Most people immediately think of commercial banks when they determine a need for business financing. Unfortunately, as a source of start-up funding, banks end up far down on the list of likely sources. Instead, most small businesses are financed through private funding and other sources. Some of these sources include: 

1. Personal savings
2. Loan from family or friends
3. Personal bank loan
4. Refinancing or a second mortgage on real estate or other assets

(Note: Sources 3 & 4 are generally contingent upon your having a regular source of income, i.e., a job; thus, if you plan to travel this route, you need to secure this financing while you’re still employed.)

• Cash value of assets you could sell
• Cash value of life insurance, stocks or bonds
• Credit cards
• Investments from partners
• Advance payments from contracts (not a likely source)
• Credit from suppliers 

Your first step in evaluating any business prospect should be a feasibility study to determine the potential of your particular product or service. The cash flow projection is a basic piece of any feasibility study. In it you estimate revenues and expenses of your business, generally on a monthly basis, for a year or two. This analysis is important in that it will tell you (and your banker or investor) what amount of funds you will need to invest in the business to keep it running until sales reach a point where they will support the business. This analysis will also illustrate the burden placed on a fledgling business by borrowed funds and will assist you in making the difficult financing decisions. Be aware that banks vary in their aggressiveness over time and between one another and that bankers themselves vary according to their own background and experience. Thus, you must be persistent and willing to shop around.

SBA offers a variety of loan programs designed for business owners who may have trouble qualifying for a traditional bank loan. Review their loan programs to see if you qualify.

Many small business start-ups are inherently risky and commercial banks are traditionally risk averse. Bankers are neither investors in small businesses nor speculators, but they will lend money to a small business if its repayment is relatively assured. Commercial banks generally provide financing at comparatively low rates but in return expect a strict repayment schedule and detailed recordkeeping. Their main concern is whether or not you will be able to repay the loan in full and on time. The bank’s lending officers look for specific criteria when evaluating your loan proposal. They will rate you on the following characteristics: 

• Experienced management – Are you familiar with the business and do you know the industry?
• Substantial investment – Are you willing to make a substantial investment of time and money?
• Strong credit history – Have you borrowed similar amounts and repaid them in a timely manner?
• Responsible character – Can your references vouch for your honesty and good business sense?
• Good collateral – Do you have satisfactory collateral appraised high enough to secure the loan?
• Adequate cash flow – With the loan, will the business generate enough dollars to pay off the loan and then some? 

Meeting the preceding criteria can be very difficult for a start-up business. Often one or more criteria cannot be met. It may be especially difficult to convince a banker that your projections of sales and cash flow are realistic. This can be accomplished but only by exhibiting extensive knowledge of the business and the market. The bank will expect to see a formal business plan, complete with pro-forma financial statements, and will expect you to complete a personal financial statement. 

When all the bank’s criteria have been met, the banker will look for additional means to secure the loan. This can be done through a variety of methods: 

• Personal guarantee – First of all, you will be required to personally guarantee the loan. If your business fails, you personally will be responsible for repaying the loan.
• Co-Signer – If your ability to repay the loan – should the business fail – is in question, the bank may require that you find another person with the financial capacity to guarantee repayment.
• SBA or FAME Guarantee – The U.S. Small Business Administration (SBA) and Finance Authority of Maine (FAME) primarily assist small start-up businesses by providing commercial loan insurance. The first step, to take advantage of these programs, is to get a bank committed to your project – for it is a bank that will make applications to SBA or FAME. SBA or FAME will have similar requirements of you in terms of experience, character, credit worthiness, collateral and cash investment. The primary difference is that they may be willing to accept more risk than the bank in the name of promoting small business. (Note: Even if you do get a guarantee from SBA or FAME, these agencies will still hold you personally responsible for the debt.) Finally, guarantees do not mean low interest loans. The loan is made at the bank’s current rate and a fee is charged by the guarantee agency.

There are a number of different economic development lenders across the state. Availability may depend upon where your business will be located and what type of business you are starting. The SBDC business advisors may be able to recommend these sources to you. These lenders are generally non-profit entities. You may hear the term “gap funding”. These lenders will oftentimes take more risk than a traditional bank and fill in the “gap” between what a traditional bank will do and what you need to make it work. These lenders still do normal underwriting, but may be willing to take on additional risks beyond what the bank is comfortable with. They may also do all of the funding you need if it is a smaller amount.

An angel investor is a high net worth individual who provides capital to startups or entrepreneurs in return for ownership equity or debt repayment.

Maine Angels – Maine Angels help entrepreneurs by investing in and mentoring early stage New England businesses, with an emphasis on Maine. Visit their site for more info.

Common Angels – CommonAngels® Ventures invests in early-stage information technology startups in New England. Visit their site for more info.

The Finance Authority of Maine (FAME) provides innovative financial solutions to help Maine citizens pursue business and education opportunities. Learn more

Federal, state and local governments offer a wide range of financing programs to help small businesses start and grow their operations. These programs include low-interest loans, venture capital and economic development grants. For more information on grants, visit Grants.gov

Crowdfunding is used to fund projects or ventures by raising small amounts of money from a large number of people, and is typically done on the internet. There are two general types of crowdfunding – rewards-based and equity. There are hundreds of crowdfunding platforms so be sure to do your due diligence to choose one that fits best with your project/venture. In addition, check crowdfunding rules at Maine Office of Securities.

Venture capital is capital provided to high-potential, early stage startup companies. Money typically comes from a group of investors who pool their investments into one venture capital fund. With venture capital, the investors own equity in the company it invests in.

Maine Venture Fund (MVF) – MVF is a professionally managed venture capital fund that invests exclusively in Maine companies that demonstrate a potential for high growth and public benefit. Click here for more info.

CEI Ventures, Inc. – CEI Ventures manages socially responsible capital funds. Portfolio companies are diversified by geography, industry, stage of business development and social benefits. Click here for more info.

The Maine Technology Institute (MTI) is a private, non-profit corporation that offers early-stage capital and commercialization assistance for the research and development of technologies that create new products, processes and services, generating high-quality jobs across Maine.

Each MTI funded program has an application process where applications are reviewed for their criteria. Visit their website for more info.