Where you look for capital will depend to a great extent on three factors:

1. The strength of your business plan
2. The strength of your credit - both business and personal
3. Your willingness to share control

Strength of your plan

Your business plan must be compelling enough to demonstrate that you:

• Understand the business totally
• That the path tocash flow is logical
• That cash flow is adequate to payoff the debt and yield a return

Strength of yourcredit

Lenders traditionally have evaluating credit based on the 5 C's.

1. Character - are they dealing with someone who has integrity
2. Capacity - doyou have adequate cash flow to repay the loan
3. Collateral - are there assets that could be sold in the event of default
4. Capital - how strong is your net worth (business and personal)
5. Conditions - are the economy and market trends favorable

Willingness toshare control

Taking on a partner who can help to finance your business will obviously diminish your control. What may not be quite so obvious is the extent to which lenders can diminish your control as well. Once your business has the financial strength to move away from your personal credit with personal guarantees and personal collateral, lenders often apply conditions that impact your ability to make decisions solely on your own. Banks typically require covenants relative to financial ratios and other measures of performance. Violation of those covenants will give the banks power to exercise management authority. Covenants can also require bank consent for transactions outside the ordinary course of business. Non-bank lenders will often require an equity participation through stock warrants or special add-on interest provisions. And all lenders require regular reporting. Certainly, taking on a financial partner should not be taken lightly and requires considerable thought and planning.

Banks will generally make loans to young and start-up companies only with personal guarantees of the owner and based on the personal credit of the owner. This is true with both standard bank loans and government backed loans such as those guaranteed by the Small Business Administration. If you believe in your dream, you may have no choice but to risk your personal net worth.

Almost all small business owners require some outside financing to fund growth. However, bootstrapping from a combination of personal savings and internally generated revenues will help you maintain maximum control.

You will almost certainly need to make a meaningful investment from your personal savings. No lender wants to fund a new business owner who has no skin in the game.

Recognizing the likelihood of a debt requirement at some point in the company's growth, most owners should establish a small line-of-credit so that the business establishes a credit history. If the company has both a credit history and a positive operating history before attempting to locate significant amounts of capital, the owner will be able to maintain maximum control of his business.

If your liquid savings are inadequate to meet your need for personal investment, look to your home. A second mortgage or a home equity line of credit is the quickest way to generate working capital. And within IRS limitations, the interest is deductible. The biggest drawback to home equity loans is that you risk losing your house if you can't pay. However, taking a job can fund a mortgage payment if the business goes south.

Home equity loans can take the form of a second mortgage with fixed interest and fixed monthly payments. They can also take the form of a line of credit with floating interest and payments based on the outstanding balance. Even if you don't want to risk your home in your business, it can be wise to go ahead and establish an equity line as a fund for personal emergencies.

Your credit doesn't have to be perfect either. Rates may be slightly higher for less than perfect credit or for those wishing to borrow their entire equity balance, but there are lenders willing to evaluate such loans.

For short term cash flow, credit cards can be used to purchase required office supplies or small ticket equipment items. Cards with a grace period can provide anywhere from 20 to 55 days of float. Use this period to look for cheaper funds since credit card interest can be steep.

If you have limited personal funds, a logical place to look is to friends and relatives. You have surely heard it said that the quickest way to end a friendship is to go into business together. To avoid this type of nasty result, go out of your way to create a clear written understanding. Businesslike behavior is critical if you expect to maintain your relationships.

Very often, a person starting a business is skilled in certain key aspects of the business, but not in others. If a business partner can bring both expertise and capital to the table, it might be worth considering joint ownership. The costs are heavy: sharing management; sharing profits; repayment of the original investment; etc. However, if the chemistry is right, two heads are generally better than one.

Some sort of a buy-sell (a business marriage pre-nuptial) is usually warranted. Think ahead about the possibility things won't work out.

Ask for terms. It really stinks to be paying your vendors net 15 and have your customers pay you net 60. Let your vendors know that you are building relationships and loyalties and that you need more time than normal to pay. If the vendor is selling a product, the terms will likely depend on the vendors own liquidity. If the vendor is selling a service, terms might be relatively easy to negotiate. By taking your average terms from net 15 to net 45 you can reduce your bank financing and save interest.

Venture capital is not for very small businesses, with typical investments being more than $250,000. Venture capital firms look for companies with extremely high growth potential and competition can be fierce. Only a small percentage of business who apply for venture capital get approved, and only a fraction of those are start-ups.

Venture capital takes various forms including: senior debt; subordinated convertible debt; preferred stock and common stock. The venture firms typically invest in industries that they understand and they invest more than just money. They invest time and expertise, often providing business consultants and board members. Having this kind of oversight can be very helpful in maintaining business discipline but it can also be a huge burden to manage. And it isn't cheap. Venture capital firms must add value beyond the cash because they expect a handsome return.

Commercial finance companies operate in a manner similar to banks, but they are less conservative, willing to take more risk and willing to look at collateral that most banks would not consider. Of course, they charge a correspondingly higher interest rate, perhaps as much as 3 to 4 points higher in some cases. The rates are negotiated to consider both the additional risk and the higher cost of administration, since these companies monitor their collateral closer than a bank.

Examples of loan types include:

Accounts receivable loans - - typically up to 70% or 80% or current receivables (less than 90 days old with verified documentation.

Factoring - - actual sale of accounts receivable to the lender at a discount from face value. Factoring has lingering bad connotations based on some of the deep discounts of years past. The industry today bears little resemblance to the industry that created a bad reputation. Today's industry is dominated by sophisticated lendors using cutting edge technology and competitive lending principles. Reputable factors will assess a reasonable discount based on an interest rate and an expected collection period. Factors will only purchase receivables that are good quality paper since the deals are generally non-recourse to the selling company.

Loans - - usually short term or seasonal in nature and more conservative in terms of evaluating the collateral than accounts receivable loans. 50% of wholesale value would be common at interest rates comparable to the receivables loan.

Purchase Order Loans - - used to finance production of items for sale under significant contracts from credit worthy customers. The lender finances the production cycle and uses the customers order as collateral. The loan is paid when the borrowing collects from its customer.

Equipment Financing - - both equipment loans and equipment leases are available, usually at interest rates considerably higher than bank rates. Again, these lenders are willing to assume more risk, therefore they get a higher return.

Banks are generally the most conservative lenders on won't take risks that you as an entrepreneur might consider a sure thing. They have stringent reporting requirements and often impose restrictive covenants. However, if you qualify banks offer advantages that make them the lender of choice:

• Bank funds are the least expensive
• Bank credit builds your company's reputation
• Banks provide a very broad range of loan types
• Banks can provide integration with other financial services

In addition to the types of loans offered by commercial finance companies, banks also provide:

Short-term loans - - typically unsecured with no collateral, but usually require a personal guarantee. Provided for seasonal or temporary need with payback in one lump sum in 180 days or less.

Intermediate-term loans - - most often used for major equipment purchases with the acquired assets serving as collateral. Payback expected in regular installments over a period of three to five years.

Long-term loans - - usually secured by land and/or buildings, but sometimes with liens on other assets as well. Payback according to monthly amortization schedule.

Lines of credit - - an arrangement to borrow funds as needed up to a set maximum amount. Interest is paid only on the amount outstanding, but there is often a small charge on the available amount not drawn and lines are usually required to be paid down to zero at some point within a twelve month period. Lines of credit are probably the most desirable facility and the most difficult to get. Most lines are unsecured, but banks will ask for blanket liens on the property of smaller borrowers.