Inadequate capital is the cause of many business failures. Enough capital is needed to start up the business, to operate it through the hard times and to provide an opportunity for growth and expansion. There are several sources to consider when looking for financing for your business. But first you need to consider how much money you are going to need.

The financial needs of your business will vary according to these factors:

• the type of business;
• the kinds of products or services you provide;
• who your suppliers will be;
• where you are located;
• the purchasing power of your customers;
• the amount of competition in your trade area;
• cost of labor; and
• general economic conditions.

If yours is a start-up business, you will need capital for fixed assets such as equipment and buildings and working capital for licenses or permits, inventory, supplies, raw materials, labor, etc.

Sources of Financing
Personal savings. The first place to look for money is your own savings or equity. Personal resources can include profit-sharing or early retirement funds, real estate equity loans or cash value insurance policies.

Life insurance policies. A standard feature of many life insurance policies (not term insurance) is the owner’s ability to borrow against the cash value of the policy. The money can be used for any business or personal need. It takes about two years for a policy to accumulate sufficient cash value for borrowing. You may borrow up to 95 percent of the cash value of the policy of an insurance premium, and paying the interest you owe often can be deferred. The loan will reduce the face value of the policy, and, in the case of death, the loan has to be repaid before the beneficiaries of the policy receive any payment.

Home equity loans. A home equity loan is similar to a second mortgage. It is a loan backed by the value of the equity you have built up in your home. For example, if your house is worth $100,00 with an outstanding mortgage of $60,000, you have $40,000 in equity you can use as collateral for a home equity loan or line of credit. Some home equity loans are fixed-rate loans paid to the borrowers in a lump sum; others are set up as a revolving credit line from which you draw only the amount you need at any one time, using a special check or credit card provided by the lender. Interest on home equity loans is tax-deductible, which makes them particularly attractive to borrowers.

Friends and relatives. Many entrepreneurs look to private sources, such as friends and family, when starting out in a business venture. Often money is loaned at a low interest rate, which can be beneficial when getting started with a business. If you borrow from a friend or relative, do it on a business-like basis by writing up a loan agreement that specifies the amount borrowed, the length of the loan period, the interest, schedule of payments and any collateral.

Loan equity drives. Many value added agricultural businesses in the upper Midwest have been capitalized partially by producers cooperating and pooling their money to capitalize a company.

Banks, savings and loans and credit unions. Banks and other commercial lenders are popular sources of business financing. However, most lenders insist on a solid business record and plenty of collateral, which are very hard to come by in a startup situation. Once your business is well underway and you can supply profit and loss statements, cash flows and balance sheets, you may be able to borrow more operating capital or money you need for expansion.

Commercial finance companies. Commercial finance companies may be considered when you are unable to secure financing from other commercial sources. They may be more willing to rely on the quality of the collateral than your businesses track record or profit projections to repay the loan. If you do not have substantial personal assets or collateral, a commercial finance company may not be the best place to secure business capital. Also, the cost of finance company money is usually several percentage points higher than other commercial lenders.

Venture capital firms. Venture capital firms provide capital to unproven young businesses in exchange for equity or partial ownership in the firm. Generally, they are looking for high-growth businesses. With loan repayments and interest charges, they do reduce the primary owner’s share of the profits.

Government programs. Federal, state and local governments have several programs designed to assist the financing of new ventures and small businesses. The best known are the Small Business Administration (SBA) and the USDA Rural Development programs.

SBA Loans
The SBA does not provide direct loans, but provides loan guarantees. This means the money comes from your local lender, but if you were to default on your loan, the SBA repays the loan to the bank up to 85 or 90 percent of the amount borrowed. SBA interest rates on loans vary from year to year based on the cost of money to the government. These are some of the financial assistance programs offered by the SBA:

7(a) Regular Business Loans. Maximum to $750,000; 5-7 years for working capital, 10 years for equipment and up to 25 years for business real estate. The standard 7(a) loan can require pretty extensive applications and could take several weeks to get approved at a bank that is not an SBA Certified Lender.

Certified Development Company Loans or 504 Loans. Fixed asset financing only for growth and expansion of small businesses. The borrower must come up with 10 percent, the bank loans 50 percent, and the development company makes a 40 percent second mortgage on fixed assets, such as land, equipment or buildings. Geared to create and retain jobs; the borrower must create one job for every $35,000.

Low/Doc Loans. This program provides a streamlined application for borrowers with good character. Maximum is $80,000; 5-7 years for working capital, 10 years for equipment and up to 25 years for business real estate.

Small Business Investment Companies (SBIC). This is for venture-capital companies that wish to supplement their private investment capital by borrowing funds at a preferred rate from the SBA. The SBIC, in turn, makes long-term loans or provides venture capital to small businesses.

Capital Access Loans (CAP). For borrowers with insufficient collateral for conventional financing. The CAP program offers default protection to participating lenders who pay into a loss reserve account each time a CAP loan is made. The cost to the borrower is higher than for a standard loan, and the money is to provide working capital for short-term needs (up to 5 years).

Other SBA loan programs include the following:

• Seasonal line of credit guarantees
• Energy loans
• Export working capital
• International trade loans
• Pollution control financing
• Surety bond guarantee program
• Small loan program
• Small general contractor loans
• Loans to qualified employee trusts
• Employee stock option plans (ESOPs)
• Employee Retirement Income Security Act (ERISA)

USDA Loans
Business and Industrial Loan Guarantee Program
Provides guarantees on loans of up to $10 million or more made by private lenders for start-up or expansion purposes to for-profit or non-profit businesses or investors of any size located in rural areas with populations under 50,000.

Intermediary Relending Program
Provides 1 percent, 30-year loans to eligible intermediaries to establish a revolving loan fund. The intermediary then relends the funds for business and community development projects in rural areas with populations under 25,000. Competition will require an equity contribution by the intermediary.

CoBank
With $24 billion in assets, CoBank has been the leading lender to some of America’s most successful businesses since 1916. It specializes in cooperative, agribusiness, rural communications, rural energy and infrastructure, Farm Credit association and agricultural export financing. There are 14 offices in the U.S., including a national office in Denver, plus representative offices in Mexico City, Singapore and Buenos Aires.

CoBank offers a broad array of services specially, including short-, intermediate- and long-term financing at variable and fixed interest rates. It also offers on-line financial solutions, cash management services, international trade tools, letters of credit and interest rate risk management services.Leasing is offered through a subsidiary, Farm Credit Services Leasing Corp. Private placements, equity sourcing, trust-preferred securities, asset securitization and tax-exempt financing are offered through strategic alliances of CoBank.

The bank is owned by its U.S. customers, including approximately 2,600 cooperatives and other businesses serving rural America. CoBank is governed by a board of directors elected by the cooperative owners of the bank. The bank operates on a cooperative basis and, historically, has returned a substantial portion of bank earnings to the bank’s patronage customers in the form of patronage refunds.

CoBank is part of the Farm Credit System, an $89-billion nationwide network of lending institutions created by Congress in 1916. The funds to finance CoBank loans primarily come from the sale of Farm Credit securities to the national and international money markets. Because of the market acceptance and attractiveness of Farm Credit System securities and the volume of funds raised, CoBank offers competitive interest rates.


Types of Business Loans
Most lenders believe a business should be started with the owner’s personal assets providing much of the financing. Expect to invest at least 30 percent or more of the total financial needs of the business. The size of your commitment is critical. Lenders will hesitate to risk their funds if you are not risking some of your own.

Traditionally, smaller businesses have used local banks for their financing needs. When you borrow money from a bank, savings and loan, credit union or other lending institution, it is important to know the kind of money you need. Here are the basic categories lenders generally use to classify loans, grouped according to the expected duration of the loan.

Short-term business loans. Business runs on short-term loans. Technically a “short term” loan means repayment in less than a year, but in real life, short-term loans often expand to two to three years. Businesses usually seek short-term loans to finance their accounts receivable and supplies/inventory needs.

Medium-term loans generally require collateral. They are usually used to finance equipment, fixtures and expansions.

Long-term loans extend payment over 10 to 15 years and must be linked to some business purpose, such as the purchase of real estate or a major expansion.

Loan Opportunities for New Iowa Businesses

Iowa Department of Economic Development Community Economic Betterment Account (CEBA)
Iowa Department of Economic Development, 200 E. Grand Ave., Des Moines, IA 50309
Phone: (515) 242-4819; FAX: (515) 242-4749
Designed to increase employment opportunities for Iowans by increasing economic activity in the state. While financial assistance from CEBA is intended to expand existing businesses and encourage start-ups, CEBA funds are only a small piece of the financial package. The remaining investment must come from private and local sources. CEBA applications are filed by communities on behalf of the interested businesses.

Economic Development Set-Aside (EDSA)
Iowa Department of Economic Development, 200 E. Grand Ave., Des Moines, IA 50309
Phone: (515) 242-4819; FAX: (515) 242-4749
EDSA is funded through a portion of the federal Community Development Block Grant money Iowa receives that is allocated for economic development projects. It provides forgivable loans and direct loans to businesses. These projects must be sponsored by Iowa counties or cities with populations under 50,000.

Entrepreneurs with Disabilities Program
Iowa Department of Economic Development, Bureau of Business Finance, 510 E. 12th St.,
Des Moines, IA 50319
Phone: (515) 242-4819, FAX: (515) 242-4795
Provides technical and financial assistance to qualified individuals with disabilities who are seeking self-sufficiency by establishing, maintaining, expanding or acquiring a small business.

Export Trade Assistance Program (ETAP)
Iowa Department of Economic Development, International Division, 200 E. Grand Ave.,
Des Moines, IA 50309
Phone: (515) 242-4819; FAX: (515) 242-4749; www.state.ia.us/international
Provides financial assistance to businesses that participate in overseas trade shows and trade missions. ETAP money is available to Iowa firms that produce products or provide services in Iowa.

Self-Employment Loan Program (SELP)
Iowa Department of Economic Development, 200 E. Grand Ave., Des Moines, IA 50309
Phone: (515) 242-4819; FAX: (515) 242-4749
Offers low-interest loans to low-income owners of new or expanding small businesses. The Bureau of Business Finance oversees SELP-loans, which can total as much as $10,000 with a 5 percent simple interest rate.

Targeted Small Business Financial Assistance Program
Iowa Department of Economic Development, 200 E. Grand Ave., Des Moines, IA 50309
Phone: (515) 242-4819; FAX: (515) 242-4749
Designed to create and expand minority- and women-owned businesses. The TSB program has two components: direct loans or equity grants of up to $25,000 and loan guarantees of up to $40,000.

Value-Added Agricultural Products and Processes Financial Assistance Program (VAAPFAP)
Iowa Department of Economic Development, 200 E. Grand Ave., Des Moines, IA 50309
Phone: (515) 242-4819; FAX: (515) 242-4749
Promotes and encourages the “value-added” processing of agricultural commodities. VAAPFAP is designed to increase the types of agricultural products and commodities produced in Iowa with applied research and innovation.

Iowa Finance Authority
Iowa Small Business Loan Program and Iowa Economic Development Loan Program
Iowa Finance Authority, 100 E. Grand Ave., Des Moines, IA 50309
Phone: (515) 242-4819; FAX: (515) 242-4776
Provides financing to new and expanding businesses through the sale of tax-exempt bonds. The maximum loan is $10 million, and interest rates vary depending on the market.

Treasurer of State’s Office

Link Investments for Tomorrow (LIFT)
Treasurer of State’s Office, Capital Building, 1st Floor, Des Moines, IA 50309
Phone: (515) 281-3287
Assists with rural small business transfer, and horticulture and alternative agricultural crops. Contact the Treasurer of State’s Office for further details.

Entrepreneurial Ventures Assistance (EVA)
Iowa Department of Economic Development, Bureau of Finance, 200 E. Grand Ave., Des
Moines, IA 50309
Phone: (515) 242-4819
Offers financial and technical assistance to start-up and early-stage enterprises. An initial investment of up to $50,000 may be awarded. To be eligible, a business must be located in Iowa and in an industry offering the greatest start-up and growth potential for
the state, including, but not limited to:

• Biotechnology
• Recyclable materials
• Software development and computer-related products
• Advanced materials
• Advanced manufacturing
• Medical and surgical instruments

To qualify, applicants must have completed or must be participating in entrepreneurial training from a John Pappajohn Entrepreneurial Center or have comparable training or experience. Businesses engaged in retail sales, the provision of health care or other professional services, or the distribution of products or services are not eligible for EVA funds.

USDA

Business and Industrial Loan Guarantee Program
USDA, Rural Development, 873 Federal Building, 210 Walnut St., Des Moines, IA 50309
Phone: (515) 284-4714, FAX: (515) 284-4859
Provides guarantees on loans of up to $10 million or more made by private lenders for start-up or expansion purposes to for-profit or nonprofit businesses or investors of any size located in rural areas with populations under 50,000.

Intermediary Relending Program
USDA, Rural Development, 873 Federal Building, 210 Walnut St., Des Moines, IA 50309
Phone: (515) 284-4714; FAX: (515) 284-4859
Provides 1 percent, 30-year loans to eligible intermediaries to establish a revolving loan fund. The intermediary then relends the funds for business and community development projects in rural areas with populations under 25,000. Competition will require an equity contribution by the intermediary.

Small Business Administration Loan Program
U.S. Small Business Administration, Federal Building, 210 Walnut St., Room 749, Des Moines, IA 50309
Phone: (515) 284-4422; FAX: (515) 284-4572; www.sbaonline.sba.gov  
Offers a number of guaranteed loan programs designed to meet the needs of small business. The SBA reduces risk to lenders by guaranteeing major portions of loans made to small businesses that demonstrate the ability to repay the loan, and enables lenders to provide financing to small businesses when funding is otherwise unavailable on reasonable terms.

Iowa Business Growth Company (SBA Fund 504)
7043 Vista Drive, West Des Moines, IA 50266
Phone: (515) 223-4511; FAX: (515) 223-5017;
E-mail: iabusgrowth@MSM.com
Provides fixed asset loans for land, buildings, remodeling, new construction and machinery or equipment. SBA 504 loans are available for qualified small businesses throughout Iowa and provide up to 90 percent financing for most projects. A low fixed interest rate and 10 or 20 year maturity is standard. IBGC is the statewide 504 provider. For more information on local organizations providing 504 funds, contact SBA at (515) 284-4422.

Small Business Innovation Research Grants (SBIR)
U.S. Small Business Administration, Federal Building, 210 Walnut St., Room 749, Des Moines, IA 50309
Phone: (515) 284-4422; FAX: (515) 284-4572
Provides small, high technology firms a greater share of federal research development funds. SBIR ensures that federal agencies with substantial research and development budgets direct a certain percentage of research and development contracts to small firms.

Financing Alternatives

Companies require capital to thrive. While a few companies manage to succeed with just  the funds they raised at the kitchen table, most successful companies, particularly those  involved in technology, raise money from professional investors or from the public at  some time in their histories. Strategies for raising funds include angel financing, venture  capital financing, public market initial public offerings (IPOs) and direct IPOs.

Angel Financing
Angel Financing refers to backing from one or more individuals who take an interest in helping small businesses grow. These investors make most or all of the same demands that professional venture capital (VC) firms make, but are sometimes willing to get involved at an earlier stage in a company’s development and are interested in (and sometimes limited to) smaller financing than would typically interest a VC firm.

Venture Capital
Venture Capital (VC) refers to financing that comes from firms in the business of investing in young, privately held companies. VC firms usually don’t want to participate in the initial financing of a company unless the company has management with a proven track record. Generally, they prefer to invest in companies that already have received significant equity investments from the founders, and, if necessary, friends and family. They also prefer that companies have something to show for their efforts, either in the form of a patent, a proven demand for the product or a very special (and protectible) idea. VC investors often take a hands-on approach to their investments, requiring representation on the board of directors and sometimes the hiring of new corporate officers. VC investors can provide valuable guidance and business advice and are looking for substantial returns on their equity investments.

Public Market IPOs
Public Market IPOs are usually available to companies with profitable operations, management stability and strong demand for their products or services. This generally doesn’t happen until companies have been in business for several years. To get to that point, they usually will have had to raise money privately on more than one occasion.

While a start-up may not be able to access public markets right away, it can improve its future appeal by being careful in structuring its early financing. For example, a company can include in its standard shareholder agreement a provision that requires each shareholder to refrain from selling into the public markets for some period (such as six months) after an initial public offering (IPO). Underwriters routinely require such a share lock-up, which can be difficult to arrange if, for example, shares have been left by a deceased founder to a widow who has little interest in locking up her shares. Other planning issues will affect the ability to show a profit after the IPO, which is always a key concern to underwriters.

Direct IPOs
Direct IPOs or initial public offerings made directly by the company, are possible through the Small Corporate Offering Registration (SCOR) form U-7. In such an offering, a company sells stock to the public without the benefit of an underwriter. When these transactions work, they are wonderful, but successful SCOR offerings are few and far between. They require a special relationship between the company and a target investor group that is numerous, loyal and well-heeled enough to be able to invest large sums of high-risk capital in a young company.


Going Public to Raise Capital
The offer and sale of an equity interest in a business enterprise will generally be considered the offer and sale of a “security” and requires that you comply with applicable federal and state securities laws. The basic requirement under securities laws is that offers and sales of securities must be registered with the applicable regulator authority or completed in compliance with an exemption from registration provided by the applicable statute or the regulations adopted under that statute. The following is a summary for reference only. Use your attorney’s counsel to carefully analyze the needed regulations for your project.

Registration of Securities. The registration of an offering under federal and state security laws requires the preparation and filing of a detailed registration statement. The registration statement includes the prospectus, which is actually to be distributed to prospective investors, and other information that will become public after filing with the applicable regulatory authority. Preparation for an equity offering requires extensive effort and typically takes at least 30 days, often longer. Once the registration statement is completed, it is filed at the federal level with the Securities and Exchange Commission (SEC) and the appropriate state authorities. The SEC staff and state agencies review the document and make a series of comments regarding the registration statement. The comments are usually received in a comment letter provided by the SEC staff about 30 days after the initial filing with the SEC. Upon receipt of the staff comments, the enterprise must react to the comments, usually through the filing of one or more amendments to the registration statement. Only after the SEC staff is satisfied that adequate responses have been provided for all of its comments, the registration statement will be declared “effective.” Only then can the business begin accepting subscriptions for the sale of its securities. State security laws generally include procedures similar to the federal procedures followed by the SEC, although they may include authority to review the “merits” of the proposed venture, as well as commenting on the adequacy of the disclosure contained in the registration statement. In addition to the significant amount of time involved in completion of securities registration, the process can be expensive. The registration process requires the efforts of attorneys and accountants, as well as printing expenses and payment of filing fees. The total cost of a securities registration at the state and federal level for new ventures frequently ranges from $75,000 to $150,000. Depending on the complexity of the issues presented, the costs can exceed that amount significantly.

Given the time and expense involved in a securities registration, most value added agricultural ventures attempt to structure their efforts to obtain the benefits of an exemption from registration.

General Exemptions from Registration. On the federal level, there are four primary varieties of exemptions which may be of interest in a value added project. Those are (i) private offering exemptions, (ii) the small offering exemptions, including Regulation A, (iii) the intra-state offering exemption, and (iv) the cooperative exemption.

Private Offering Exemption. Congress has enabled the SEC to adopt “private offering exemptions” to allow entities seeking investment from a very small number of individuals to obtain the investment without the cost and expense involved in a registration. In addition to the statutory exemption for a transaction not involving a public offering, the SEC has adopted a variety of safe harbor exemptions from registration. Although generally not limited by dollar amount, the private offering exemptions are premised on a private contact between the issuer and small number of prospective investors.

Small Offering Exemption. The counterparts of the private offering exemptions, described above, are exemptions from registration for certain “small offerings.” Private offering exemptions are focused on the number of participants and, with one exception, do not contain dollar limitations on the amounts of the investment that may be obtained. There are two basic small offering exemptions: sales of securities in which the dollar amount invested is less than $1 in a 12-month period, and the “Regulation A” exemption, in which the total dollar amount sought is less that $5 million in a 12-month period. In the second case, a mini-registration process must be undertaken.

Intrastate Exemption. These are transactions that are considered “local” in nature, but, in general, mean all the investors in an offering are located in one state. Nospecified form of disclosure is required, and there is no limit on the number of investors who may participate.

Cooperative Exemption. Cooperatives classified under Section 521 of the Internal Revenue Code are exempted. However, this exemption is not available until the cooperative has applied for and obtained a determination letter from the IRS indicating the cooperative is tax exempt.

Broker Dealer Requirements. Most states require securities to be offered through registered brokers or dealers. Brokers or dealers will provide their services at varying costs.
 

Establishing and Maintaining Rapport with Your Lender
All business owners – whether their businesses are large or small, well capitalized or operating on a shoestring – should develop a working relationship with their primary lenders. Both problems and opportunities will require financial assistance, and the best hedge against a lender’s loan rejection is to maintain a constant rapport. There are a number of steps a business owner can follow to do this. The following are offered as suggestions:

1. Establish a credit history with the lender. Borrow funds for short periods and repay promptly.
2. Find out what types of customers your lender is interested in serving. Is your business too large or too small? Most small businesses need lenders who understand their unique situations.
3. Get to know the lender and the employees even if you do not need them now. Invite a potential lender to your business. Introduce him or her to your employees.
4. Keep your lender current on information concerning your business. Share your plans for the future. For a start-up venture, the new business will need to have a fully developed business plan to share with the lender. Included in this business plan must be a clear indication of the financing to be provided by the owners. The plan must show how the management team will make the business be successful.
5. Apply for loans well in advance of the actual need for the money.
6. Never surprise your lender. If you foresee repayment problems, tell him or her right away. He or she may have a solution and be prepared to help. Lenders would rather restructure loans for repayment than have to foreclose.
7. Be honest with your lender, since the truth always comes out sooner or later.