- Financing a Business in New Jersey
* Personal funds * Banks * Equipment financing * Factoring
* Credit scores * Angel investors * Venture capital * Crowdfunding
* Government financing. * Nonprofit services
- Founders personal investment -
Most startup businesses are financed through use of the own money of its founder or founders. This financing, however, is obviously constrained by the amount of personal money available, and many founders supplement their investment through obtaining personal loans through a home equity line of credit, retirement plans, insurance policies or a line of credit on a credit card. If the business fails, however, there is a risk that all personal assets may be lost, a risk demonstrated by research finding that most small businesses fail in the first five years of operation, thus jeopardizing the personal financial viability of its founder or founders.
In many cases, founders also resort to seeking help from others, often friends or family members, to raise additional money. These arrangements, while frequently commenced informally on the basis of the good will forged by personal relationships, may later become divisive as disputes arise over the terms of the financing, such as whether it was intended as a loan or equity investment or whether the money also was intended to allow participation in decisions related to management, sale or closure of the business. Business analysts strongly advise that the terms of these financing arrangements, even among close family or personal contacts, be detailed in documents reviewed by attorneys and/or accountants representing the respective parties.
- Bank Loans & Credit Lines -
For startup businesses, it is usually extremely difficult to obtain business loans and lines of credit from a bank since banks normally wish to review the cash flow of a business over two to three years in decisions to extend credit, with some banks requiring lenders to show annual business revenue of at least $100,000. But some banks will lend to startups if the founder or founders have strong personal credit histories or can provide collateral to guarantee payment. Even in these situations, however, banks will typically seek personal guarantees from the founders or from third parties willing to sign guarantees. Most banks require extensive documentation during the application process for a business bank credit card, a business line of credit or a short-term or long-term loan, including bank statements, balance sheets, income statements, and cash flow projections. In addition, most lenders require a current financial position statement including accounts receivable and accounts payable.
A bridge loan is a form of short-term financing that can serve as a source of funding and capital until a company secures permanent financing or removes an existing lien or other debt obligation. Bridge loans are typically short-term in nature, lasting on average from six months up to a year, and are most often used in residential real estate transactions. But they also may be utilized in financing commercial and industrial real estate purchases, such as when there are delays in closing a sale of an existing facility, thus creating pressure on a business to raise cash to close on another purchase or to meet other obligations. Costs and rates are generally higher than conventional loans and can also vary considerably between lenders,
- Credit scores -
A credit score is a number that depicts a consumer's creditworthiness. The higher the score, the better a borrower looks to potential lenders. All consumers are guaranteed access to their credit history via a credit report) accessed from the government-approved website AnnualCreditReport.com and consumers are eligible for one free annual credit report rom each major credit bureau (TransUnion; Equifax; and Experian). Several other consumer finance sites, including CreditKarma.com, Investopedia, and FreeScoreOnline.com, provide free access to credit scores and reports.
Most credit bureaus focus on credit accounts, but some also access more comprehensive information such as payment history on cellphone bills, utility bills, rent, and more. Credit bureaus then use a range of methods to calculate a person’s credit score based on this credit history. FICO scores are the most common credit scores used in the US, but to supplement FICO scores, the three bureaus have also combined to create their own credit score, the VantageScore. Credit scores issued by the three bureaus usually are similar in their rating, but may differ somewhat since each credit bureau may add information they’ve compiled on their own to issue a comprehensive credit report providing credit issuers with information to help determine credit approval and appropriate interest rates for borrowers.
An individual with a higher credit score will likely have a lower interest rate on a loan. Both scores are calculated on a range from 300 to 850, although the VantageScore initially used a 501 to 990 range, and some industry-specific FICO scores are graded on a 250 to 900 scale. A good FICO score, for example, is considered to be in the 670 to 719 range, while a good VantageScore is in the 661 to 780 range.
* Credit Scores and Reports, USA.gov
- Equipment financing -
An equipment financing loan may be one avenue to explore to obtain a business loan with no or reduced amounts required as a down payment. These loans allow the lenders to use the equipment itself as collateral, thus reducing risk and eliminating the need for, or reducing the amount, of a down payment. Working capital bridge loans and merchant cash advances may also be options for businesses to get a loan with no money down.
- Factoring -
Other forms of financing beyond traditional banking and finance loans include factoring, a financial transaction and a type of debtor finance in which a business sells its accounts receivable (i.e., invoices) to a third party (called a "factor") at a discount. The factor then will attempt to collect the receivable, assuming the risk that the amount due will not be paid in full. A business will sometimes factor its receivable assets to meet its present and immediate cash needs. Again, factoring generally is not available to startup or newer businesses since it requires an ongoing revenue stream.
- Angel investors-
Some businesses with unusually high potential for growth may seek financing from "Angel" investors, private individuals who alone or in small groups invest in businesses, usually by making an investment in exchange for an equity share of the business. Angels fill the need for growth capital at startup or early stages, usually before the business has grown to attract the interest of more systematic investors such as venture capital firms, who manage the pooled money of others in a professionally-managed fund and prefer more established businesses.
Angel investments may significantly dilute the percentage of ownership of the founders and also frequently provide for active participation of the investors in the management of the business, sometimes through membership on the board of directors, a relationship which the business founders must evaluate in terms of potential advantages and disadvantages. Angel investors also may exert pressure on the founders for an exit strategy which includes a relatively expedited return of investment through a public stock offering or a sale of the business, options which may conflict with the intentions of the founders. But Angel investors also can provide expertise, advice and contacts to help grow the business.
In January, 2021, the state government enacted legislation establishing the New Jersey Angel Investor Tax Credit Program operated through the New Jersey Economic Development Authority providing tax credits against corporation business or gross income taxes based on a qualified investment in a New Jersey emerging technology businesses or in a qualified venture fund for the purposes of stimulating investment. Angel supported technology companies with minimum trailing 12 month commercial revenues of $250,000 may be eligible for up to $250,000 in subordinated convertible debt financing. Growth capital through the Edison Innovation Angel Growth Fund can be used for key hires, product rollout, product enhancement, and marketing/sales. There is a 2:1 angel match funding requirement that must be received within 90 days prior to application. Another earlier program established with state government support, the JumpStart New Jersey Angel Network, was formed in 2002 with sponsors including the New Jersey Technology Council and the New Jersey Economic Development Authority, to help early-stage companies, with about half of its $35 million in investment in New Jersey firms.
* JumpStart New Jersey Angel Network
* Angel Capital Association
* Edison Innovation Angel Growth Fund
- Venture capital -
On a somewhat more organized level than Angel investors but with similar interests, venture capital firms typically fund emerging firms with the potential for significant growth in the anticipation that their investment at an early stage later will be rewarded with higher returns than other investment options. Along with their investment, venture capitalists also often take an active role in the evolution of firms, frequently taking positions on boards of directors or otherwise providing advice on strategic and management issues facing newer companies. Like Angel investors, venture capital firms generally seek to exit their investment within a relatively short period--typically five to ten years--through such options as the company's sale or a public stock offering.
The state government also has taken steps to encourage venture capital investment in New Jersey firms through establishment of the New Jersey Innovation Evergreen Fund, a partnership with the private sector to provide $60 million in tax credits and grants for venture capital funding.
(See also New Jersey Venture Capital Firms on this site for profiles of leading New Jersey-based firms).
* New Jersey Venture Capital Firms, NewJerseyAlmanac.com
* New Jersey Venture Capital Firms, Gaebler.com
* New Jersey Venture Capital Investors, Crunchbase.com
* New Jersey Tech Council
* National Venture Capital Association
- Crowdfunding -
Another newer avenue for raising capital which has emerged over the Internet is Crowdfunding through web sites where people can invest in a project, idea or business. Crowdfunding initially developed as a means for artists such as musicians and painters to seek funding, but has expanded rapidly to raise money for a broad range of causes or projects, including business ventures. Crowdfunding sites charge different amounts and fees and charges for processing payments, which may range from 3%–5% per transaction. Some sites might also require that a minimum amount be raised; if the goal is not met, the money pledged by contributors is returned. Some leading sites include
* Which Type Of Crowdfunding Is Best For Your Small Business?, Forbes.com
- Government financing -
Government financing generally is limited to firms with some history of operations, but may be available to finance early-stage growth and expansion. The most frequent sources for potential assistance are the federal government's US Small Business Administration, which maintains a New Jersey District Office in Newark, and the New Jersey Economic Development Authority, a state government agency based in Trenton. In addition to their ongoing financing programs, both the federal and state governments enacted emergency programs responding to the COVID-19 economic disruption to assist businesses with lockdowns and loss of income from the pandemic.
* New Jersey District Office | The U.S. Small Business Administration | SBA.gov
* NJ Economic Development Authority, New Jersey Business Action Center
- Nonprofit financing assistance for small business
There are a range of government and nonprofit agencies and organizations which provide free or low-cost assistance in how to seek financing in the state. The New Jersey Business Action Center was established in 2010 as a resource for business owners in mentoring and counseling entrepreneurs throughout the state. The state government also supports regional Small Business Development Centers, most frequently associated with universities and colleges, to help entrepreneurs draft business plans, comply with legal and tax requirements and identify financing and hiring resources.
With its sponsors including the US Small Business Administration, SCORE is a national non-profit organization helping emerging and existing small businesses by providing free, confidential, professional business counseling to launch companies and solve management problems. The regional chapters typically provide volunteer mentors comprised of active, semi-retired or retired executives or business owners from small- to mid-size companies.
Several higher education institutions also have established centers to support entrepreneurs and others, including their own faculty and students, to develop new businesses and products, as well as offering educational programs in entrepreneurship. In August 2021, the National Science Foundation announced a $15 million grant for the establishment of a new hub for the Northeast, with Princeton as the lead institution, and including five initial affiliates: the New Jersey Institute of Technology and Rowan University in New Jersey; Lehigh University and Temple University in Pennsylvania; and Delaware State University. The goal is to accelerate the economic impact of federally funded research in health care, energy and the environment, computing, artificial intelligence, robotics, advanced materials and other areas while building skills and opportunities among researchers in entrepreneurship.
Other programs include the Rutgers Entrepreneurship Coalition; New Jersey Innovation Acceleration Center at the New Jersey Institute of Technology;
Princeton's Keller Center for Innovation in Engineering Education, and the Rowan University Center for Innovation and Entrepreneurship.