Business Loans

How to get business loans through the Internet: some practical advice.

Securing Finance for your Business

Many businesses start small, with no business loan required, and these are often the safest — no meddling from outside parties, no overdrafts to be suddenly called in. But that's hardly practicable where new market opportunities have to be seized, and staff, premises and marketing budgets found quickly. What are the possibilities?

In this order, Internet businesses are most frequently funded by:

 

• seed capital of family and friends

• business angels

• private placements

• mergers and acquisitions by competitors

• venture capitalists

• secured bank loans and overdrafts

Each has its pros and cons, but the key points are:

Seed Capital from Friends and Family

A popular way, but you will have to ensure that your business plan specifies who is running the company, and what financial rewards investors can expect.

Business Angels

Angels are individuals who provide seed money to companies who are starting out or in their early years of operation. Small sums are involved, generally under $100,000, but investors do expect a good return. You'll need a sound business plan, persistence in securing the right investors (though there are many network agencies) and patience in explaining your business over and over again. Make sure that expectations are covered by agreements, and do your homework on investors if you can. The best bring enthusiasm, contacts, experience and business savvy to your operation.

Private Placements

You sell shares in your company to private individuals. You'll have to prepare a good business plan that promises vigorous growth, get a lawyer to prepare the paperwork and keep out of the attentions of competitors. Best suited to companies that have been established for a year or two. Funding is more secure than a bank loan or overdraft, but larger shareholders will expect a seat on the board, though probably in a non-executive role. Backgrounds and personal strengths of your team members will certainly enter into assessments, so be prepared.

Mergers and Acquisitions

Many Internet companies merge with others, or are taken over in the first two years of trading. For entrepreneurs wanting a quick return that may well be a happy outcome, but most companies find the adjustment difficult. Management is no longer in their hands, and financial rewards are very much curtailed. Over-optimistic plans and under-funding were usually the cause, but what can be done now, when funds are urgently required?

Size up the opportunities. Be proactive and approach strategic partners while there's time. Remember that deals take months to finalize, and don't accept the first offer. Find a company whose abilities complement yours, so that the new entity has combined strengths. Agree a common policy. Have a buyout clause, and procedures to govern management or policy disagreements. Scrutinize the merger agreement, obtaining legal opinion experienced in this field.

Venture Capitalists

Also called vulture capitalists, these institutions are looking to invest in fast-growing, mid-stage and highly profitable companies. They will fund heavily, but only where explosive growth seems likely, and where they can largely take over the management and marketing of the product (services are less popular). Venture capitalists tend to work to well-tried formulae, and understand that they are investing large sums from wealthy individuals and institutions who expect fast results. Broad aims are important, as investors generally make their money when your company goes public.

Bank Loans and Overdrafts

If banks cannot see an established, well-run business, with every likelihood of loans being repaid on schedule, they will not lend, or lend only at exorbitant rates against collateral of home or other assets. You need to think very carefully before taking this option. Feed very negative figures into your projections, and be sure you can repay, whatever happens.

Where Next?

Start with the links on our Funding Sources page and note carefully the recommendations and requirements of the various institutions. Generally, investors are looking for:

• a sound business idea capable of rapid exploitation.

• evidence that the idea has been thoroughly researched, and ways found to cope with possible difficulties.

• a business plan covering all aspects, long-term aims outlined and the first three years treated in detail.

• energy, enthusiasm and commitment from the principle officers.

• a good business track record in one or more of the management team.

• a business actually started rather than simply "a good idea".

These are very brief notes on the various types of business loan. Consult the e-book for a detailed listing of resources.

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