More Information About Starting Your Small Business
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Finding Capital |
Raising capital is the most basic
of all business activities, but it may not be easy; in fact, it
is often a complex and frustrating process. However, if you have
studied and planned effectively, raising money for your business
will go as smoothly as possible.
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 personal resources.
While credit cards are often used to finance business needs, there
are usually 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 sources
of funding, banks and credit unions, will provide a loan if you
can show that your business proposal is sound.
Angel Investors and Venture capital firms: These
individuals and firms help expanding companies grow in exchange
for equity or partial ownership.
A source of venture capital is the SBA's
Small Business Investment Company (SBIC) Program. SBICs,
licensed and regulated by the SBA, are privately owned and managed
investment
firms that use their own capital, plus funds borrowed at favorable
rates with an SBA guarantee, to make venture capital investments
in small businesses.
Read SBA's
Venture Capital Primer for Small Business
Additional Sources of Capital
Related Information on Additional Sources of Capital
Read SBA's
Financing for the Small Business |
Borrowing Money |
It is often said that small businesses
face difficulty borrowing money, but 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 suggests to your lender that you are a high risk.
To successfullly obtain 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. |
Types of Business Loans |
Terms of loans vary from lender to
lender, but there are two basic types: 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.
SBA loan programs are intended to encourage long-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.
Read SBA's "The Benefits of Making
Your Banker Your Friend"
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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 are willing to pledge as security for the loan
Related Information
Read SBA's "How to Prepare a Loan
Package"
Read SBA's "Never Take No for an Answer
- (When the Bank Says No)"
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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. 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, no lender or investor will finance 100 percent
of your business.
- Do you have a sound record of credit-worthiness 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?
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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 in-depth information on the financing programs available
through the SBA visit the Financing
Your Business section of the SBA's main web site.
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