You should use your personal savings as much as possible in starting a new business. There are two main reasons for this. First, there is no interest charge when you use your own money. If money is also invested by family or friends, it can be with the written understanding that no interest will be paid on the initial investment but that they will share in the profits for a predetermined period of time. If interest is to be paid on the money of friends or family, it may be less than that charged by a bank. The second reason for using personal savings is that it is evidence of your commitment to the business. Such evidence is important when credit is sought later from other sources. Certainly, the healthiest financial situation is to have enough capital available from personal sources that the borrowing of working capital is only necessary during peak seasons, and the loans are of short duration.
For the novice as well as the established horticulturist, borrowing may be the only way to obtain capital; but it is also the most expensive way. In addition, it requires you to reveal a good deal of information about your background and personal finances, precise details on how the money is to be used, and in-depth records of the financial history of the business. Lending institutions tend to be conservative and cautious when making loans, especially to new businesses with no financial history; hence their inquiring attitude. Regardless of the institution, it will require collateral, or something of value to be guaranteed as security for the loan. Big ideas, enthusiasm, and a college degree are not collateral, although the personal credentials of the borrower can lend credibility and promote confidence. Usually accepted as collateral are such things as land, buildings, vehicles, equipment, crops, or accounts receivable.
Several kinds of loans are available.
Character or Signature loans These are short-term loans granted to business people with good credit ratings. To obtain working capital for thirty to ninety days requires only the borrower’s signature if the bank approves a line of credit in advance. This kind of loan is reserved for the well-established and successful. A young person starting out will seldom qualify for a character loan, but it is the kind of loan all should aspire to attain.
Term loans These long-term loans are repaid over a period of years, usually by the month. This is an expensive loan due to the interest rate charged. Term loans may be made entirely by a private lending institution or by the federal Small Business Administration (SBA) in association with a bank. The SBA supports small businesses by granting a percentage of loans to borrowers that in its opinion deserve the chance for success. Through the agency’s support, the borrower obtains capital at a rate of interest lower than what the bank alone would charge.
Accounts Receivable loans These are obtained by established businesspersons by pledging money owed to the business from customers. This is a short-term loan that is repaid as the customers pay their bills.
Loans on life insurance These can be obtained using the cash value of the borrower’s life insurance as collateral.
Limited Partnership loans Loans made by individuals who provide capital in return for a share of the profit, this type of capital is termed equity funds. Most owners do not want strings attached to the loan, particularly attempts by the lender to influence management decisions, so the terms of the loan need to be spelled out in writing.
Contract growing loans Made to growers by firms that will eventually market their crops, these loans provide the grower with the money necessary to produce a particular crop while ensuring the lender of a guaranteed price. Recently, contract growing has been used by growers to ensure that they will have a market for their crops and thus avoid expensive overproduction.
Reinvesting Profits into the Business
Retaining the profit that a business makes rather than paying them out to the owners is an important method of raising interest-free capital. While it is not enough for a developing and expanding business, it can be of major significance for a successful, established firm that needs capital to replace inventories and depreciated equipment, or to pay taxes and other operational costs. In order to gain the greatest benefit from this source of capital, the administrator of a business must be attentive to money owed the company. The longer customers withhold payment, the more it costs the business, since an unpaid account represents money tied up in expended materials and services that is unable to be used.