Pre Start-up/Assessing
Your Business Idea
Financing Your Business Start-up
One key to a successful business start-up
and expansion is your ability to obtain and secure appropriate
financing. Raising capital is the most basic of all business
activities. But, as many new entrepreneurs quickly discover,
raising capital may not be easy; in fact, it can be a complex
and frustrating process. However, if you are informed and
have planned effectively, raising money for your business
will not be a painful experience.
This information summary focuses on
ways a small business can raise money and explains how to
prepare a loan proposal.
Finding the Money You Need
There are several sources to consider
when looking for financing. It is important to explore all
of your options before making a decision.
Personal savings: The primary
source of capital for most new businesses comes from savings
and other forms of personal resources. While credit cards
are often used to finance business needs, there may be better
options available, even for very small loans.
Friends and relatives: Many entrepreneurs
look to private sources such as friends and family when
starting out in a business venture. Often, money is loaned
interest free or at a low interest rate, which can be beneficial
when getting started.
Banks and credit unions: The
most common source of funding, banks and credit unions,
will provide a loan if you can show that your business proposal
is sound.
Venture capital firms: These
firms help expanding companies grow in exchange for equity
or partial ownership.
Borrowing Money
It is often said that small business
people have a difficult time borrowing money. This is not
necessarily true.
Banks make money by lending money. However,
the inexperience of many small business owners in financial
matters often prompts banks to deny loan requests.
Requesting a loan when you are not properly
prepared sends a signal to your lender. That message is:
High Risk!
To be successful in 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.
SBA Loan Maturities
SBA loan programs are generally intended to encourage longer
term small business financing, but actual loan maturities
are based on the ability to repay, the purpose of the loan
proceeds, and the useful life of the assets financed. However,
maximum loan maturities have been established: twenty-five
years for real estate; up to ten years for equipment (depending
on the useful life of the equipment); and generally up to
seven years for working capital. Short- term loans are also
available through the SBA to help small businesses meet
their short term and cyclical working capital needs. For
additional information, go to http://www.sba.gov/financing.
Types of Business Loans
Terms of loans may vary from lender
to lender, but there are two basic types of loans:
Short-term and long-term.
Generally, a short-term loan has a maturity
of up to one year. These include working-capital loans,
accounts-receivable 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.
How to Write a Loan Proposal
Approval of your loan request depends
on how well you present yourself, your business, and your
financial needs to a lender. Remember, lenders want to make
loans, but they must make loans they know will be repaid.
The best way to improve your chances of obtaining a loan
is to prepare a written proposal.
A good loan proposal will contain the
following key elements:
General Information
Business name, names of principals,
Social Security number for each principal, and the business
address.
Purpose of the loan - exactly 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 short 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 would be willing
to pledge as security for the loan.
How Your Loan Request Will Be Reviewed
When reviewing a loan request, the lender
is primarily concerned about repayment. To help determine
this ability, many loan officers will order a copy of your
business credit report from a credit-reporting agency. Therefore,
you should work with these agencies to help them present
an accurate picture of your business. Using the credit report
and the information you have provided, the lending officer
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,
a lender or investor will not finance 100 percent of your
business.)
Do you have a sound record of creditworthiness
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?
SBA Financial Programs
The SBA offers a variety of financing options for small
businesses.
Whether you are looking for a long-term loan for machinery
and equipment, a general working capital loan, a revolving
line of credit, or a microloan, the SBA has a financing
program to fit your needs. For additional information, go
to http://www.sba.gov/financing.
Web Link
http://www.sbaonline.sba.gov/starting/indexstartup.html#finding