A vital part of getting any start up business successfully off the ground is obtaining secure and appropriate financing. Raising capital is a fundamental part of all business activities. What every new business owner soon comes to realize is that raising capital is not necessarily easy. Coming up with capital for your start up can be a difficult and frustrating process. However, raising capital does not have to be painful if you are informed about the process and plan effectively.
Where to find the money you need.
You have several options which you should consider when searching for financing. Take the time to research all of them prior to making your decision on the best course to take.
- Personal savings is the most common source of capital when for start ups. Some will even use credit cards to finance their business, but there are much better options available even when talking about small loans.
- Some entrepreneurs will turn to private sources for funding the start up that include relatives or friends. Many loans from these sources end up being interest free or very low interest rates that help to decrease the overhead for the new business.
- The most common source of third party funding of start-ups comes from credit unions and banks. They will often make business loans if you can show them that your business proposal is well thought out with good potential.
- There are also venture capital firms that will help fund start-ups usually in exchange for partial ownership or equity.
Borrowing Money
There is a misperception that it is difficult for start-ups to borrow money, which is not necessarily the way it is. Banks want to lend money. It is the business they are in and how they create earnings. What makes the process difficult is that owners of start-ups are often times inexperienced in financial matters which can cause a bank to reject requests for loans.
If you request a loan for your start-up without being properly prepared you are sending a poor signal to the lender. What you are immediately telling them is the loan will be a high risk. To increase your chances of success you need to organize and prepare for the meeting. Have a thorough understanding of how much money you will need, for what purpose and how you intend to repay the loan. If have it well planned out you will present yourself as a better credit risk.
Loan Maturities for Start Ups
Loans designed for business are typically intended to be longer in duration, but are actually dependent upon the ability to repay, the assets useful life and the general purpose for the proceeds. The maximum loan maturities have been set at 25 years for real estate and equipment can go up to ten years depending on its useful life span. Working capital for the business is generally limited to seven years. If a business has short term or cyclical needs for working capital short term loan solutions are also available.
Loan Types for Business
When it comes to business there are two basic types of loans available and the terms will vary by lender. The two types are short-term and long-term. Short-term loans typically mature in a year or less and are most often used for accounts receivable, working capital or may be held as a line of credit.
A long-term loan typically falls between a one and seven year maturity. It the loan is for equipment or real estate the maturity might extend for up to twenty five years. These long-term maturity loans are used for major business expense situations such as purchases of facilities, real estate, equipment or construction.
Putting Together your Loan Proposal
The presentation of your loan request will have a major impact upon its approval. You need to present yourself and your business in a positive light with a thorough knowledge of your financial needs and situation. Financial institutions are in the business of lending money, but they want to make loans which they feel will be repaid. To impress this upon them and improve your chances of success make a written proposal.
A well thought out loan proposal will contain:
General Business Information
- Business name and address.
- The names of the principals and their social security numbers.
- Spell out exactly why the loan is needed and what it will be used for.
- Provide the exact amount of financing you need.
Business Description
- Give a history of the business.
- Describe the nature of the business.
- Include business details such as age, business assets and number of employees.
- Give specifics on the company’s legal structure.
- Provide details on the ownership structure.
Overview of the Management Profile
- For every principal in your business give a short overview that includes their accomplishments, skills, education and professional background and experience.
Overview of Market Information
- Describe the products of your company and the markets served.
- Offer a profile of your clients and customers while describing how your business serves their needs.
- Explain your competitive market. Identify your competitors and how your business competes including any advantages unique to your business.
Financial Information of Business
- Give the business’s financial information for the last three years or as long as in business including the statements, balance sheets and income statements.
- Also include a projected income statement and balance sheet.
- Give financial statement from all principals to the business.
- List any collateral you are willing to offer in order to secure the loan.
The Review Process for your Loan Request
The first consideration for any lender when reviewing a loan is probability of repayment. A commonly used method to determine that ability to repay is for the loan officer to pull a credit report on the business from a credit reporting agency. It is a good idea to work with these credit reporting agencies in order to ensure an accurate credit picture for your business. The loan officer will take the credit report and the information provided by you to consider the following:
- Is there sufficient cash flow for the business to make the monthly payments timely?
- Are your background, education and experience sufficient to successfully run your business?
- Have you demonstrated your understanding of your business and a commitment for its success by submitting a professional business plan and loan proposal?
- Are your credit history and work history solid as demonstrated by a credit report and letters of reference?
- Have you established a personal stake in the business by investing personal assets or equity that amounts to 25% to 50% of the requested loan. You need to understand that an outside source will not risk funding 100% of someone else’s business.
