FINDING THE MONEY YOU NEED - Financing Your
Business Start-Up
One key to a successful business startup
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.
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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:
twentyfive 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. Shortterm loans are
also available through the SBA to help small businesses
meet their short term and cyclical working capital
needs.
Types of Business Loans
Terms of loans may vary from lender to lender,
but there are two basic types of loans: shortterm
and longterm.
Generally, a shortterm loan has a maturity
of up to one year. These include workingcapital
loans, accountsreceivable loans and lines
of credit.
Longterm 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. Longterm 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 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 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 creditreporting
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:
