Where to Find Funding

When you need to finance the startup of your business, where you go for funding depends a lot on how much money you need. The less money you need, the easier it will be to find it. If you need really big sums, your options become more limitedand the process more involved.

Let's look at all the places you can find funding for your new eBay business.

Personal Savings

The easiest place to look for money is in your own bank account. If you've been frugal with your money, you might have enough cash on hand to cover the startup costs of your eBay business. Just remember to work through your monthly cash flow to determine when you'll generate enough cash to pay yourself back.

The advantages of going the self-financed route are obvious. You don't have to spend time wooing a multitude of lenders and investors, and you don't have any obligations (legal or financial) to anyone else. The disadvantage, of course, is that it's all your moneyand you could lose it all if your new business fails. You also lose whatever interest your money could have been otherwise earning.

It's possible that you don't have enough money to completely fund your eBay business. So self-funding isn't always a viable option. If you have the money, however, it's the fastest and least-complex option available.

Credit Cards

Getting an advance on your credit card is another way of borrowing money from yourself. The big difference between this method and withdrawing funds from your savings account is that you have to pay interest on the funds advancedwhich could be a couple of percentage points every month. You may also be charged a fee for making a cash advance to yourself. So when you're calculating your payback schedule, make sure you factor in these additional costs.

Friends and Family

If you don't have the funds, maybe someone you know does. Depending on whom you know (or are related to), you may want to consider borrowing your startup funds from a friend or family member.

The upside of dealing with friends and family is that you're dealing with friends and family. The downside is also that you're dealing with friends and family. Borrowing money from people you know is always a little tricky; even the best of friendships can be tested when the issue of money is involved.

If you decide to hit up someone you know for a loan, my advice is to keep things as professional as possible. That means starting with a well-written business plan and then writing up the entire transaction as a proper loan, complete with an agreed-upon payback schedule and a reasonable rate of interest. Treat your friend just as you would a banker, and make all your payments as scheduled. This way you'll avoid (as much as possible) having this business interfere with your personal relationships.

Loans

If you need more than a few thousand dollars, you may be forced to visit your friendly neighborhood bank or lending company and apply for a small-business loan.

Lenders, of course, require you to give them back the money you borrowedwhich means you have to include the loan payback in your financial plans. (This is also the case when you borrow money from friends and family.) You also have to factor in interest payments, which can be significant. This means, of course, that when you're putting together your financial plans, you have to make sure you generate enough profits to cover the loan and interest payments.

Still, if your funding needs are large enough, taking out a loan may be your only option. If this is the case, make sure you borrow no more (or no less) than you really need and that you can realistically pay back on a regular basis. Also be sure to shop around for the best rate possible. When you're talking about the large amounts typical of business loans, a difference of a quarter or an eighth of a point can significantly affect your total payback and your monthly payments.

When you're preparing to approach a banker or a loan official to ask for a loan, remember that lenders aren't expecting some huge payback on their investment; they merely want their principal back along with the designated amount of interest. What they're interested in, then, is your ability to repay the loan. So keep these points in mind when making a presentation to a lender:

• Show stability. Show your personal stability. Show the stability of your business model. Show anything you can that says "stable" and "low risk."

• Concentrate on cash flow. Lenders are less interested in your profitability (although they are interested in that, too) than in your ability to make loan payments. This means you want to stress your cash flow, which hopefully is positive and hopefully is large enough to cover your loan payments.

• Look professional. When you deal with professionals, you need to look professional. That means creating a solid business plan and printing it out in a professional fashion. It also means working through your financials so that they're as solid as possible. And rememberwhen you're dealing with bankers and loan officers, think staid, lowkey, and conservative.

• Show a real use for the money. Bankers won't want to lend you money without a good justification for it. (On the other hand, they also won't want to lend you money if you're so down on your luck that you really need it to survive; you'll have to strike a balance.) Show exactly how the money will be used, and be precise; bankers are nothing if not detail oriented.

Note

If you have trouble getting a bank to lend you money, you can enlist the services of the Small Business Administration (SBA). The SBA offers a number of different types of loans as well as loan assistance. Learn more at the SBA's website at www.sba.gov.

Most lenders will want to see not only your business plan, but also your current balance sheet and projected P/L. (That's your profit and loss statement projected over the next year or two.) You may also be asked to put up collateral for the amount of the loan. For this reason, many small businesspeople get their startup funding by taking out a second mortgage or line of credit on their houses or other property.

Note

Large-scale financingbank loans, investors, and venture capitalmight be necessary if you're expanding into the consignment selling, or Trading Assistant, business, especially if you plan to open a retail storefront. Learn more about this business model in Chapter 13, "The Trading Assistant."

Investors

When you need more funds than you can get with a simple loanwhen you want to raise really large amounts of money, typically in the tens or hundreds of thousands of dollarsyou need to consider equity funding. It's called equity funding because you sell equity in your business in return for the funding dollars. The people or companies that buy shares of equity are called investors; they're investing their money with the hope that their equity position will be worth more at a later date than it was when they purchased it.

When you take on investorsof any typeyou're gaining partners. An investor buys a share of your business and thus has a lasting equity stake. Even though that equity stake can be small, it's still therewhich means for every investor you add, the business adds a new co-owner.

The stake of the business that an investor purchases is called a share. Each share of your company's stock that you sell is assigned a specific price; this price can vary for different types of investors and will vary over time. As long as your company is private, you set the value of your shares. Once your company goes public (and it doesn't ever have to, of course), the value of the shares is set on the open market of a stock exchange.

Note

Although your business plan is a good document to use when looking for a loan, it is just one of the documents you need to prepare when pursuing equity funding. Any time you sell stock in your company, the Security and Exchange Commission (SEC) requires that you prepare and distribute a private placement memorandum (PPM), which must contain some very specific information in a very specific format. Your business plan can accompany your PPM, or you can use your business plan as the cornerstone of your PPM. Ask your lawyer for more information.

There are many types of investors you can pursue for equity funding. In most cases, you'll be going after small investorssometimes called "friend and family" or "angel" investors, people you know from other business dealings who are willing to invest in the future of your business. If your funding needs are really large, you'll be dealing with venture capital (VC) firms, who will demand a major stake in your business in return for their investmentand will expect high growth numbers to make their investment worthwhile.

The ins and outs of equity funding are beyond the scope of this book, and (fortunately) beyond the needs of most eBay sellers. If you think you want to form a business with equity partners, you'll need to bring in expert legal and financial help to put the deal together.