Pathways To Funds

How Saint Louis, MO Small Businesses and Start-Ups Can Find Money

Finding funding for a small business can be a challenge, but there are several options available to entrepreneurs. Please note: I am not a lawyer nor a CPA which I strongly recommend you talk with before any of these approaches are taken.

"Small businesses are the backbone of our economy, and entrepreneurs are the driving force behind their success. Finding the funding to start or grow a business can be challenging, but there are more options than ever before, from traditional bank loans to crowdfunding and angel investing. With perseverance and a solid plan, small business owners can secure the funding they need to bring their dreams to life." - Karen Mills, former Administrator of the U.S. Small Business Administration

Here's an overview of some of the most common ways for a small business to find funding:

Small Business Loans: Small business loans are a popular option for many entrepreneurs, as they can provide a lump sum of capital to help finance the business. Small business loans can come from traditional banks or from alternative lenders, such as online lenders or peer-to-peer lending platforms.

Business Grants: Business grants are financial awards that are given to small businesses with the aim of promoting economic development. Business grants are often competitive and are awarded based on factors such as the business’s potential for growth, the strength of its business plan, and the business owner’s experience.

Crowdfunding: Crowdfunding is a way for small businesses to raise funds from a large number of people, typically through online platforms. Crowdfunding allows businesses to tap into a large pool of potential investors, who can contribute as little or as much as they like.

Angel Investors: Angel investors are wealthy individuals who provide capital to startups and small businesses in exchange for equity. Angel investors can provide a significant source of funding, but they typically require a high level of involvement in the business and expect a high return on their investment.

Venture Capital: Venture capital is a type of investment that is provided to startups and small businesses with high growth potential. Venture capital firms provide significant amounts of capital in exchange for a significant ownership stake in the business.

Grants: Grants for business start-ups are financial awards provided by government agencies, non-profit organizations, and corporations to help entrepreneurs establish and grow their businesses. Unlike loans, grants do not require repayment and are typically awarded based on specific criteria, such as the business's industry, location, or social impact. While grant funding can be a valuable resource for entrepreneurs, it is important to note that the application process can be highly competitive, and recipients must comply with specific rules and reporting requirements. (I will craft a separate post just on grants).

Family and Friends: For many small business owners, family and friends can be a valuable source of funding. Borrowing from friends and family can provide a low-interest loan and can be a good way to get the business started without incurring too much debt.

Bootstrapping: You fund it yourself, over time. Finding economic ways to get done what needs to be done without larger outlays of cash/capital. If you can self fund the growth and find ways to generate the funds from the business operations or from your own savings (and pay yourself back over time) might be the best way to keep debit low while you are starting up or growing a small business.

Two more unique ways to find the funds:

Individual Retirement Accounts (IRAs) are designed to help people save for retirement, but in some cases, you may be able to use your IRA funds to finance your small business without incurring early withdrawal penalties or taxes. This is known as a "rollover as business startup" (ROBS) arrangement.

Here are the basic steps for borrowing from your IRA to start a business:

1. Establish a C-corporation: In order to use the ROBS arrangement, you will need to set up a C-corporation. This is because the ROBS arrangement involves using funds from your IRA to purchase stock in the corporation.
2. Create a new 401(k) plan for the corporation: The C-corporation must establish a new 401(k) plan that is specifically designed to receive rollover contributions from your existing IRA account.
3. Rollover funds from your IRA to the new 401(k) plan: You can then rollover funds from your existing IRA account to the new 401(k) plan established for the C-corporation.
4. Purchase stock in the corporation: Once the funds are in the 401(k) plan, the plan can purchase stock in the corporation.
5. Use the funds to start or finance the business: The corporation can then use the funds from the sale of the stock to start or finance the business.

It's important to note that there are some risks involved with using a ROBS arrangement, and it's essential to work with a qualified professional who can guide you through the process and help you make informed decisions about your retirement savings.

Additionally, not all IRAs are eligible for a ROBS arrangement, and there are strict rules and regulations that must be followed to avoid penalties and taxes. Therefore, it's important to do your research and speak with a financial advisor or tax professional to determine if this type of financing is right for your business.

A 401(k) plan is a retirement savings account offered by many employers. While 401(k) plans are typically designed to help individuals save for retirement, there are some circumstances where you may be able to use the funds in your 401(k) to start or finance a small business.

Here are the basic steps for borrowing from your 401(k) to start a business:

1. Check your plan's rules: Before considering borrowing from your 401(k), you should check with your plan administrator to determine if your plan allows for loans. Not all 401(k) plans allow loans, and those that do may have specific rules and limitations on borrowing.
2. Determine how much you can borrow: If your plan does allow loans, you can typically borrow up to 50% of your vested account balance, up to a maximum of $50,000.
3. Apply for the loan: To apply for a loan, you will typically need to complete an application and provide documentation, such as proof of income and proof of the business you plan to start.
4. Repay the loan: Once the loan is approved, you will need to repay it according to the terms of your plan. Generally, you will have up to five years to repay the loan, and you will need to make regular payments that include principal and interest.

It's important to note that there are risks involved with borrowing from your 401(k) to start a business. If you are unable to repay the loan, you may face penalties and taxes, and you could also jeopardize your retirement savings.

Therefore, it's essential to consider all your options and speak with a financial advisor or tax professional to determine if borrowing from your 401(k) is the best option for your business. Additionally, you should have a solid plan for how you will use the funds and how you will repay the loan to minimize your risk.

Ultimately, the best way to find funding will depend on the unique needs and circumstances of each small business. It's important to research the different options available and to seek the advice of a financial advisor or business mentor before making a decision.

"Small businesses are the heart and soul of our communities, and they play a critical role in driving economic growth and creating jobs. Whether you're looking to launch a new venture or expand an existing one, there are a wealth of resources available to help you secure the financing you need, from government grants and loans to private investors and crowdfunding platforms. Don't be afraid to think big and pursue your vision with passion and persistence." - Richard Branson, founder of the Virgin Group

How The SBA Helps Small Businesses

The Small Business Administration (SBA) is an independent U.S. government agency that provides support to small businesses. The SBA provides a variety of programs and services to help small businesses access capital, including loan programs.

The SBA does not provide loans directly to small businesses. Instead, it provides a guarantee to banks and other lenders, reducing the risk of lending to small businesses. This, in turn, encourages lenders to provide loans to small businesses that they may otherwise consider too risky.

The SBA's most popular loan program is the 7(a) Loan Program. This program provides loans for a wide range of business purposes, including start-up costs, working capital, and the purchase of machinery, equipment, and real estate. The SBA also offers Microloans, which are smaller loans designed for startups and very small businesses, as well as Disaster Loans, which provide assistance to businesses affected by declared natural disasters.

In addition to its loan programs, the SBA provides counseling, training, and technical assistance to small businesses. This support can help small businesses develop the skills and knowledge they need to be successful, and can also help them navigate the loan application process.

Overall, the SBA can be a valuable resource for small businesses looking to access capital. By working with the SBA and participating in its loan programs, small businesses can access funding they may not have been able to obtain otherwise.

Securing a small business loan typically involves the following steps:

Preparation: Before applying for a loan, it's important to have a clear understanding of your business's financials, including income and expenses, as well as a detailed business plan. You'll also need to determine the amount of funding you need and what you plan to use the funds for.

Research: Next, research various loan options to find the one that best fits your business's needs. Consider the loan amount, interest rate, repayment terms, and any other requirements or restrictions.

Credit Check: Review your personal and business credit reports to ensure that they are accurate and to identify any areas that need improvement. A good credit score can improve your chances of being approved for a loan and getting a better interest rate.

Application: Complete and submit a loan application, which typically requires information about your business, its financials, and your personal financial history. You may also need to provide financial statements, tax returns, and other documentation.

Approval: After submitting the application, the lender will review your information and make a loan decision. If approved, you will receive the loan funds, typically in the form of a lump sum payment or a line of credit.

Repayment: The loan will need to be repaid, typically with interest, over a specified period of time. Be sure to carefully review the repayment terms and make payments on time to avoid damaging your credit score.

This is a general overview of the process to secure a small business loan. The specific requirements and steps may vary depending on the lender and type of loan. It's important to carefully review the terms and conditions of any loan before accepting it.

Mistakes Small Businesses Make When Going For A Loan

Getting a small business loan can be a challenging process, and there are many mistakes that entrepreneurs can make along the way. Here are the top three mistakes people make when trying to get a small business loan:

Failing to Prepare: Many entrepreneurs approach the loan application process without adequately preparing themselves or their business. This includes not having a clear business plan, not having accurate financial statements, and not understanding the loan requirements.

This includes not having a solid business plan: Lenders want to see that a small business owner has a clear understanding of their business, including its financial projections and growth potential. A well-prepared business plan can increase the chances of loan approval.

Not providing enough information: Lenders will want to see detailed information about the business and its financials, including projected cash flow, sales, and expenses. It's important to provide enough information to give lenders a clear picture of the business's financial situation.

Inadequate collateral: Some lenders require collateral, such as real estate or equipment, to secure a loan. Small business owners should be prepared to provide adequate collateral to increase their chances of loan approval.

Lack of financial statements: Lenders will want to see current financial statements, including profit and loss statements, balance sheets, and cash flow statements, to assess the financial health of the business.

Underestimating the Importance of Credit Score: A poor personal or business credit history can make it difficult to secure a loan. Lenders will review credit reports to assess the risk of lending to a business. Small business owners should take steps to improve their credit before applying for a loan. Many entrepreneurs overlook the importance of their personal credit score and do not take steps to improve it before applying for a loan.

Underestimating the cost of borrowing: It's important to accurately calculate the total cost of borrowing, including interest and fees, to ensure that the loan will be affordable for the business. Applying for the wrong loan can result in a loan that is too expensive, has too many restrictions, or does not meet the business's needs.

Failing to shop around: Small business owners should shop around for loans, comparing rates and terms from different lenders, to find the best deal for their business.

Applying for too much or too little funding: Small business owners should only apply for the amount of funding they need, neither too much nor too little. Over-borrowing can put a strain on the business's finances, while under-borrowing can limit growth potential.

Failing to understand the terms and conditions: It's important to thoroughly review the terms and conditions of a loan before accepting it, including the interest rate, repayment terms, and fees.

Not having a plan for repayment: Lenders will want to see that a small business owner has a plan for repaying the loan, including a timeline for paying back the funds. A solid repayment plan can increase the chances of loan approval.

By avoiding these common mistakes, entrepreneurs can increase their chances of successfully obtaining a small business loan and securing the funding they need to grow and succeed

"Starting and growing a small business takes grit, determination, and a willingness to take risks. But perhaps the most important factor is access to capital. Fortunately, there are more ways than ever before to secure funding, including online lending platforms, peer-to-peer lending, and equity crowdfunding. With the right strategy and the right partners, small business owners can overcome the financing challenges they face and achieve success." - Jamie Dimon, CEO of JPMorgan Chase & Co.

List Of Banks In Saint Louis, MO

Here is a list of top financial institutions in St. Louis, Missouri that provide loans to small businesses:

UMB Bank

Commerce Bank

Midwest BankCentre

Enterprise Bank & Trust

First National Bank of St. Louis

MidFirst Bank

Busey

St. Louis Bank

Central Bank of St. Louis

MidAmerica Bank

This is not a comprehensive list and there may be other financial institutions in St. Louis, Missouri that provide loans to small businesses. It is important to shop around and compare the loan options offered by different lenders to determine the best fit for your business.

It's also worth mentioning that there are alternative lending options, such as online lenders, that small businesses can consider as well. These lenders typically offer faster loan approvals and flexible repayment terms, but it's important to compare the costs and terms of these options carefully.

Here are two places to look for a few more options/ideas:

Best Banks in Saint Louis MO for small business loans

Best small business bank loans

How SCORE Helps

SCORE is a nonprofit organization that provides free business advice and mentorship to small business owners. In terms of finding funding, SCORE can help a small business in several ways:

• Business Planning: SCORE mentors can help small business owners create a solid business plan that outlines the business's goals and strategies, including funding needs. This can be a critical tool when seeking funding from lenders and investors.
• Financial Projections: SCORE mentors can also help small business owners create financial projections that show how much funding they will need, when they will need it, and how they plan to use the funds. This information can be used to convince lenders and investors of the viability of the business.
• Funding Resources: SCORE has a wide network of funding resources, including local and national lenders, grants, and other financing options. SCORE mentors can provide guidance and connect small business owners with these resources to help them find the funding they need.
• Preparation for Lending: SCORE mentors can help small business owners prepare for the loan application process by reviewing their business plan and financial projections, as well as their personal and business credit reports. They can provide advice on how to improve these areas to increase the chances of being approved for a loan.

By working with a SCORE mentor, small business owners can receive valuable guidance and support throughout the funding process, increasing their chances of finding the funding they need to grow and succeed.

In the words of Jack Welch, "Change before you have to." As an entrepreneur, you know that change is inevitable, and adapting quickly is critical to the success of your startup or small business. One of the most significant changes you may face is finding the necessary funding to launch or grow your business. But don't let that be a stumbling block to your success. With the right mindset, a solid plan, and a willingness to take risks, you can overcome the financing challenges you face and achieve your goals.

Remember, it's not about having the most resources; it's about being resourceful. So go out there, be creative, and never give up on your dreams. With hard work and determination, you can make anything happen.

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If you are a small business or an individual wanting to start a small business (or if you would like to volunteer and become a mentor coach) feel free to reach out to the SCORE Saint Louis team, I am a volunteer with SCORE as a mentor and coach, to learn more visit my page on the SCORE website, David Carrithers, SCORE STL Mentor & Coach