Financing Options for Small Businesses

Starting your own business is a challenging but rewarding process. While having the idea for a business and being a good entrepreneur are important for starting a business, financing is the key element for a start-up-business venture. Before we explore the various financing options available to small-business owners, you need to determine your financial needs.
• Do you need more capital or can you manage within the existing cash flow?

•  If you have trouble paying your obligations on time, you may need an infusion of working capital.

• What is the nature of your need?

•  You should determine whether you need money to start or expand your business or as a cushion against risk.

• How urgent is your need?

•  Whenever possible, it’s better to anticipate your needs rather than have to look for money under pressure. It is harder to gain approval for a loan when your company is already in trouble, so plan ahead and secure financing well in advance of a crisis.

• How great are your risks?

•  All businesses carry risk, and the degree of risk will affect both the cost of your loan and the financing alternatives available to you.

• In what state of development is your business?

•  Needs are generally more critical during transitional stages—startup and expansion being two of the most urgent and costliest stages.

• For what purposes will the capital be used?

•  Lenders will need to know your specific intentions for the money to assure themselves that your business will thrive and that repayment is assured.

• What is the state of your industry?

•  Whether your industry is depressed, stable, or fast-growing will have a distinct effect on your search for funding sources. Businesses that prosper in tough economic times will generally receive better funding terms.

• How strong is your management team?

•  Effective management is an important element of business. Your lender will be looking for a strong managerial presence.

• How does your need for financing mesh with your business plan?

•  If you don’t have a business plan yet, make it a priority to write one. All lenders will want to see a solid, well-thought-out business plan for the startup and growth of your business.

After determining your financial needs, you must acquire financing. Financing can be broken down into two different types, debt financing and equity financing.
Debt Financing

•  Debt financing is borrowing money that must be repaid
• Repayment is done over a period of time and with interest
• Lender does not gain an ownership interest in the business
•  Loan is often secured by company assets and borrowers’ personal guarantee

Sources may include:

•  Banks
• Savings and loans
•  Credit unions
•  Commercial finance companies
•  SBA-guaranteed loans
•  State and local government programs
•  Family members, friends, and former associates

Equity Financing

•  Equity financing is raising money in exchange for a share of ownership in the business
•  Equity financing allows business to obtain funds without incurring debt or having to repay specific amount within specific time

Sources may include investors such as:

•  Friends
•  Relatives
•  Employees
•  Customers
•  Industry colleagues
•  The most common source of equity funding comes from venture capitalists.

Credit History:
When a small business requests a loan, one of the first things a lender looks at is personal and business credit history. So, before you even start the process of preparing a loan request, you want to make sure you have a good credit history. Collateral:
In addition, the amount of collateral you have to offer to the lender will determine whether or not you will receive a loan. Assets such as equipment, buildings, accounts receivable, and inventory that can be sold by the bank for repayment can be considered collateral.

Short Term vs. Long Term Financing:
Short-term financing can be in the form of:

• Overdraft
•  Letter of credit
•  Short-term loan

Long-term financing can be in the form of:

•  Long-term loan(s)
•  Leasing

Sources of Loans:

•  Traditional bank loans are a great option for a business with good credit. The turnaround time for getting a loan may be long but the interest rates tend to be low.
•  The Small Business Administration offers a variety of small business loans. For more information, check out www.sba.gov

This resource was created using resources from The U.S. Small Business Administration website.