How To Finance Your Small Business
If you have a great business idea or plan, or you would like to expand your existing business, don’t let a lack of funds stop you in your tracks. There is a wide variety of financing available for small businesses. Let’s look at the financing opportunities that small business entrepreneurs can take advantage of.
While the financing sources comprise diverse institutions, such as banks, government sources, venture capitalists,s and “angel” investors, it is useful to look at what all lenders, regardless of category, want when they loan money or invest in a business enterprise.
When you seek money for an already existing business, lenders will be interested to know about the history of your business, whether it has a track record of good management and good performance. Lenders will be keen to know whether you can repay a loan and will look at your present cash flow to see whether it is sufficient to enable you to meet your current obligations as well as to take on extra debt.
Your credit history will also be under scrutiny. Good credit history will help you to get a loan. If you have had problems in the past, it is best to bring these to the attention of the lender yourself and explain how you have turned the situation around.
You can also bolster your chances of getting a loan by putting up collateral. This reduces the risk for the bank in case you default. And finally, if you can show that your own personal money is invested in your enterprise then lenders will have more confidence in the proposition.
Many small business loans are turned down due to poorly presented proposals, inadequate collateral, insufficient cash flow, and a lack of management experience.
These are the general points that lenders and investors are interested in, now let’s look at the main sources for small business financing.
1. Traditional Lenders: Banks, credit unions, and finance companies are the main source of loans to small businesses. Many of these institutions have a small-business department and are experienced in handling small-business loans. The most logical place to start is with the institution which handles your business and personal banking. You should do your best to get to know the manager and personnel at the bank. So don’t try to save time at the ATM! Being friendly with the bank staff will not guarantee you a loan but it will make it easier for you to make your loan presentation.
2. Government Sources, the Small Business Administration (SBA): The programs of the SBA work in conjunction with the traditional lenders, as they are mostly loan guarantee programs that reduce the risk to lenders in case of default. Some of the popular SBA programs are as follows
a. The 7(a)-loan-guarantee program: This program helps businesses that lack sufficient collateral, by providing repayment guarantees ranging from 75-85% depending on the size of the loan.
b. The SBA LowDoc loan program: If you’re a borrower who wants an SBA loan fast, a low-doc SBA loan could be the ideal solution. Unlike typical SBA 7(a) loans, which may require up to 2-3 months to be finalized, low-doc loans can be completely finalized within 45 days (or even sooner.) Low-doc loans offer borrowers between $25,000 and $150,000, which can be used to fund inventory, equipment, and working capital for small businesses.
c. The SBAExpress loan program: This is another quick-procedure loan guarantee program, but it covers loans up to $350,000. The SBA guarantees 50% of these loans, and interest rates in this program may be higher than in the other SBA programs
d. Microloans: The Microloan program provides loans up to $50,000 to help small businesses and certain not-for-profit childcare centers start up and expand. The average microloan is about $13,000.
3. Venture Capitalists: These are typically firms that are seeking investment opportunities in companies with high-profit potential. Usually, when you take money from a Venture Capitalist firm it means that you must give up some ownership and control to the investors. If you are thinking of going in this direction, then it is imperative to investigate the VC firm and make sure that it has good references.
4. Angel Investors: These are individual investors who are looking for good opportunities in a wide variety of businesses. You don’t have to be a high-tech company to attract these funds. Angels have smaller sums to invest than venture capitalists, and their investments range from $100,000 to $1 Million. There are a good number of angel investors in the U.S. and Canada, with at least 170 investment groups or angel networks spread around both countries. You can find the angels by making a search on the Internet, looking for angel associations in your particular area of business. You can also inquire with your local small business librarian, the chamber of commerce, your local SCORE office, and other non-competitive businesses.
As you can see from this brief survey, the money for small businesses is out there. Prepare your proposal carefully and approach the institutions or individuals that best match your needs and capacity.