Finance

If your goal is to make considerable money off your invention, it is important to consider your idea as a small business in and of itself. This requires the preparation of a detailed business plan. No matter what kind of financial avenue you seek, a well-conceived business plan would be needed to attract potential investors or financing. Business plans are an important test of your clear and objective thinking and the merit of you idea. Typically, the order of importance that an investor places on your business plan's components is as follows:

  • Personnel. The individual(s) behind the invention.
  • The market potential for your idea and your marketing strategy.
  • Your invention's uniqueness and your ability to protect the technology.
  • The financial statements (balance sheet, income statement, cash flow statement).

You should also be able to clearly explain how you expect to provide investors with a return on their investments. Specifically, how they could realize their financial returns. Venture capitalists, those who invest in new ideas, do not invest based on financial projections, but if your idea does not pass the reasonability test, you will not get funded. Financial projections need to be based on rational expectations—they are, in essence, a sanity check. Before you speak with venture capital investors, you should prepare a brief, well thought out, oral presentation. You should include detailed information on such topics as:

  • The market potential of your invention.
  • Your invention's unique success ingredient(s).
  • The growth prospects of your invention.
  • How you plan to achieve your objective.
  • The amount of financing needed and the way you will use it

How the Government Can Help You Market Your Idea

The United States Government, in association with banks, lending institutions, and intermediaries, provides loans and venture capital financing to small businesses who cannot secure financing through traditional channels. This enables individuals to find an easy source for finding flexible governmental small business loans to initiate their own business. The following are some of the popular types of governmental business loans:

  • SBA offers a type of loans called 7(a) loans, which are pure, primary governmental business loan programs. A 7(a) loan may be used for most business purposes including start-up, expansion, equipment purchases, working capital and inventory or real estate acquisition. The SBA can guarantee up to $750,000 of a private-sector loan. Interest rates for 7(a) loans are negotiated between the applicant and the lender.
  • SBA Low Documentation Loans (SBALowDoc) are a good option if you are looking for a small business loan of $150,000 or less.
  • SBA Express encourages lenders to make more small loans to small businesses. Lenders approve loans of up to $150,000. Lenders can also offer revolving lines of credit to borrowers.
  • The SBA Prequalification Program offers loans to armed forces veterans, minorities, women, exporters, rural small business owners and business owners in certain specialized industries. This program enables the SBA to pre qualify an applicant for a 7(a) loan guarantee before the applicant goes to a bank. The maximum loan amount is $250,000. The application will focus on your character, credit, experience and reliability rather than assets.
  • The MicroLoan Program provides short-term loans of up to $35,000. If you need a loan for small-scale financing purposes such as inventory, supplies and working capital, this program may be your answer.

Business Development Bank Loans

Anyone who is running or establishing a business and needs financial assistance can seek out a bank-issued business development loan. The loan can be used for a variety of reasons from buying office automation equipment to financing research and development. Your business can be a one-person operation or a corporation, and you can acquire loans for business development as long as you pass certain criteria:

  • Your business must be a for-profit operation
  • You should be debt free or on the way to becoming so
  • You must have a proposal for the new development loan
  • You must be able to invest part of the cost

Inventors who are homeowners have several viable options to secure financing to develop their idea. Here are a few of the most popular:

Home Equity Loans

Home equity loans are simple-interest, fixed-rate loans, secured by a lien in second position on the title of your home. The amount of equity that is available for a loan is determined by the difference between the appraised value of your property and the balance on the first mortgage. With a fixed rate home equity loan, the lender makes a one-time payment of the full amount that is borrowed, which is paid to you at the closing of the loan process. If you have an existing home equity credit line or a second mortgage on your home, it will need to be paid off with the proceeds of your new equity loan, so make sure to request a sufficient loan amount to include the pay-off. The available programs can vary—some lenders offer 100% home equity loans, while others may offer only up to 80% of the appraised value. Other options can include a zero cost loan, or a loan designed for borrowers with bad credit, which can require a greater amount of equity. Home equity loan rates can vary depending on factors such as credit score, loan amount, and loan-to value.

Second Mortgages

Second mortgages are fixed-rate, simple-interest installment loans, recorded as a lien on your property title behind your existing first mortgage. A second mortgage loan can provide a tax deductible way to access the equity in your home, and not refinance your first home loan. Cash out can be used for any purpose. Consolidating high interest debt is a common use for a second mortgage loan, which can provide several benefits, such as reducing the combined monthly payments, changing compound interest into a simple interest mortgage, and possibly saving more by deducting the interest payments.

Home Equity Line of Credit

A home equity credit line is a re-usable credit line account secured by placing a second lien on your home. Monthly payments are subject to change because equity credit line rates can be adjusted every month, based on an index—usually the prime rate as published in the Wall Street Journal.

Interest accrues only on the outstanding balance of the account as you withdraw money, instead of accruing on the full available balance, as in a fixed loan. Home equity credit line withdrawals can be made in variable amounts, as you need it, unlike a fixed rate loan, which is paid in a lump sum.

Each lender has different lending guidelines, including options like zero costs and no-fee home equity lines. Some lenders offer a maximum loan to value of 100%, and some have a maximum loan amount of $500,000. As a general rule of thumb, most home equity credit lines are only available for owner-occupied single-family homes, condominiums and town homes.

A Few Final Words

Financing your idea can be as simple as borrowing funds from family and friends, or as complex as forming a corporation funded by a consortium of venture capitalist. Questions such as whether you should use a private lender or a bank need to be addressed in the beginning of the process. No matter what type of lending you pursue, only by doing your homework and learning about each option can you make an informed decision appropriate for your specific requirements.

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