Financing Your Start-up & Raising Capital
Finding the money you need
It is important to explore all of your financing options before making a decision; several sources to consider are:
- Personal Savings: This is the primary source of capital for most new businesses.
- Friends & Relatives: Many entrepreneurs look to friends and family when starting a new business. This can be a great way to get funding for a reasonable interest rate.
- Banks & Credit Unions & SBA: This is the most common sources of funding. With good financial projections, a bank will provide a loan if you can show that your business proposal is sound.
- Angel Investors & Venture Capital firms: These individuals and firms help expanding companies grow in exchange for equity or partial ownership. This is a great source of funding and knowledge.
Borrowing the money your business needs
It is important to remember that banks make money by lending money. Less experience and new businesses will likely require harsher lending terms. Requesting a loan when you are not properly prepared suggests that you are a high risk. To successfully obtain a loan, you must be prepared with a business plan and financial projections. 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
There are two basic types of loans: short-term and long-term. A short-term loan is generally due within one year. These loans include working capital, accounts receivable, 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. The best way to improve your chances of obtaining a loan is to prepare a business plan. A well-written business plan contains:
- 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
- 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
- Short statement on each of the principals in your business -provide background, education experience, skills, and accomplishments
- Clear definition 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 statements - provide 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
How your loan request will be reviewed
When reviewing a loan request, the lender is primarily concerned about repayment. To help determine its likelihood, 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 make sure they present an accurate picture of your business.