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Seeking venture capital for a Web start-up

IN BOX

Online businesses are relatively cheap to begin and are not usually eligible for loans. Show some revenue history, then seek financing.

February 02, 2009|Karen E. Klein

Dear Karen: I'm embarking on an Internet business. How do I get venture capital funding or a small-business loan?

Answer: Start-ups usually aren't eligible for venture capital funding or bank loans. Investors want proof of concept, and banks typically require two years' profit history and collateral before they write small-business loans.

Save or raise funds yourself or borrow from friends and family. Online start-up costs are relatively modest; home-based businesses often launch for $10,000 or less.

Create a simple business plan that lays out your experience, your company's unique value proposition and how you'll drive traffic to your site, said Dan Nathanson, visiting professor at UCLA's Anderson School of Management. Once you have revenue, seek out angel investors specializing in Internet retailing.

"Show investors that you have credibility, commitment and have made contributions of your own before you ask them to put money on the line," he said.

Is license needed to rent out gear?

Dear Karen: I bought some home-cleaning equipment and would like to rent it out. Do I need a license?

Answer: Your city's business development office can help determine whether you need a license. Also look at your sales paperwork for restrictions on post-sale use of the equipment. Some companies void extended warranties if the equipment is rented, said Stephanie Rahlfs, an attorney and editor at FindLaw.com.

Be careful not to use trademarked terms or logos in your promotional materials without the permission of the trademark owner.

Be sure to have your customers sign an equipment rental agreement that limits your liability and sets out basic terms such as late fees and dispute procedures, and look into buying liability insurance.

Finally, talk to a business attorney about how to structure your business legally.

Using a 3rd party to do payables

Dear Karen: We're thinking about outsourcing company payments to an online service. What issues should I consider?

Answer: Look into security, pricing and long-term contracts before you buy online payment processing. Investigate vendors: How long have they been in business? Are they rated by the Better Business Bureau? Have they had numerous customer complaints or security breaches?

"If they go out of business, what happens to your financial information? Is it encrypted? Who has access to your sensitive data? Are they using overseas contractors?" said Steve Roderick, founder of GoTo Billing.com.

Some packages may include options you don't want, such as shopping cart processing or e-mail newsletters.

Compare prices for bundled versus a la carte packages, keeping future needs in mind. Also look into cancellation policies.

Finally, determine whether you'll save money by outsourcing. Pricing typically ranges from flat fees to per-user fees. You may also be able to download a payment program free of charge, Roderick said, that could be useful if you have the time and expertise to set up and manage it yourself.

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Got a question about running or starting a small enterprise? E-mail it to inbox.business @latimes.com or mail it to In Box, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012.

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