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Ask Stacy: Where do I find money to start a business?

Dream of being self-employed? Here's what to do, and what not to do, as you approach financing your small-business startup.

By MSN Money Partner Apr 1, 2014 12:40PM

This post comes from Stacy Johnson at partner site Money Talks News.

Money Talks News on MSN MoneyAs a business owner myself, I'm all about helping others start their own business, become their own boss and live their dreams.

Here's this week's reader question:

Businesswoman using laptop and telephone © Terry Vine, Blend Images, Getty Images

Hi, I am just starting a new business. I have done all of the filing and am at the point that I need startup capital and business lines of credit.
For the startup capital, will you help me in getting grants? Please tell me where I should look and apply that will not cost me to submit an application. And also, where do I find legit private lenders? Thank you. -- Shaela

First, Shaela, congratulations on starting your own business. But let's get you started on the right foot by avoiding making a big mistake out of the gate.

Are government grants real?

Like many rumors and rip-offs, the one about government grants contains a grain of truth.

The government does hand out grant money -- but almost never to typical small businesses.

The government might give a grant to a university, for example, to explore the efficacy of an experimental drug. There are also grants through the Small Business Administration, or SBA. They include the Small Business Innovation Research and the Small Business Technology Transfer programs. But as the names imply, these grants are about research and high-tech innovation, not working capital for business startups.

If you see a site or ad promising grants to just about any small business, run the other way, especially if there's a fee. Uncle Sam says in black and white he doesn't do that. From the SBA website:

The federal government does NOT provide grants for starting and expanding a business. Government grants are funded by your tax dollars and therefore require very stringent compliance and reporting measures to ensure the money is well spent. As you can imagine, grants are not given away indiscriminately.
Grants from the federal government are only available to noncommercial organizations, such as nonprofits and educational institutions in areas such as medicine, education, scientific research and technology development. The federal government also provides grants to state and local governments to assist them with economic development.

In short, there's virtually no such thing as free money in the form of federal government grants to start or fund a for-profit business. Anyone promising one, especially in exchange for a hefty fee, is quite likely to be a thief.

So, Shaela, don't waste your time, and especially your money, filling out forms and paying fees to companies promising something they can't deliver. Instead, invest some time in exploring the SBA.

What the SBA can do for you

I've done several stories over the years about the SBA. Funded by taxpayer dollars, it's definitely your first stop on the road to self-employment, especially if you'll be requiring funding. You won't find free money, but you will get free information on finding funding, including government-guaranteed loans.

You'll also find helpful people, including potential mentors who will take a personal interest in you and your business.

Here's how the SBA can help every step of the way:

  • Thinking about a business. Here you'll find articles and information covering things like forming a business, finding a mentor and hiring employees.
  • Making a business plan. Every business should have a business plan and any small business that's even considering raising money will need one. These articles explain what a business plan is, how it's used and how to build one, step by step. 
  • Finding financing. This information is about the process of finding money to start your business, including SBA assistance eligibility, types of financing, venture capital and more. 

And that's just the tip of the iceberg. You won't find a more thorough source of critical information for small-business owners than the SBA site. And don't stop with just online reading. If you have easy access to an SBA office, visit in person. You'll find friendly people, encouragement, expert advice and even workshops designed just for you.

Keep in mind, however, the SBA doesn't loan money. What it will do in certain circumstances is guarantee a bank loan. That is, if you qualify. But as I mentioned, the SBA has tons of information on every type and source of funding out there.

Where do you find legitimate private lenders?

When you read about angel investors or venture capital groups ponying up millions to help small startups, or watch shows like "Shark Tank," it's easy to conclude there's tons of money out there dying to find you.

Unfortunately, nothing could be further from the truth.

Unless you have major league connections, a monster resume, the best idea since sliced bread, and lots of your own money at risk, most potential lenders won't touch you.

You can't blame them. Think the stock market's risky? Try putting your savings into someone else's small business. According to the SBA (.pdf file), only half of new businesses make it five years and only a third last 10. Those aren't great odds.

Which is probably why, according to a survey released in January, 86 percent of small businesses in 2013 were started with personal savings. That includes this one. Money Talks News was bootstrapped, meaning it's funded entirely by my personal savings and whatever profit it generates.

That's not to say you shouldn't try to approach private lenders, especially if you know people who believe in you. Next to personal savings, the largest source of startup capital for small businesses is family and friends.

But whether you know the right people or not, start with the SBA. Make a business plan. Get a mentor from the SBA Score program. Check out the SBA's Access Financing search tool. Network, while developing both your plan and your pitch. Be honest about your prospects, with both yourself and others. And be prepared to put your life savings at risk.

I'll leave you with this, Shaela. Over the last 20 years, I've started three businesses. The only time anyone ever offered to lend me money was when I didn't need it.

More from Money Talks News

Apr 2, 2014 3:44PM
I own 2 small businesses.  You won't get start up capital from anyone but your own personal savings.  If you can't start the business that way then you shouldn't go into business yet.   Save up some money like I did.  When you have a multi year track record of profits, then a bank will loan you money.
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