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Capital Sources |
Arranging capital is one of the most
critical of all business activities, but
it may not be easy; in fact, it is often
a complicated and lengthy process.
Nevertheless, if you put the proper time
and planning into your approach, raising
capital for your business will go as
smoothly as is possible.
Locating the Money You Need
Consider several
sources when looking for financing. It
is important to explore all of your
possibilities before making a decision.
Personal
savings:
The primary source of capital for most
new businesses comes from savings and
other personal resources. Credit cards
are often used to finance business
needs, however there are usually better
options available, even for small loans.
Friends and
relatives:
Entrepreneurs often look to private
sources such as family and friends when
starting a new business. Often, money is
loaned interest-free or at a low
interest rate, which can assist a new
business in the start up stage.
Banks and
credit unions:
A common choice of funding, banks and
credit unions are difficult sources to
obtain a loan for a start up or a
relatively new business from.
They will often require very strong
assets to back it up, most often equity
in a home. In such a case,
it will likely be better to simply do a
home equity loan, since the interest
rate will be lower and the bank is
holding your home as collateral anyway.
Angel
Investors and Venture capital firms:
These individuals and firms help
expanding companies grow in exchange for
equity or partial ownership in your
business.
A source of venture
capital is the
SBA's Small Business Investment Company
(SBIC) Program. SBICs, licensed and
regulated by the SBA, are privately
owned and managed investment firms that
use their own capital, plus funds
borrowed at favorable rates with an SBA
guarantee, to make venture capital
investments in small businesses.
Read SBA's Venture
Capital Primer for Small Business
Additional
Sources of Capital
Related
Information on Additional Sources of
Capital
Read SBA's Financing for
the Small Business |
|
Borrowing Money |
| It is
often stated that small businesses face
difficulty borrowing money, but this is
not always true, but it is a hurdle that
most small business owners face.
Banks have approximately a 90% turndown
rate for business loan requests.
One of the ways banks
make money is by lending depositor
money. However, the inexperience
of many small business owners in
financial matters often prompts banks to
deny more loan requests than they
otherwise would. Requesting a loan
when you are not properly prepared gives
a lender another reason to see your
business as a high risk for a business
loan.
To increase your
chances of obtaining a loan, you must be
prepared and organized. You must know
exactly how much money you need, why you
need it, and how you will pay it back.
You must be able to convince your lender
that you are a good credit risk. |
| Types
of Business Loans |
| Terms
of loans vary from lender to lender, but
there are two basic types: short-term
and long-term asset based and unsecured
loans.
Generally, a
short-term loan has a maturity of up to
one year. These include working capital
loans, accounts receivable loans, bridge
loans, and lines of credit.
Long-term loans have
maturities greater than one year but
usually less than seven years. Real
estate and equipment loans may have
maturities of up to 25 years. Long-term
loans are used for major business
expenses such as purchasing real estate
and facilities, construction, durable
equipment, furniture and fixtures,
vehicles, etc.
Read "The Benefits of Making Your Lender
Your Friend" |
| How to
Write a Loan Proposal |
|
Approval of your loan request depends on
your Time in Business, Business and
Personal Credit, your type of
business, how well you present yourself,
and your financial needs.
Remember, lenders want to make loans,
but they must make loans they know will
be repaid. One way of enhancing your
chances of obtaining a loan is to
prepare a written proposal.
A well-written loan
proposal contains:
General Information
- Business name, names of
principals, Social Security number
for each principal, and the business
address
- Purpose of the loan - What the
loan will be used for and why it is
needed
- Amount required - the exact
amount you need to achieve your
purpose
Business Description
- History and nature of the
business - details of what kind of
business it is, its age, number of
employees and current business
assets
- Ownership structure - details on
your company's legal structure
Management Profile
- Develop a brief statement on
each principal in your business,
provide background, education
experience, skills and
accomplishments.
Market Information
- Clearly define your company's
products as well as your markets.
- Identify your competition and
explain how your business competes
in the marketplace.
- Profile your customers and
explain how your business can
satisfy their needs.
Financial Information
- Financial statements - balance
sheets and income statements for the
past three years. If you are
starting out, provide a projected
balance sheet and income statement.
- Personal financial statements on
yourself and other principal owners
of the business
- Collateral you are willing to
pledge as security for the loan
Related Information
Read "How to Prepare a Loan Package"
Read "Never Take No for an Answer
- (When the Lender Says No)" |
| How
Your Loan Request Will Be Reviewed |
When
reviewing a loan request, the lender is
primarily concerned about your repayment
ability. To help determine its
likelihood, many lenders will order a
copy of your business credit report from
a credit-reporting agency such as
Dun and
Bradstreet or
CIT.
Therefore, you should contact these
agencies to make sure they present an
accurate picture of your business. Using
the credit report and the information
you have provided, the lender will
consider the following issues:
- Have you invested savings or
personal equity in your business
totaling at least 25 percent to 50
percent of the loan you are
requesting? Remember, no lender or
investor will finance 100 percent of
your business if it is a new
business?
- Do you have a sound record of
credit-worthiness as indicated by
your credit report, work history and
letters of recommendation? This is
very important.
- Do you have sufficient
experience and training to operate a
successful business?
- Have you prepared a loan
proposal and business plan that
demonstrate your understanding of
and commitment to the success of the
business?
- Does the business have
sufficient cash flow to make the
monthly payments?
- Your tax returns, both personal
and business should show a net
income. Many, many
current and future business owners
allow their accountants to show they
are not making any bottom line, or
"net" income. This is
great when it's time to pay taxes
but terrible when trying to obtain a
loan. If you or your
business are reporting via your Tax
Returns that you are not making any
money, why should anyone make you a
loan? Report enough
income on your tax returns to
justify you can make the monthly
payment on any new loan.
More about our Capital For Businesses
Program!
Apply for a Small Business Loan Today!
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