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How to Fund A New Business

Financial Insight From Bridgewater Bank

Thinking about starting a new business, but not sure how to fund it? It’s okay, Tony Ferraro, managing director of commercial lending for Bridgewater Bank, has got your back. Using his 25 years of finance experience, he is here to answer four critical funding questions that all entrepreneurs ask.

Read on, you may be surprised by his responses.

How can I fund my new business?

How someone goes about funding a new business depends a lot on the overall complexity and startup capital needs.  

If someone is starting a business that needs very little initial seed money, they may use personal resources such as equity in their home, higher interest options like credit cards – which I don’t advise if possible – or loans from friends and family.  

For more capital-intensive startup businesses, you may see a combination of personal resources and bank financing. Often a Small Business Administration loan comes into play.  These loans provide a 75% guaranty to the bank from the U.S. government for the traditional SBA loan product or a 50% guaranty for their SBA express program, which is a more streamlined program for smaller loans.  

Start-up businesses are inherently higher risk as they do not have historically proven cash flow to make loan payments, and there may be a lack of collateral to secure the loan.  An SBA loan with a government guaranty may make it an acceptable credit risk for a bank to approve a loan.

In some areas, there are also grants or other types of programs that provide some startup capital which should be looked into. Many can be found by a simple Google search. There are also crowdfunding options as well as venture capital available for businesses where outside investors see an opportunity for growth in the business. 

Sometimes the startup capital needs are very intensive and in these situations you typically see someone find outside investors or partners that have additional financial resources to fund the business. Typically a percentage of ownership in the business is given to attract this kind of funding. Consideration should be given to what you are giving up by taking on these partners as well as what kind of control they will require. 

What are the benefits of choosing a local lender?

The biggest benefit of choosing a local lender is having direct access to a banker who will know you by name, who can meet with you in person, understand your needs, and provide advice on how best to fund your new business.

I have chosen my funding avenue. What’s next?

If you are using your personal resources, the next steps are pretty simple. You may be using a combination of your own money and taking out a home equity loan. These can be done by yourself and on your own time.

As you progress to bank financing for something like an SBA loan, you will want to put together a well-thought-out business plan that includes financial projections that make sense with the amount of loan you are requesting. The help of a CPA or business consultant is often useful during this process. An attorney may also become necessary if you are looking at crowdfunding or bringing in outside investment.

On the more complex startups with sizable outside investment being requested, you will often need to put together a thorough pitch deck laying out the business plan, projections, and anticipated returns for investors. Those looking for this level of investment typically have experience in prior startups or have hired the help of consultants, CPAs, and attorneys to help them put it all together.  

After you have your business plan or pitch deck, you can approach investors with your idea and, hopefully, they will agree to fund your venture.

For more start-up advice, visit bridgewaterbankmn.com or stop by the St. Louis Park office.

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