SBA has Business Information Centers in nearly every state where you can utilize state of the art technology yourself, and also receive counseling. Then, when you have made the final decision to go ahead, it is time to call the bank and get going. Good luck! All of SBA's programs and services are extended to the public on a nondiscriminatory basis. ---------- FINANCING FOR THE SMALL BUSINESS WHY FINANCING IS IMPORTANT TO YOUR BUSINESS Many people dream of starting and managing their own business. Some actually do start a business and achieve their dream; others keep on dreaming. Why is this so? What separates the successful entrepreneur from the unsuccessful? In many cases, it seems to be whether the prospective business owner has access to sufficient funds to turn the dream into reality. You've probably heard stories about how many businesses fail each year. Sometimes their failure can be traced to a lack of financing. It is difficult to guess how many businesses never even start because of that same lack of funding. Just learning where and how to get the funds to start or expand your business can be confusing, frustrating and time consuming. The amount of financing may be as little as $100 or more than $1 million, based on the type of business. Many different businesses can be started with a relatively small amount of money. This guide will explain how, when and where to secure the capital your business needs to be a success and will give you step-by-step instructions on how to finance your business in the most profitable ways possible. Finding money may be difficult at times, but the economy depends heavily on small businesses like yours. It is possible to get the money that your business needs, and the first step to success is knowing how and where to look. WHO CAN GET FINANCING TO START OR EXPAND A BUSINESS? You can. Almost every valid business idea can be funded; it's a matter of knowing where to look. When a new business is a success, everyone involved wins too. You as the owner certainly benefit. So does the economy, since your business helps it to grow. A successful business also creates new jobs and adds an important product or service to the community. It is for all these reasons that organizations and individuals may be willing to invest in your business; as your business profits so do your investors. HOW MUCH MONEY WILL YOU NEED? Every business is different, but it is still possible to get a reasonable idea of how much cash your business is likely to need by considering a few key factors. Does Your Business Produce a Product or Provide a Service? Initially, a service business will require less cash because it will not have high material and equipment costs. If you intend to manufacture a product, you must consider the type and amount of direct materials and equipment needed and expenses incurred. Who Will Provide Labor? Do you intend to do most of the work yourself or will you hire employees to assist you? Contributing your own time to the business is one way to keep costs down. Later, when your business is firmly established, you may wish to hire employees to take over many of the day-to-day operations. Do You Have Personal Funds to Invest in Your Business? Almost all investors prefer or require that you contribute some of your money to the business. This contribution of unborrowed funds is called equity. There is no fixed percentage for this equity contribution, but most lenders require at least 25 percent of the total amount needed to establish the business. The amount of equity required is also influenced by other credit factors, such as management experience and adequacy of collateral. Can You Provide for Your Personal Expenses While the Business Is Getting Started? It is unusual for a beginning business to show a profit in the first few years. It's good strategy to plan to cover your personal living expenses for at least six months while your business is getting started. If your business is already operating, it may be necessary to reduce your salary while you try to expand. If you have your own funds set aside for your personal expenses during these periods, you will have one less expense for which you will need borrowed funds. ESTIMATING YOUR EXPENSES There are certain expenses that virtually all businesses must incur. The following chart will help you estimate your typical expenses. (This is not an all inclusive list. It provides some of the more typical expenses.) Office space rental $--------------- Office equipment $--------------- Office supplies $--------------- Insurance $--------------- Utilities (phone, electricity, heat, water) $--------------- Maintenance $--------------- Advertising $--------------- Labor $--------------- Business licenses $--------------- A manufacturing business will also have specific expenses related to production. Therefore, the following expenses should also be considered: Raw materials $--------------- Machinery and equipment rental $--------------- Warehouse or factory space rental $--------------- Total estimated costs $--------------- ASSESSING YOUR FINANCIAL NEEDS Once you have determined your expenses, you will need to estimate what percentage of the funds you can supply yourself and what percentage you must find elsewhere. At this point, the figure may seem overwhelming. Don't be discouraged. It's far better to have realistically assessed your situation early than to rush into a new venture before you've planned adequately. Almost all businesses need outside funds and yours probably will not be an exception to the rule. You should prepare a month-by-month cash flow projection for the entire first year, perhaps with the help of your accountant or banker. If the projection is realistic, it will clearly show how much financing you need. Local SBA offices have cash flow projection forms; ask for Form 1100. Yes, starting a new business can be risky, but it can also pay big rewards both in personal satisfaction and in economic return. TYPES OF FUNDING DEBT OR EQUITY? In deciding how to finance your business, you need to consider certain questions: - How much control of your new business can you comfortably give up? - Which facts will debt and equity financiers be interested in? How do debt and equity requirements differ? - How highly leveraged do you want your company to be? (The higher the amount borrowed compared to the amount of equity, the higher the leverage.) In order to answer these questions, it is important that you clearly understand how debt financing and equity financing work and that you be aware of the advantages and disadvantages of each. DEBT FINANCING Debt is a direct obligation to pay something (cash) to someone (an investor or lender). In exchange for having lent you the money, an investor will expect to be paid interest. Obviously, this means that you will repay more money than you have borrowed. Therefore, an important feature of debt financing is the interest rate you will be charged. Interest Rate and Risk The interest rate usually reflects the level of risk the investor is undertaking by lending you money. Investors will charge you lower interest rates if they feel there is a low risk of the debt's not being repaid. Investors will raise interest rates if they are concerned about your ability to repay the debt or if you have a history of slow payments to lenders as shown on your personal or business credit reports. It is important to realize a new business is likely to be charged a higher interest rate than a well-established business because the lender will feel a new business represents a greater risk. Here's an example of how interest rates can affect your loan repayment amount: Example 1: A ten-year loan for $50,000 at 12 percent interest requires monthly payments of $717. Example 2: A ten-year loan for $50,000 at 15 percent interest requires monthly payments of $807. A payment difference of $90 each month, over 120 months, makes the loan in Example 2 almost $11,000 more expensive over the life of the loan. What Do Debt Lenders Look For? A debt lender will evaluate your loan request by considering answers to several key questions: - Can you offer reasonable evidence of repayment ability- either established earnings (for an existing business) or income (profit and loss) projections (for a new business)? - Do you have sufficient management experience to operate the business? - Do you have enough equity in the business? Equity provides what lenders call a cushion for creditors. - Do you have a reasonable amount of collateral (assets to be acquired, residential property equity, etc.)? Advantages of Debt Financing The biggest advantage of debt financing is that it allows you, the business owner, to retain control of your company. You are therefore entitled to all company profits and have ultimate decision-making authority. Since many entrepreneurs start a business for exactly these reasons, a critical advantage of debt financing is that it provides you with some financial freedom; your debt is limited to the loan repayment period. After you have repaid the borrowed money, the lender has no further claim on your business. Disadvantages of Debt Financing The biggest disadvantage of debt financing is having to make monthly payments on a loan. Cash may be scarce and expenses may be higher than estimated during the early years of a new business. Even so, the lender must be paid on time and there are severe penalties for late or missed payments, such as additional fees, a poor credit rating and the possibility that the lender may call the loan due. Another disadvantage of borrowing funds is the difficulty in obtaining them. In general, lenders prefer to invest in proven businesses. If your business is new, a lender may charge you a high interest rate or may refuse to make the loan entirely. In contrast, if you have been in business for a significant period of time, you may find debt lenders very happy to extend loans. EQUITY FINANCING Equity financing involves no direct obligation to repay any funds. It does, however, involve selling a partial interest in your company. In effect, an equity investor becomes your business partner and will have a degree of control over how your business is run. For example, the sale of stock, one type of equity financing arrangement, typically works as follows: Step 1 - You determine from your analysis that your business will need more funds than you can provide. Step 2 - You consider financing options and decide that you prefer to sell an interest in your company rather than borrow money. Step 3 - You arrange to offer a sale of stock. This can be much more complicated than it sounds because you must comply with an array of legal and reporting requirements for the life of your business. After shares of your stock are purchased, investors own a portion of your company, which they can keep or sell to others. What Do Equity Investors Look For? Equity investors buy part of your company by supplying some of the capital your business requires. Because they will own a share of your business, equity investors are interested in the business's long-term success and future profitability. Equity investors can resell their interest in your company to other investors. If your business is doing well, they will be able to sell their stake at a higher price than they paid and make a profit. Legally, equity investors are more exposed to risk than are debt investors. If your business fails, equity investors stand to lose more money than debt investors, since creditors are typically paid before owners in the event of business failure. Since equity investors are taking the greater risk, they expect to earn more on their investment than do debt investors. Advantages of Equity Financing With equity financing, you do not repay the money invested by others (unless a payoff agreement is made at the time of investment). This can be important when cash is at a premium. Also, your ideas for making your business successful may carry more weight with a potential equity investor than with a debt investor. Since it is in an equity investor's best interest for your business to grow and expand, he or she will be more likely to consider sound business ideas than will a debt investor, who is more concerned with the security of the deal proposed. Many people who are interested in starting or expanding a business have more ideas than money; this can be an important factor in favor of equity financing. In addition, equity investors, with their genuine interest in your success, can be a good source of advice and contacts for your business. Disadvantages of Equity Financing The biggest drawback of equity financing is that you give up some control over your business. You may or may not find this acceptable. Remember, when you accept equity partners, you are selling part of your business. It may be very difficult to retain control in the future. Also, you may find your equity investors do not always agree with your plans for the business. However, since they own part of your business, you will have to consider their point of view, even if you do not agree with their choices. Finally, equity financing tends to be very complicated and invariably will require the advice of attorneys and accountants. A great deal of paperwork must be prepared and filed. For example, public companies must comply with specific legal regulations that govern their ways of doing business. POSSIBLE SOURCES OF FINANCING Most new small businesses start out by borrowing money rather than by selling stock. If your business does well, you may at some point combine both types of financing as your needs change. Because knowing how, when and where to borrow is so important to the success of your business, you should be aware of the variety of possible funding sources. These fall into two basic categories: private sources, such as your local bank, and public sources, such as the federal government. PRIVATE SOURCES Private sources of financing are either personal sources (savings or loans from friends and relatives) or external sources (debt lenders, equity lenders and arrangements that combine debt and equity). Savings Personal funds are the most likely, and the most typically used, source of funds for a new business. Most lenders require that a reasonable percentage of your own funds be invested in your business, as an indication that you will work hard to make the business a success. You will find most investors unwilling to consider your request for funding if you have not contributed cash. This can present a problem, though. Most entrepreneurs do not have the personal resources to provide all of their initial financing. They are not alone. Almost all business owners must borrow money from outside sources. It is helpful if you, as an owner, provide some of the funds from your own savings. You may also want to consider such personal sources as the cash value of a life insurance policy, a home equity loan or even a credit card. Combining personal savings with external sources of debt and equity will permit you to benefit from the effects of leverage, i.e., using other people's money to earn a profit for yourself. One of the biggest advantages of using personal savings to fund your business is your easy access to those funds. There are no loan applications to complete, no lenders to visit, no paperwork to prepare and no interest payments to make. If available, personal savings are a valuable source of capital for your business. Finally, a big advantage of having your own start-up capital is that it ensures that you retain ultimate control of and responsibility for your business. Friends and Relatives Friends and relatives are often an important source of capital for your business. Since they know you well, the terms of repayment are likely to be more flexible than those of strangers. Keep it formal. It's a good idea to prepare a formal agreement when a friend or relative is willing to invest money in your business. This will make the relationship professional and will help to avoid future misunderstandings about how much was borrowed or when it should be repaid. The investment can take the form of a direct loan or an equity investment. Review the previous section on debt versus equity financing to determine which arrangement will be best in your particular circumstances. Based on their personal relationship and their impression of your business judgment, friends and relatives may be willing to invest in your business even when others may not. Beware, however. Because they know you well, they may wish to be more involved in the day-to-day operations of the business than you would like. Friends or relatives may feel their investment entitles them to a routine say in how the business is run, even though you intend to repay the loan. Debt Financing When it is necessary to look to someone other than yourself or a close friend or relative for business funds, it helps to be aware of other sources. Banks Banks are financial institutions that accept deposits and make loans. They fall into several categories, such as savings and loans, thrift institutions and commercial banks. Knowing the category in which they include themselves can tell you a lot about the kinds of loans these banks are interested in making. Savings banks are more experienced in dealing with consumer loans, such as home mortgages and automobile loans. Commercial banks have more experience and interest in business loans. This doesn't mean that you can't go to a savings bank for a business loan. It may be a good choice. Just be sure to consider that bank's primary focus and level of experience with your type of request. Probably the most important point to keep in mind when dealing with a bank is that bankers don't like risk. Their primary concern is always the safety of their funds. How do they operate? Banks may be one of the first sources that come to mind when you begin searching for additional business capital. Certainly, they will meet your most basic condition: they have money available to lend. However, it may be difficult for a new business to borrow from a bank since lenders usually prefer to lend to established businesses. Keep in mind, the first responsibility of a bank is to protect its depositors. As a result, bankers tend to be very cautious about lending money. Banks come in all shapes and sizes and there are some real differences among them. Small community banks with two or three branches may operate quite differently from large commercial banks with hundreds of loan offices. You will want to carefully review the differences among banks before you select a particular one. Each type offers certain advantages. A commercial bank may be more experienced and familiar with a business loan request, but a community bank may know you personally and have more confidence in your ability to repay your debt. Where can you get more information? Chances are you're already familiar with several banks in your area. It's extremely helpful to approach a bank with which you already have a savings or checking account or a personal loan. For banks outside your area, you may want to consult a banking directory, such as Rand McNally's Bankers Directory or Polk's World Bank Directory. Most libraries have copies. Directories list the name, location, assets, liabilities and officers of banks. Debt Financing Credit Unions Credit unions are financial institutions developed by the members or employees of a company, labor union or other group. Their overall goal is service to their members, as opposed to profit making. As a result, their interest rates and other terms may be more favorable than those offered by a bank. Credit unions are regulated by the National Credit Union Administration. What are the advantages of a credit union? The company for which you or another family member works may have a credit union. If you decide to start your business while you are still working for a large company, you may be able to borrow some of the capital you will need from the credit union. As your business becomes more profitable and better able to support you financially, you may decide to concentrate all your energies and time on your business. Credit union interest rates are often lower than the rates charged by other lenders. The amount you will be able to borrow from a credit union may not be large, but this source of funds may be helpful in making initial purchases for your business. Also, a loan application through a credit union may be more likely to be approved as you may be known to the individual evaluating your loan request. Where can you get more information? If you're employed, ask the human resources department of the company where you work about your eligibility to join a credit union. There are directories available at your local library listing all of the credit unions in the United States. Debt Financing Consumer Finance Companies Consumer finance companies make small personal loans secured by collateral. Unlike banks, they do not accept deposits and they lend under the jurisdiction of each state's small loan regulations. Consumer finance companies will often consider loans with 100 percent financing because the loans are secured by an asset. How do they operate? Consumer finance companies charge higher interest rates and processing fees than banks and credit unions but can be more flexible about approving requests. Loans from this source are more expensive because they are considered to be more risky. In some cases, the interest rate you will be charged will be the highest allowed by law for your state. Consumer finance companies are often approached by people who have poor credit ratings. Certainly, if you want to start a business and your credit rating is questionable, you will find consumer finance companies a more likely source of funds. However, this does not mean that you should only borrow from a consumer finance company if you have credit problems. You should be aware that loans from this source will usually not exceed several thousand dollars. Also, keep in mind that if you can't repay your debt, the item that you purchased with the funds will be seized. Where can you get more information? The classified advertising section of your telephone directory lists consumer finance companies under the heading of Loans. Call and request a meeting, or ask them to send you written information. Debt Financing Commercial Finance Companies The primary purpose of a commercial finance company is to provide loans to purchase inventory and equipment. This can be a useful resource, particularly if your business will manufacture a product or act as a wholesaler. Commercial finance companies are similar to consumer finance companies but concentrate on business loans rather than consumer purchases. How do they operate? Like consumer finance companies, commercial finance companies charge higher rates of interest than banks. They also may be more willing than banks to approve your loan request. Commercial finance companies will require your debt be collateralized. This means if you purchase a computer with the funds you have borrowed, they will have a direct claim on your computer. If you can't make your monthly payments, the commercial finance company will be entitled to take your computer and sell it to recover its investment. Where can you get more information? Check the telephone directory for a list of commercial finance companies in your area. You should research your rights when borrowing from a loan company by reading your state's laws concerning debt repayment. Debt Financing Trade Credit When a vendor allows you to buy a product and to delay paying for it, this is known as trade or vendor credit. Vendors offer this service to help make their products more attractive and to induce you to buy from them rather than elsewhere. Offering easy credit terms encourages sales. Keep in mind that the vendor is in business to make money. There may be a hidden cost for flexible credit terms in the form of slightly higher prices. How does it work? Trade credit is one of the most readily available sources of financing for your business. In many situations, you will be able to purchase supplies and equipment directly from a vendor and spread your payments over several months or years. Often it is possible to make no or a minimal down payment and to avoid interest charges as well. Even suppliers who will not extend credit in the beginning of your relationship may be very willing to do so after you have placed several orders. When you are trying to pay for equipment and/or supplies that your business needs, trade credit can be invaluable. Office furniture, computers, certain raw materials and manufacturing equipment are examples of products that can be purchased with trade credit. Where can you get more information? Discuss payment terms with vendors with whom you deal or plan to deal. There may be dramatic differences in terms among different suppliers. Talk to several suppliers before making a decision. Remember to ask what types of credit they offer and if they grant a discount for prompt payment. Also, be sure to compare prices. Vendor financing is not desirable if you are being charged substantially more for the same product you can purchase elsewhere more cheaply with cash. Debt Financing Insurance Companies Insurance companies are a possible source of financing for your business because they make commercial loans as a means of investing unused portions of their income. Generally, insurance companies make term loans and mortgage loans. How do they operate? If you borrow from an insurance company, you can expect terms and interest rates similar to those available from a commercial bank. Insurance companies can provide your business with a large amount of capital at market interest rates, but you must have assets sufficient to cover the debt, plus 20-30 percent extra. In effect, you mortgage your property to free cash for your business. This allows you to retain title to the property while freeing cash invested in it. Insurance companies usually have high loan limits; this makes them a good source of funds if you need a large supply of capital. Where can you get more information? Speak with your insurance agent or ask friends to make recommendations. You may also wish to request information packets from insurance companies' loan offices. Debt Financing Factor Companies A factor company can be a useful source of funds if you are already in business and have made sales to customers. Factor companies purchase your accounts receivable at a discount, thereby freeing cash for you sooner than if you had to collect the money yourself. You transfer title of your accounts receivable to the factor company in exchange for a cash payment. How do they operate? Factor companies provide two types of financing alternatives: recourse factoring and nonrecourse factoring. In recourse factoring, you retain part of the risk for ultimately collecting the debts owed to you. The factor company assists you by speeding up the process. For example, the factor company purchases your receivables and advances you cash while the accounts are being collected. However, if your customers do not pay, you will be held responsible for repayment to the factor company. In nonrecourse factoring, you sell all rights and obligations concerning your accounts receivable. The factor company purchases your receivables and collects the debts owed. If a customer does not pay, you will be under no obligation to the factor company. Factor companies can be a useful source of funds for a new or existing business. They are not appropriate as a means of seed capital to start a business because they require that you have accounts receivable to sell. Where can you get more information? Factor companies often advertise in the business sections of newspapers. Usually the advertisement will say We buy accounts receivable or something similar. Make sure you work with a reputable company that will not alienate your customers by harassing them for payment. Debt Financing Leasing Companies A leasing company is a business that rents various types of equipment to businesses and individuals. By renting rather than buying the equipment your business will need, you will be able to avoid many capital expenditures associated with the purchase of equipment. How do they operate? Many leasing companies require a down payment or several months' prepaid rent. Some, however, may allow you to lease equipment without requiring any prepayment. This depends upon the relative size or worth of the asset leased. The small amount of cash needed to secure the use of equipment for your business makes leasing very attractive to many business owners. However, since you do not actually own the equipment, the leasing company may repossess it if you miss a payment. An advantage provided by leasing is that you will need little or no cash to secure equipment and you will be able to upgrade your equipment more easily than if you purchased it. If your industry experiences rapid changes in technology, leasing may help you to avoid the expense of purchasing quickly outdated equipment. Obviously, you will not be able to meet all of the financing needs of your business by leasing. You will still need additional funds for ongoing expenses, such as employee salaries. Leasing, however, can allow you to hold on to the cash you may otherwise have spent on equipment, and this cash savings can be used in other, less easily financed, areas. Where can you get more information? Many equipment suppliers offer leasing arrangements in addition to actual sales. Discuss with suppliers and vendors what types of items they lease and what terms they offer. A service contract can usually be purchased for an additional charge. Equity Financing Venture Capital Firms Basically, venture capital is an investment in an unproven business. Venture capital firms provide equity funds to new and young companies. This immediately separates venture capital firms from investment firms, which prefer to invest in existing, financially secure businesses. Venture capital firms do not make outright loans. Instead, they buy an equity interest in the business that gives them the same advantages and disadvantages associated with equity arrangements. How do they operate? Venture capitalists are looking for two basic things when considering whether to invest in your business: - High return - Because venture capitalists are willing to take unusual risks by investing in a new business, they require unusual returns as well, perhaps seven to ten times their original investment within five to seven years. - Easy exit - Venture capital firms will realize a profit by selling their interest in your business at some future point. In general, venture capital firms are most interested in investing in new technology and can typically supply large sums of money. Venture capitalists are not passive investors. They play an active role in the strategic planning phase of your business and seek continuing involvement. They will also expect to be fully informed about operations, problems and whether your joint goals are being met. Where can you get more information? Keep in mind that venture capitalists have extremely rigid investment standards and relatively few businesses qualify. Still, this capital source is worth pursuing because venture capitalists specialize in start-up financing and have access to large sums of money. There are many books on venture capital in your local library. Equity Financing Closed-end Investment Companies A closed-end investment company is similar to a venture capital firm but has smaller sums of money available to invest. Closed-end investment companies are most likely to invest in a proven business, but some specialize in new businesses. How do they operate? Like venture capital firms, closed-end investment companies are interested in purchasing the stock of your business. Keep in mind what this means: you will be selling a portion of your business and giving up some control as well. Closed-end investment companies are called closed because they have a fixed amount of money available to invest. The investment company has sold shares of stock to private investors, and these funds are available to invest in your business. As with other types of stock purchases, if you make a profit, the stockholders make money on their investment. Because closed-end investment companies have limited amounts of funds available to lend, they may or may not be looking for new investments. It depends upon whether they have cash available at a particular time. Where can you get more information? Legitimate closed-end investment companies are registered with the federal government. Your banker, accountant or attorney may be able to recommend reputable companies. Equity Financing Corporate Capital Sources In order to generate additional profits, corporations sometimes establish corporate venture capital firms, which operate within the overall corporation. These firms differ substantially from traditional venture capital firms. One of the biggest differences is that they are not motivated purely by profit, at least not in the immediate sense. A corporate capitalist firm typically seeks access to new markets in addition to realizing a financial gain. How do they operate? Corporate capital firms operate in much the same way as traditional venture capital firms. The corporation makes an investment in your business in exchange for an ownership interest. In this way, the needs of both the corporate investor and the entrepreneur are met. The corporation benefits by accessing new markets; the business owner benefits by receiving additional capital. In addition, associating your business with a corporate capital source can add credibility when you seek funds elsewhere. The expertise of the corporation can also be useful in marketing, manufacturing, product development, etc. Its experience represents a valuable asset for your business. Corporate investment in your business will probably take one of several forms: - Complete purchase - An outside corporation buys your business in its entirety, and you forfeit all rights and control. - Partial purchase - An outside corporation purchases part of your business's stock. - Joint venture - You and an outside corporation create a partnership, typically one in which you run the business and the corporation provides capital and business advice. - Licensing agreement - As the business owner you retain control of your business but receive cash for work performed on contract. Sometimes entering into a licensing agreement means giving up the rights to products developed under this agreement. Where can you get more information? A useful source of further information on corporate capital suppliers is Corporate Venturing News, published by Venture Economics, Inc., 16 Laurel Avenue, Wellesley Hills, MA 02181. You can also contact large corporations in your area to inquire if they invest in new businesses. Equity Financing Investment Clubs In many communities, groups of business people form organizations to invest in new and existing businesses, usually on the local level. These clubs are typically less formal than a professional organization might be. How do they operate? Private investors pool resources to make a business investment. Because the group invests together, small investors are able to make funds available to your business on a scale that would be difficult or impossible if they were operating independently. Investment conditions and standards vary from club to club. As with other equity arrangements, you will give up a percentage of your business in exchange for funds received from the investment club. Where can you get more information? For additional information contact the National Association of Investors Corporation, 1515 East 11 Mile Road, Royal Oak, MI 48067, (313) 543-0612. Investment clubs are often informally structured; contact a local attorney or broker to find a club in your area. Equity Financing Employee Stock Ownership Plans (ESOPs) If your business has employees, it may be possible for you to sell stock in your business directly to them. Like other equity arrangements, you will give up a degree of control. But with an ESOP, you will share control with your employees rather than with outside investors. This can be beneficial because your employees will have a vested interest in making your business successfuland employees can have a large impact on operations. How do they operate? An ESOP operates in a similar fashion to other equity sales. Employees purchase shares of stock and thereby gain an ownership interest in your business. You gain capital to be used for expansion. Employees may also offer to take a reduction in salary or benefits in exchange for partial ownership in the company. This is a good point to consider if you anticipate problems in meeting a payroll but cannot reduce staff. One obvious drawback to an ESOP is that a plan of this type is workable only after you have hired employees. It is not an option when your business is in the very early stages. Where can you get more information? Both your attorney and accountant can provide information on how to structure an ESOP. They will be very useful in helping you consider all relevant aspects and potential advantages and disadvantages of the decision. More information is available from the ESOP Association, 1100 17th Street, NW, Suite 1207, Washington, DC 20036. Equity Financing Private Investment Partnerships A private investment partnership is an arrangement in which one or more individuals agree to provide funding for another individual's business. The role of the partner(s) providing the funding is limited to supplying capital. Partners are not responsible for any debts your business incurs and will typically not play a role in managing the day-to-day operations of your business. How do they operate? Private limited partnerships with 35 or fewer members are not required to register with the Securities and Exchange Commission. The typical investment is $20,000 or more per partner. The general partner (you) is responsible for overseeing operations and for making decisions that will have an impact on the business and its performance. The limited or passive partners provide you with funds and expect a substantial return on the investment. However, the return they will require may be less than that required by a venture capital firm. Where can you get more information? Several computer data bases exist to match entrepreneurs with investors. In this case, your banker, attorney and accountant may be useful sources of referrals. It is also possible to find investors by joining local business organizations and clubs, where you may meet individuals with money available to invest. Combining Debt and Equity Financing Customers as a Source of Funds In some industries, potential purchasers of your service may be interested in offering financial help as you start or expand your business. They are interested because an additional supplier (you) provides them with another source for a product or service they need. The addition of your business to the market may also increase price competition, resulting in lower prices for the customer. Each of these aspects translates into important benefits for the customer, just as the customer's funds translate into important benefits for you. How does it work? Both direct loans and equity interests are possible. Again, a direct loan must be repaid, while an equity sale diminishes your control. It is a good idea to consider the advantages and disadvantages of each and prepare a tentative proposal. You may need to approach potential customers yourself, or the customer may come directly to you with an offer. Be wary if the customer proposes that you sell your product or service exclusively to him or her in exchange for financial help. Securing exclusive rights to your products will give the customer more control over your business operations and pricing than you may wish. This type of arrangement will shrink your potential market tremendously. If the customer stops buying from you for any reason, your business may be in serious jeopardy because you have not cultivated other customer relationships. Where can you get more information? Ask the customer directly. You may find a customer more willing to supply you with financing than you would expect. The customer receives a return on his or her investment and gains a supplier. These are very strong incentives for most businesspeople. Government Sources In addition to the private sources we've discussed, there are a number of government financing sources that may be available to you and your business. A government agency may be interested in financing new businesses that will have a direct impact on the agency or the client population it serves. If your business produces a product or service you feel would be of interest to a government agency, contact the agency directly and request information and applications for grants and other possible business development resources the agency may control. It may be helpful to investigate some or all of the following general sources of assistance available through the government. U.S. Small Business Administration (SBA) The SBA may provide a loan guaranty that will help you borrow from a bank. Essentially, the SBA guarantees the lender that up to 90 percent of your debt will be repaid. This helps the lender feel more comfortable about making you a loan. Although the SBA primarily guarantees loans made by banks and other lenders, there is a limited SBA direct loan program, generally for Vietnam-era and disabled veterans, businesses located in areas of high unemployment and handicapped individuals. Funding for this program is subject to congressional appropriations. Loans backed by the SBA usually offer reasonable interest rates and long repayment terms, making them very desirable. It is the SBA's goal to assist those businesses unable to borrow successfully from conventional lenders without the assistance of the government. You can get additional information on SBA programs by contacting the SBA field office in your area. Small Business Investment Companies (SBIC)/Specialized Small Business Investment Companies (S-SBIC) The federal government may also be able to help you with financing through an SBIC or S-SBIC that makes direct loans to entrepreneurs for start-up and expansion as well as equity investments. SBICs and S-SBICs are licensed by the SBA and operate under its guidelines. They are privately owned organizations, chartered by the state in which they operate. There are several conditions your business must meet in order to be considered for assistance from these sources. Typically, an SBIC or S-SBIC is less averse to risk than a bank. They can provide your business with both loans and equity investments, as well as technical assistance. You can obtain the Directory of Operating Small Business Investment Companies by visiting the SBA regional or district office nearest you or by writing to: Deputy Associate Administrator for Investment, U.S. Small Business Administration, 1441 L Street, N.W., Washington, DC 20416. More information is available by contacting the National Association of Small Business Investment Companies and the American Association of S-SBICs, both located in Washington, D.C. Economic Development Commission (EDC) The Economic Development Commission, a part of the U.S. Department of Commerce, lends to new and existing businesses in an effort to create new jobs in economically deprived regions. There are a number of specific conditions that must be met in borrowing through the EDC, including location. You can contact the EDC through the U.S. Department of Commerce in Washington, D.C., or the local office of the Department of Commerce. A Last Note about Government Sources As with all types of financing, government sources have diverse requirements. Learn which agencies and/or programs might be a possible financing source for your business and then contact them for the appropriate paperwork to set the process in motion. ALTERNATIVE WAYS TO OWN A BUSINESS In addition to the possibilities already mentioned, you may want to consider two slightly different ways of owning and operating your own business: purchasing either a franchise or an existing business. Franchises Buying a franchise gives you the right to sell a particular product or service. You retain a portion of your profits and a portion is paid to the overall organization that sold you the franchise. How do they operate? One of the easiest methods of becoming a sole proprietor and acquiring the needed capital at the same time is to purchase a franchise. It is possible to start some franchises with relatively little money and to obtain start-up financing directly from the company selling the franchise. If a direct loan is not possible, the seller of the franchise may be willing to cosign a loan with another lender. The seller of the franchise supplies you with materials, a recognized brand name and sales and marketing assistance. Some franchises are fairly inexpensive while others may cost hundreds of thousands of dollars. Strict limits on innovation. The relative ease with which you can become the owner of a franchise is not without its price. By purchasing a franchise, you give up a high degree of control over your business. Most often the product and operations of a franchise are strictly regulated and there is little room for new ideas. Purchasing a franchise is a sort of middle ground between working for someone else and being an independent business owner. You should, of course, evaluate franchise opportunities as carefully as you would any other type of business. Profit potential, as well as the cash needed to get started, should be considered in your choice. Where can you get more information? Directories of every franchise in the United States can be found in your local library. Information on franchises is also heavily promoted at trade shows and in business magazines. Virtually every type of business imaginable can be purchased through a franchise. Alternative Ways to Own a Business Purchasing an Existing Business One path to becoming an entrepreneur is to buy an already operating business from its present owner. Especially with regard to financing, buying an existing business may have certain benefits over starting a business from scratch. In many cases, the current owner will finance the sale of the business. For example, you read a newspaper advertisement of a small restaurant for sale in a good location. The owner is willing to sell his or her interest in the business for $15,000 if the buyer takes over existing business obligations, e.g., space rental, employee wages, etc. After visiting the restaurant and carefully analyzing the business potential, you decide you are interested in owning this business and decide to purchase it. How can you pay for the business? Let's assume that you don't have $15,000. You have calculated that by using the money you have saved, you can offer the owner $3,000. But this still leaves you $12,000 short. What are your alternatives? 1. Ask the owner to finance the $12,000. 2. Try to find a way to borrow the money using the methods and sources outlined above. 3. Offer the owner less than the asking price, thereby reducing or eliminating the amount of cash needed. No matter which alternative you choose, remember that the owner of an existing business often will help you to find financing. An owner who wants or needs to sell a business will be anxious to help you find a way to make the purchase possible. Why is it being sold? Learn why the owner is selling the business. Make certain that the reasons do not spell disaster for the next owner. You may have nothing to worry about if the present owner is selling in order to retire; however, if he or she is selling because the business is not profitable due to few customers and/or poor location, you will need to realistically assess your ability to improve the situation. If you do not have a carefully researched plan, you may soon find yourself repeating the mistakes of the previous owner. Where can I get more information? The classified section of your newspaper is a good source of information on businesses for sale. You may also want to contact a business broker who, like a real estate broker, sells businesses and properties for a commission. The commission is paid by the seller of the business, which means that the broker is being paid to represent the seller rather than you, the buyer. HOW DO YOU ACTUALLY RECEIVE FUNDS FROM FINANCING SOURCES? All of the sources of financing discussed have one critical point in common: they all require that you sell your ideas and plans to someone who controls the money you need. In this sense, you shouldn't underestimate the importance of being a good salesperson. The responsibility is on your shoulders to share a sense of excitement about your business with the person or organization evaluating your request. This remains true regardless of whether you decide on debt financing, equity financing or a combination of the two. Negotiating Financing If you plan to borrow money, there are certain elements of the borrowing process that are critical to your success. You and the investor have different goals. If you are starting or have already started a business, chances are you strongly believe you will be successful. The investor, however, will not have this same degree of confidence in you and needs to be convinced of your sincerity and of the validity of your ideas. The lender's goal is protection of his or her investment, while yours is more likely financial growth. The investor will need documentation of virtually every statement that you make. If you say your business will grow by 10 percent per year for five years, be prepared to support your claim with facts and figures. You and the investor need each other. Clearly, you need the investor, because he or she controls whether you will have access to funds integral to the success of your business. Without financing, your ideas may remain just that. But there's another side to the coin: the investor needs your business. He or she makes money from interest, fee income and/or profit generated from your business. Keep this point in mind: the investor cannot thrive without you anymore than you can thrive without the investment. Getting financing takes time. Be prepared to wait weeks or months before any money actually changes hands. Don't approach a lender when you are desperate for cash. You'll greatly harm your chances of having your request approved. Instead, plan for your financial needs well in advance. Getting financing takes persistence. You may be turned down many times before someone agrees to provide funds. Don't be discouraged; there are many sources who may be willing to help finance your business. Remain determined and don't give up after just a few tries. If your business ideas are good ones, you will eventually be successful in obtaining financing. Ten Rules of Negotiating for Financing 1. Prepare a comprehensive business plan. 2. Be prepared to explain uses and benefits of the proposed loan. 3. Speak to the appropriate person. 4. Do not overstate your financial strength. Be realistic. 5. Give complete information about your business. 6. Seek a lender with whom you feel comfortable. 7. Negotiate interest rates and fees. 8. Give an impression of confidence and competence. 9. Carefully check all terms of the agreement. 10. Dress conservatively. 1. Prepare a comprehensive business plan, including an income (profit and loss) projection for one year and a cash flow projection. An overview of competition, composition of man- agement and staffing, marketing plans and pricing strategy are also important. Lenders respond favorably to applicants who know where they are going and who have done their home- work. See the Appendix: How To Write A Business Plan for an outline of material that should be included in the busi- ness plan. Use SBA Form 1100 for Cash Flow Projection. If your strategy can be adjusted to alternative amounts of financing, request the preferred amount first and be prepared to submit the alternative plan if you meet obstacles. 2. Be prepared to explain uses and benefits of the porposed loan. Summarize the information in the Sources and Funds Statement in your business plan, and provide specific examples and supporting data for uses of the funds (e.g., estimates, list prices for equipment, etc.). 3. Speak to the appropriate person. With banks, as well as with all other sources, find out who will make the ultimate decision about your financing request, and then deal with this person directly. It is a waste of time to present your loan request to an individual who does not have the personal authority to lend you funds. In banking, most commercial lenders have what is commonly referred to as a lending limit. This is the amount of money they are able to lend on their own authority, without having the request approved by any other parties. It is perfectly acceptable to ask the amount of the lending limit even before setting up an appointment and, what's more, it's advisable. 4. Do not overstate your financial strength. Be realistic! Guard your credibility like the very real asset it is. Remember, the investor will almost certainly verify everything you say. If you tell him your first quarter sales were $4,500, be sure that this is true. Once your integrity and honesty are called into question, it will be difficult, if not impossible, to regain your lost reputation. Even if your misstatements are the result of a legitimate error rather than a deliberate attempt to make your business appear more profitable, the investor may feel that this is a good reason to question your overall business judgment. It's a very good policy to never say anything you can't support with data. 5. Give complete information about your business. It is wise to present all the information the investor requests. Most investors are required to have certain documents on hand to invest. Some are requested just as a formality and some are thoroughly analyzed. Unfortunately, there is no way for you to tell the difference between the two. Prepare all documents carefully and double check all facts and figures before turning over the information. It will be far better for a negative aspect of your business to be handled openly than for it to come up later under less favorable circumstances. This does not mean that you are under obligation to reveal all your fears and concerns about the business and its operations. It does mean, however, that you have an obligation to disclose material or relevant facts about your business. 6. Seek a lender with whom you feel comfortable. There can be wide variations among investors. Because you are turned down by one source does not mean that you will be turned down by the next. Avoid putting all of your eggs in one basket. Carefully scrutinize potential investors in the same way that you investigate any other major business decision. Investors and lenders are just like everyone else! You will feel good about working with some and not with others. Be sure to settle on one who can give adequate attention to your account and who explains all aspects of the financing relationship clearly and thoroughly. 7. Negotiate interest rates and fees. We've already noted how a small difference in interest rates can have a big impact on your payments. Fees, too, can drastically alter the total amount you are paying for financing. Typically, you will be asked to pay points, which are a percentage of the total loan, due at the time the loan is originated. If, for example, you borrow $20,000 and are told that there is a 2 percent origination or commitment fee, you can expect to pay $400 in fees to borrow from this source. The length of the loan is also important. The shorter the term, the less total interest you will pay. All lenders charge different rates and fees. Be aware of what you are paying. If the lender seems receptive, attempt to reduce the charges you will incur. In the worst case, the lender will tell you that the lending conditions cannot be changed. You've lost nothing by trying to minimize your costs. 8. Give an impression of confidence and competence. No one likes to borrow money. It is perfectly reasonable for you to feel a little nervous when applying for financing, but be careful not to let your nervousness cloud your judgment. The investor needs to have a high degree of confidence in your ability to repay the debt or generate a profit. Be sure of your facts and rehearse what you will say. Give some thought to the types of questions you may be asked and consider the best responses. Again, remember that the investor is dependent upon you, just as your business is dependent upon the investor. You are both in a position to help one another. 9. Carefully check all terms of the agreement. Be sure you know what you are signing. It is perfectly appropriate to ask that your attorney or accountant review the conditions of the agreement. If you or your advisors do not feel comfortable with some aspect of the agreement, don't hesitate to raise it as an issue. The time to discuss alternatives is before the deal is finalized. Once you have signed an agreement, you are legally bound by it. The investor will prepare the agreement for self-protection. Given this, it is not unreasonable to expect the terms to favor the investor. To a certain extent, this is inevitable, but try to prevent the insertion of any clauses or conditions that may present a serious hardship for you. 10. Dress conservatively. Like almost everyone, investors and lenders feel most comfortable around people like themselves. For this reason, it is a good idea to dress carefully when meeting with an investor, even if you do not normally do so when running your business. A suit and tie are recommended for men, a jacket and skirt for women. Avoid overly elaborate accessories. Remember, you are trying to give an impression of conservative good judgment. Dress to fit the environment. SOME FINAL POINTS No one ever said that starting a business would be easy. Without a doubt, finding the money to start or expand your business requires hard work and determination. It may be the largest obstacle you will face when planning to own or expand a business. Don't despair; financing is available. It's all a matter of knowing where to look, and now you know! Perseverance makes all the difference. Most successful entrepreneurs have been turned down many times for financing. Remember, it is your job to sell your ideas and to pursue every possible means of securing capital. If you truly wish to finance your business, and if your ideas are good ones, you will be successful. Don't hesitate to consider a variety of financing alternatives. Most of the sources described will not alone meet all of your needs, nor are they intended to. It is far more likely that you will find a number of sources interesting and you may be able to borrow successfully from all of them. Most businesses use a combination of financial sources to adequately fulfill their changing needs for capital. Be aware of the advantages and disadvantages of each approach and determine which ones seem most relevant to your situation. Above all, remain determined. If you persistently seek financing you will eventually obtain it. Good luck! APPENDIX A: HOW TO WRITE A BUSINESS PLAN The following pages provide a suggested outline of the material that should be included in your business plan. Your final plan may vary according to your needs or because of the individual requirements of your lender. What Are the Benefits? Every business can benefit from the preparation of a carefully written plan. There are two main purposes for writing that plan: 1. To serve as a guide during the lifetime of the business. It is the blueprint of your business and will provide you with the tools for analysis and change. 2. A business plan is a requirement if you are planning to seek a loan. It will provide potential lenders with detailed information on all aspects of your company's past and current operations and provide future projections. Business Plan Outline I. Cover sheet Serves as the title page of your business plan. It should contain the following: - Name of the company - Company address - Company phone number (include area code) - Logo (if you have one) - Names, titles, addresses, phone numbers (include area code) of owners - Month and year your plan was issued - Name of preparer II. Statement of purpose (Same as executive summary.) This is the thesis statement and includes business plan objectives. Use the key words (who, what, where, when, why, how, and how much) to briefly tell about the following: - What your company is (also who, what, where and when). - What your objectives are. - If you need a loan why you need it. - How much you need. - Why you will be successful. - How and when you plan to repay your loan. III. Table of contents A page listing the major topics and references. IV. The business Covers the details of your business. Include information about your industry in general, and your business in particular. Address the following: - Legal structure - Tell what legal structure you have chosen and state reasons for your choice. - Description of the business - Detail your business. Tell about your history present status and future projections. Outline your product or service in terms of marketability. Project a sense of what you expect to accomplish in the next few years. - Products or services - Give a detailed description of your products from raw materials to finished items. Tell about your manufacturing process. If you provide a service tell what it is how it is provided and why it is unique. List future products or services you plan to provide. - Location - Describe site and why it was chosen. (If location is important to your marketing plan focus on this in the marketing section below.) - Management - Describe who is behind the business. For each owner tell about responsibilities and abilities. Support with resumes. - Personnel - Who will be doing the work why are they qualified what is their wage what are their responsi- bilities? - Methods of record keeping - What accounting system will you use? Who will do your record keeping? Do you have a plan to help you use your records in analyzing your business? - Insurance - What kinds of insurance will you need? What will these cost and who will you use for a carrier? - Security - Address security in terms of inventory control and theft of information. V. Marketing Covers the details of your marketing plan. Include information about the total market with emphasis on your target market. Identify your customers and tell about the means to make your product or service avail- able to them. - Target market - Identify characteristics of your customers. Tell how you arrived at your results. Back up information with demographics questionnaires and surveys. Project size of your market. - Competition - Evaluate indirect and direct competition. Show how you can compete. Evaluate competition in terms of location market and business history. - Methods of distribution - Tell about the manner in which products and services will be made available to the customer. Back up decisions with statistical reports rate sheets etc. - Advertising - How will your advertising be tailored to your target market? Include rate sheets promotional material and time lines for your advertising campaign. - Pricing - Pricing will be determined as a result of market research and costing your product or service. Tell how you arrived at your pricing structure and back it up with materials from your research. - Product design - Answer key questions regarding product design and packaging. Include graphics and proprietary rights information. - Timing of market entry - Tell when you plan to enter the market and how you arrived at your decision. - Location - If your choice of location is related to target market cover it in this section of your business plan. (See location in the business section of this outline.) - Industry trends - Give current trends project how the market may change and what you plan to do to keep up. VI. Financial documents These are the records used to show past, current and projected finances. The following are the major documents you will want to include in your business plan. The work is easier if these are done in the order presented. - Summary of financial needs - This is an outline indicating why you are applying for a loan and how much you need. - Sources and uses of funds statement - It will be necessary for you to tell how you intend to disperse the loan funds. Back up your statement with supporting data. - Cash flow statement (budget) - This document projects what your business plan means in terms of dollars. It shows cash inflow and outflow over a period of time and is used for internal planning. Cash flow statements show both how much and when cash must flow in and out of your business. - Three-year income projection - A pro forma income statement showing your projections for your company for the next three years. Use the pro forma cash flow statement for the first year's figures and project the next according to economic and industry trends. - Break-even analysis - The break-even point is when a company's expenses exactly match the sales or service volume. It can be expressed in total dollars or revenue exactly offset by total expenses or total units of production (cost of which exactly equals the income derived by their sales). This analysis can be done either mathematically or graphically. Note: The following are actual performance statements reflecting the activity of your business in the past. If you are a new business owner your financial section will end here and you will add a personal financial history. If you are an established business you will include the actual performance statements that follow. - Balance sheet - Shows the condition of the business as of a fixed date. It is a picture of your firm's financial condition at a particular moment and will show you whether your financial position is strong or weak. It is usually done at the close of an accounting period and contains assets liabil- ities and net worth. - Income (profit and loss) statement - Shows your business financial activity over a period of time (monthly annually). It is a moving picture showing what has happened in your busi- ness and is an excellent tool for assessing your business. Your ledger is closed and balanced and the revenue and expense totals transferred to this statement. - Business financial history - This is a summary of financial information about your company from its start to the present. The business financial history and loan application are usually the same. If you have completed the rest of the financial section you should be able to transfer all the needed information to this document. VII. Supporting documents These are the records that back up the statements and decisions made in the three main parts of your business plan. Those most commonly included are as follows: - Personal resumes - Should be limited to one page and include work history educational background professional affiliations and honors and special skills. - Personal financial statement - A statement of personal assets and liabilities. For a new business owner this will be part of your financial section. - Credit reports - Business and personal from suppliers or wholesalers credit bureaus and banks. - Copies of leases - All agreements currently in force between your company and a leasing agency. - Letters of reference - Letters recommending you as being a reputable and reliable businessperson worthy of being considered a good risk. (Include both business and personal references.) - Contracts - Include all business contracts both completed and currently in force. - Legal documents - All legal papers pertaining to your legal structure proprietary rights insurance titles etc. - Miscellaneous documents - All other documents that have been referred to but are not included in the main body of the plan (e.g. location plans demographics advertising plan etc.). Putting Your Plan Together When you are finished: Your business plan should look professional, but the lender needs to know that it was done by you. A business plan will be the best indicator he or she has to judge your potential for success. It should be no more than 30 to 40 pages long. Include only the supporting documents that will be of immediate interest to your potential lender. Keep the others in your own copy where they will be available on short notice. Have copies of your plan bound at your local print shop, or with a blue, black or brown cover purchased from the stationery store. Make copies for yourself and each lender you wish to approach. Do not give out too many copies at once, and keep track of each copy. If your loan is refused, be sure to retrieve your business plan. For a more detailed explanation of each section of the business plan outline, see SBA's publication, How to Write a Business Plan, which includes step-by-step directions and sample sections of actual business plans. Also available from the SBA is a VHS videotape and workbook, The Business Plan: Your Roadmap for Success. APPENDIX B: INFORMATION RESOURCES U.S. Small Business Administration (SBA) The SBA offers an extensive selection of information on most business management topics, from how to start a business to exporting your products. This information is listed in "The Small Business Directory". For a free copy contact your nearest SBA office. SBA has offices throughout the country. Consult the U.S. Government section in your telephone directory for the office nearest you. SBA offers a number of programs and services, including training and educational programs, counseling services, financial programs and contract assistance. Ask about - Service Corps of Retired Executives (SCORE), a national organization sponsored by SBA of over 13,000 volunteer business executives who provide free counseling, workshops and seminars to prospective and existing small business people. - Small Business Development Centers (SBDCs), sponsored by the SBA in partnership with state and local governments, the educational community and the private sector. They provide assistance, counseling and training to prospective and existing business people. - Small Business Institutes (SBIs), organized through SBA on more than 500 college campuses nationwide. The institutes provide counseling by students and faculty to small business clients. For more information about SBA business development programs and services call the SBA Small Business Answer Desk at 1-800-8-ASK-SBA (827-5722). Other U.S. Government Resources Many publications on business management and other related topics are available from the Government Printing Office (GPO). GPO bookstores are located in 24 major cities and are listed in the Yellow Pages under the "bookstore" heading. You can request a "Subject Bibliography" by writing to Government Printing Office, Superintendent of Documents, Washington, DC 20402-9328. Many federal agencies offer publications of interest to small businesses. There is a nominal fee for some, but most are free. Below is a selected list of government agencies that provide publications and other services targeted to small businesses. To get their publications, contact the regional offices listed in the telephone directory or write to the addresses below: - Consumer Information Center (CIC), P.O. Box 100 Pueblo, CO 81002 The CIC offers a consumer information catalog of federal publications. - Consumer Product Safety Commission (CPSC) Publications Request Washington, DC 20207 The CPSC offers guidelines for product safety requirements. - U.S. Department of Agriculture (USDA) 12th Street and Independence Avenue, SW Washington, DC 20250 The USDA offers publications on selling to the USDA. Publications and programs on entrepreneurship are also available through county extension offices nationwide. - U.S. Department of Commerce (DOC) Office of Business Liaison 14th Street and Constitution Avenue, NW Room 5898C Washington, DC 20230 DOC's Business Assistance Center provides listings of business opportunities available in the federal government. This service also will refer businesses to different programs and services in the DOC and other federal agencies. - U.S. Department of Health and Human Services (HHS) Public Health Service Alcohol, Drug Abuse and Mental Health Administration 5600 Fishers Lane Rockville, MD 20857 Drug Free Workplace Helpline: 1-800-843-4971. Provides information on Employee Assistance Programs. National Institute for Drug Abuse Hotline: 1-800-662-4357. Provides information on preventing substance abuse in the workplace. The National Clearinghouse for Alcohol and Drug Information: 1-800-729-6686 toll-free. Provides pamphlets and resource materials on substance abuse. - U.S. Department of Labor (DOL) Employment Standards Administration 200 Constitution Avenue, NW Washington, DC 20210 The DOL offers publications on compliance with labor laws. - U.S. Department of Treasury Internal Revenue Service (IRS) P.O. Box 25866 Richmond, VA 23260 1-800-424-3676 The IRS offers information on tax requirements for small businesses. - U.S. Environmental Protection Agency (EPA) Small Business Ombudsman 401 M Street, SW (A-149C) Washington, DC 20460 1-800-368-5888 except DC and VA 703-557-1938 in DC and VA The EPA offers more than 100 publications designed to help small businesses understand how they can comply with EPA regulations. - U.S. Food and Drug Administration (FDA) FDA Center for Food Safety and Applied Nutrition 200 Charles Street, SW Washington, DC 20402 The FDA offers information on packaging and labeling requirements for food and food-related products. For More Information A librarian can help you locate the specific information you need in reference books. Most libraries have a variety of directories, indexes and encyclopedias that cover many business topics. They also have other resources, such as - Trade association information Ask the librarian to show you a directory of trade associations. Associations provide a valuable network of resources to their members through publications and services such as newsletters, conferences and seminars. - Books Many guidebooks, textbooks and manuals on small business are published annually. To find the names of books not in your local library check "Books In Print", a directory of books currently available from publishers. - Magazine and newspaper articles Business and professional magazines provide information that is more current than that found in books and textbooks. There are a number of indexes to help you find specific articles in periodicals. In addition to books and magazines, many libraries offer free workshops, lend skill-building tapes and have catalogues and brochures describing continuing education opportunities. ---------- End of Document