I am planning to open my shop (first time!!) in the next year or two and am at the stage where I need to consider how I am going to fund my business. Unfortunately, a bank loan is inevitable; however, I would really like to consider other sources to supplement a smaller bank loan. Has anyone tried to get outside investors... through small loans or possible even angel investors? How does this all work? How do you make it worthwhile to an investor when you may not turn a profit for several years?

Clueless...
Devon

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Devon,

I have a friend that used angel investors and all went great for the first three years but, then the balloon payment was due and she was unable to pay... if you go this route be sure that you have terms for when the balloon payment is due and what happens if it can not be paid (put a clause in there that allows you time to come up with other funding options). There may be other options for you where are you located?
Brandy
Brandy,
Thanks for the tip! The problem is, I don't understand the details of how angel investing works. Do you have any insight into this or perhaps some resources?
Hi Devon, I am looking into opening a cafe as well and this is what I know.
1) You will get no where without a great business plan. Make sure it is reviewed by others.
2) Bank loans are usually not an option for first time business owners.
3) Investors are always looking for businesses to iunvest in, but you have to show them (through business plan) that you will return a profit. Again, for first time business owners this can be very hard.
4) Most realistic approach is through savings, family, friends and partnerships.



Devon said:
Brandy,
Thanks for the tip! The problem is, I don't understand the details of how angel investing works. Do you have any insight into this or perhaps some resources?
Mark,
Sounds like we are kindred spirits. :) I take it you are planning on option 4. Do you plan to use part of your savings to live on until your business is able to turn a profit? Or are you working a small salary for yourself into your financials?

Have you seeked a bank loan yet or is #2 based on what you have heard from others?
Devon
Two sources to get money from for first time entrepreneurs:

1) People who love you.
2) Mortgage your house to the hilt.

Usually you will need to front a minimum of thirty percent of the total cost on your own. You have to show you are willing to put everything you have at risk before expecting someone else to. And if the loan seems too easy to get, read the fine print. :)
Hi Devon, yes i am in the planning stages as well...my only realistic plan is to open a business and keep my day job at the same time. Hiring others to work during the day will be the key. I work as an accountant but have experience in HR as well and consider myself a good at hiring/training. I have not applied at a bank, but have done enough research to know unless you have collateral you have no chance. Being a woman you might qualify for some special woman/minority small biz loans, so I will research all of the possibilities there.

Devon said:
Mark,
Sounds like we are kindred spirits. :) I take it you are planning on option 4. Do you plan to use part of your savings to live on until your business is able to turn a profit? Or are you working a small salary for yourself into your financials?

Have you seeked a bank loan yet or is #2 based on what you have heard from others?
Devon
Wow, that's quite a task to open a shop and keep your day job! Out of curiosity, why not make owning your shop your full time job? Are you afraid it won't quite pay the bills?

Unfortunately, I really have no collateral - just excellent credit. I was hoping to at least get small loan and to supplement it with outside investors or help from friends/family. I know relationships can be ruined over money, though, so I am trying to understand how most people structure such loans. Do they write up a contract to give back the money plus a specific amount of interest once the business turns a profit? Do they promise some sort of share in the company? I plan to structure as an S Corp. I am just trying to understand loans outside of a bank at a high level. Thoughts?
A really solid business plan is your first step, Maybe an SBA loan? Check our SCORE (Service Core of Retires Executives) for help on writing a business plan. If your plan is solid and your location great there's always a way to get funding.

SCORE
Like everyone is saying, A solid business plan is a must.
I recently bought a four year old cafe that had average books and not alot of income. i had to work extra hard with the banks with a solid business plan and projections of income to get me over the line.
Then they hurdled me with needed a security on the loan; in stepped the parents, they are listed on the loan as gurantee's to make the bank happy.
Devon, a few thoughts:

1. First time business owners usually rely heavily on savings, second mortgages, friends and relatives. Yes, when friends and family are your “bank,” you do risk those relationships, if things don’t work out.

2. If you have investors, be sure your paperwork is crystal clear about whether they are loans (promissory notes, etc.) or equity interests (stock, LLC membership, etc) or some combination. There are federal and state laws governing what you can promise, who can be approached, and what filings you may have to make, if it is an equity investment, particularly if the money comes from people who won’t be actively involved in the business. These are “usually” fairly simple for small businesses.

3. True “angel investors” are usually not interested in a stand-alone retail shop. They tend to focus on businesses with substantial upside potential, that will some day attract venture capital and then be bought out or go public.

4. Yes, it’s hard to get a loan without collateral. These days it can be difficult, even with collateral. Banks are looking for more valuable collateral on the assumption that it may decline in value.

5. Landlords are hungry for tenants in many parts of the country right now. They may be willing to cover or at least advance all or part of your tenant improvements.

6. Don’t despair! Free help here: www.score.org. They may even have free personal advisers for small businesses in your area. Also check out the SBA for free advice: www.sba.gov .
Thanks for the tips Dave! Can I ask what your loan amount was, and how much did you spend in purchasing the cafe?

Dave_G said:
Like everyone is saying, A solid business plan is a must.
I recently bought a four year old cafe that had average books and not alot of income. i had to work extra hard with the banks with a solid business plan and projections of income to get me over the line.
Then they hurdled me with needed a security on the loan; in stepped the parents, they are listed on the loan as gurantee's to make the bank happy.
"SBA provides a number of financial assistance programs for small businesses including
7(a), 504 and disaster assistance loans."

http://www.sba.gov/services/financialassistance/index.html

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