Businesses need financing for start-up costs or to fund expansions. Depending on your business, you have several options for raising the necessary capital. In addition to using your savings, the most common methods of financing are debt financing by obtaining a loan and equity financing by selling shares in your business. However, there are other creative options, such as purchase order funding, crowdfunding, or using a credit card.
Identify business lenders. Debt financing is probably the most common way to finance your business. You take out a loan and agree to pay it back over a certain amount of time. The lender charges interest and makes a profit that way. The most common business lenders are the following:
Commercial banks. If you do business with a bank, you can stop in and ask how to get a business loan.
Small Business Administration. The SBA technically doesn’t make loans, but it will guarantee loans for small businesses. This means if you default, then the SBA will cover the loan. Whether your business qualifies as “small” will depend on your industry.
Online lenders. Generally, online lenders have looser lending standards and won’t require that you pledge collateral. However, you’ll need to make sure the lender is reputable by checking with the Better Business Bureau and a local consumer protection agency.
Gather necessary paperwork. A lender will need to analyze your business’ finances before extending a loan. Collect the following paperwork, which most lenders require:
resumes for all owners and managers.
business plan.
personal and business tax returns for the past three years.
personal and business credit reports.
personal and business bank statements.
accounts receivable and accounts payable.
business licenses..
articles of incorporation or organization
commercial leases.
Update your financial reports. You’ll also need to submit financial reports to most lenders. Make sure you have created the following and that the information is updated.
Signed personal financial statements from any significant owner of the business. Generally, you’ll need a personal financial statement from anyone who owns more than 20% of the business.
Balance sheet for the business. This is the snapshot of your business and contains information about assets, liabilities, and owner’s equity.
Income statement. This document shows your business’ profitability during a specific period of time.
Cash flow analysis.
Review your credit history. Unless your business is established, a bank won’t lend to the business. Instead, they will lend based on your personal credit history. Review your credit history and clean up any errors before applying for loans.
Common errors include inaccurate balances, wrong credit limits, and accounts listed inaccurately as in default or collections.
Dispute errors online or by writing a letter to the credit bureau that has the error. The Federal Trade Commission has a sample letter you can use.
Find collateral to pledge. It might be easier to get a secured loan that is backed up with assets pledged as collateral. If you default on the loan, then your lender can seize the assets. Because of this added protection, banks might require collateral if you don’t have an established credit history.
You can pledge a variety of assets as collateral. For example, you can pledge your vehicle, home, equipment, or other assets. Talk to banks about their specific requirements.
Fully document the condition and value of your collateral. For example, you may need to have your collateral appraised.
Compare loans. After you submit an application, the lender should decide whether to approve you. Generally, it takes two to four weeks to hear back. If you applied to more than one lender, then you should compare the loan details.
Interest rate. Find out what percent will be charged annually on the loan.
Fees. You may have to pay an origination fee or other fees. Read the fine print to find out the fees charged.
Prepayment penalty. If you want to pay off your loan early, then some lenders might hit you with a fee for the privilege.
Length of repayment. Check how long you have to repay the loan. Generally, the longer the loan, the less you will pay each month. However, the total amount you pay will be higher.
Submit your application. Provide all requested information and double check that it is accurate. If you have questions, contact the lending officer you have been working with. Submit your application with all supporting documentation and keep a copy for your records.
Businesses need financing for start-up costs or to fund expansions. Depending on your business, you have several options for raising the necessary capital. In addition to using your savings, the most common methods of financing are debt financing by obtaining a loan and equity financing by selling shares in your business. However, there are other creative options, such as purchase order funding, crowdfunding, or using a credit card.
Identify business lenders. Debt financing is probably the most common way to finance your business. You take out a loan and agree to pay it back over a certain amount of time. The lender charges interest and makes a profit that way. The most common business lenders are the following:
Commercial banks. If you do business with a bank, you can stop in and ask how to get a business loan.
Small Business Administration. The SBA technically doesn’t make loans, but it will guarantee loans for small businesses. This means if you default, then the SBA will cover the loan. Whether your business qualifies as “small” will depend on your industry.
Online lenders. Generally, online lenders have looser lending standards and won’t require that you pledge collateral. However, you’ll need to make sure the lender is reputable by checking with the Better Business Bureau and a local consumer protection agency.
Gather necessary paperwork. A lender will need to analyze your business’ finances before extending a loan. Collect the following paperwork, which most lenders require:
resumes for all owners and managers.
business plan.
personal and business tax returns for the past three years.
personal and business credit reports.
personal and business bank statements.
accounts receivable and accounts payable.
business licenses..
articles of incorporation or organization
commercial leases.
Update your financial reports. You’ll also need to submit financial reports to most lenders. Make sure you have created the following and that the information is updated.
Signed personal financial statements from any significant owner of the business. Generally, you’ll need a personal financial statement from anyone who owns more than 20% of the business.
Balance sheet for the business. This is the snapshot of your business and contains information about assets, liabilities, and owner’s equity.
Income statement. This document shows your business’ profitability during a specific period of time.
Cash flow analysis.
Review your credit history. Unless your business is established, a bank won’t lend to the business. Instead, they will lend based on your personal credit history. Review your credit history and clean up any errors before applying for loans.
Common errors include inaccurate balances, wrong credit limits, and accounts listed inaccurately as in default or collections.
Dispute errors online or by writing a letter to the credit bureau that has the error. The Federal Trade Commission has a sample letter you can use.
Find collateral to pledge. It might be easier to get a secured loan that is backed up with assets pledged as collateral. If you default on the loan, then your lender can seize the assets. Because of this added protection, banks might require collateral if you don’t have an established credit history.
You can pledge a variety of assets as collateral. For example, you can pledge your vehicle, home, equipment, or other assets. Talk to banks about their specific requirements.
Fully document the condition and value of your collateral. For example, you may need to have your collateral appraised.
Compare loans. After you submit an application, the lender should decide whether to approve you. Generally, it takes two to four weeks to hear back. If you applied to more than one lender, then you should compare the loan details.
Interest rate. Find out what percent will be charged annually on the loan.
Fees. You may have to pay an origination fee or other fees. Read the fine print to find out the fees charged.
Prepayment penalty. If you want to pay off your loan early, then some lenders might hit you with a fee for the privilege.
Length of repayment. Check how long you have to repay the loan. Generally, the longer the loan, the less you will pay each month. However, the total amount you pay will be higher.
Submit your application. Provide all requested information and double check that it is accurate. If you have questions, contact the lending officer you have been working with. Submit your application with all supporting documentation and keep a copy for your records.
When it's time to finance a business, there can be substantial work involved to facilitate this step. Every small business is different, and businesses in different industries and sectors have different ways of going about getting credit. There are various costs which widely range over the span of particular sectors. However, for the core process of securing the financial assistance that a business owner needs for a start up, some basic guidelines and principles will help create effective programs and a solvent business model. Estimate the costs of doing business, find out what you need to borrow money, and then research your financing options.
Estimating Costs of Your Business.
Determine the one-time costs of your business. These are costs that will only occur at the very beginning of opening your business. These include mileage (getting to a location), market research, advertising, and training. You will also need to look up any fees which will occur, such as a lawyer or consultant fee.
Calculate the recurring costs of your business. These are costs that you will have to pay over and over again, usually on a weekly, bi-weekly, or monthly basis. These include costs of utilities, insurance, wages, etc. Recurring costs are generally larger than one-time costs, and span a length of 10-30 years depending on your financing options. Calculate not only the total cost over the lifespan of your business, but also that on a yearly, and bi-yearly basis.
Ascertain whether costs are fixed, or variable. Fixed costs are those which will not change. The cost of your utilities, or your administrative costs are all fixed. Variable costs are those which will change over time. This includes wages, insurance, and shipping/packaging costs. The best way to keep all this information organized is to create a spreadsheet (use Excel). That way you can graph out this information, and view it multiple ways(bar graph, line chart, etc.).
Create a balance sheet. If you are just starting a small business, it is important that you write out balance sheets, which include: assets, liabilities, and equity. Each of these three categories will help you keep track of the finances of your business, and make it easier to pay your bills.
Liabilities = current liabilities(accounts payable, accrued expenses, notes payable, current long-term debt) + non-current liabilities(non-current long-term debt, notes payable to shareholders and owners, contingent liabilities)
Equity = Assets - Liabilities
Develop a cash flow analysis. This measures money which goes in and out of your business. This is then broken down into operational activities, investment activities, and financing activities. This analysis will help you determine when you break even, and can start reinvesting/expanding your business. Once more, the best way to do this is to create a spread sheet. Find all of your financial statements and gather them together before you start to analyze.
Operational = net income, loses of business, sales, and business expenditures.
Investment = purchases and sales of property, assets, securities, and equipment.
Financing = cash flows of all your loan borrowing and repayment.
Borrowing Money for Your Business.
Use equity financing to start your business. Equity financing usually comes from a primary investor, or other business. They will provide you a sum of money, in exchange for part-ownership of your company. This is a good option because investors look further down the road than a loan company, and you will have more money on hand. However, the investors will naturally want to interfere, and change aspects of your business model.
There are networks online which can set you up with a primary investor.
You can also check out private equity firms, which contain a vast array of specialized and experienced investors.
Remember, that small business owners generally use very little equity financing. It all depends on your business model, and the potential for growth.
Start your business using debt financing. Debt financing is when you take out a loan, usually from a bank or lending institution. This is a great option because the bank will have no say in how you run your business. The loan is tax deductible, and you can get short-term or long-term loans. However, you must have the loan repaid in a certain amount of time, and if you don't, you could have a hard time getting capital investment.
Talk to your local bank, or lending institution about the qualifications for specific loans. You will probably have to fill out some paperwork to determine whether or not you are qualified.
When using a local bank, you may be able to set up a personal relationship. This way, you can postpone a few payments if you fall on hard times.
Find out about credit scores and ratings. The higher your score is, the less risky you are to investors. In many cases, the initial business loan will be based on the borrower's own personal credit score. However, in some cases where a business is already operational, a business plan and other documents can provide for a different kind of credit specifically for the continued operations of that enterprise.
Use the online company TransUnion or EquiFax to determine your credit score. It is important to get an independent analysis, otherwise your own calculated score could be biased.
The main focus of the score is how long you have maintained a credit line, and how many monthly payments you have made on time.
If you have no prior experience taking out credit, it may be hard to get a loan. It is best to start using a credit card on small things like gas, or grocery store trips. Then gradually build up. Show the creditors you are a responsible client.[12]
Maintain an adequate debt to equity ratio. You want to make sure that the total debt and liabilities of your business is no more than four times the equity in the business. Equity simply means any retained earnings and cash injections by investors. In order to start out with equity, the owner of the business usually has to put in anywhere from 20-40%. This will maintain an adequate debt to equity ratio, and allow you to get a loan.
Put up collateral to start your business. Before you get a loan, the lending institution or bank will ask for collateral. This means you risk some of the items you own. In the case you cannot repay the loan, the bank can seize your property. Collateral usually includes homes, cars, furniture, equipment, stocks, bonds, etc. this is a scary proposition, so you need to be sure that your business will be financially successful beforehand.
Shop around for different lenders. There are a variety of lenders who may or may not be willing to issue new business loans, and all of these potential lenders have their own terms and conditions. Talk to various lenders and ask them about what kinds of loans are available. Evaluate loans by timeline. Lenders will offer various short-term, long-term or revolving-credit loans to business owners. Look at which ones suit the needs of a startup the best.
Look at secured and unsecured business loans. Secured loans actually use existing assets as collateral. For example, the person trying to start a business can use his or her home, or other property, as collateral and get lower interest rates for the loan. However, this leaves the assets vulnerable to seizure in cases of nonpayment. Unsecured loans rest solely on the borrower's credit score. See which of these types of loans best matches desired risk.
Select the best deals. You want a loan that has the lowest interest rates and most favorable terms for repayment.
Financing Your Business.
Get a bank loan. Small, local banks have received more strict standards after the financial crash of 2008. However, large investment banks such as JP Morgan Chase and Bank of America have received a set of moneys from the Federal Reserve to lend out to small businesses. This is your best option to go with, although it takes the long to pay off. Local banks will set you up with a contract, and a monthly payment. The other benefit is that you can get this loan postponed if you are having trouble paying it off.
Place your home up as collateral. Banks will generally allow you to borrow up to 75-80% of your home's worth, as long as you have at least 10-15% already down on your home. This is great because the loan will have a much lower interest rate than a credit card. Talk with your financier, or local mortgage company for more detailed information.
Use your credit card. This is a very dangerous game to be played. You need to stay on top of your monthly payments. If you fall behind, you get trapped in a death spiral. However, when carefully managed, credit cards can be great to get out of an emergency. Only use a credit card occasionally, when you are experiencing a hole you know that you can get out of.
Tap into your 401(k) plan. You will need a financial expert who can start up a C Corporation which you can then roll your retirement assets into. This is also a risky business, because you are tapping into your nest egg. This should only be done if you have more money put away in a savings account, or if you are independently wealthy.
Try loaning money from your friends and family. Ask who would be willing to make a contribution, or purchase a percentage of the company. Go about asking members of your church for donations. Let local businesses to partner with you. You might make some acquaintances, and make some deals (you make cheese, they make wine, a chance to exchange).
Pledge your future earnings. Some companies, or peoples, are willing to gamble and put money upfront, if you are willing to commit a certain percentage of future profits. This is a gamble because they, and you, are betting that you will be able to earn enough in the future. There is usually a contract involved, guaranteeing that they will at least get some money back, so keep that in mind.
Kickstart your business. Crowd funding, in the age of the internet, has become a very popular way to finance businesses. Write a description of your business idea online, at sites like Kickstarter, and convince people to donate to your business. You will want to be really descriptive, and excited in your word choice. The downside of this is that it could take months or years before you raise enough money.
Secure an SBA loan. SBA (Small Business Administration) is a branch of the Federal Government that supplies loans to businesses struggling to get off the ground. However, there are a number of qualifications. You had to have been denied a loan from another bank before. You have to meet the government's definition of a small business. You will also have to meet other restrictions, depending on the type of SBA loan. Go to the SBA's website, and fill out a form if you think you might meet these qualifications.
Attract an angel investor. These are wealthy individuals who like to bet on the financial success of start-up businesses. Angel investors are usually found at private-equity, and venture capital firms. You will want to bring someone older, who looks like he has had experience in business before. Be passionate about your idea when you present, and know all of the financial details before you walk in the room. Keep in contact with the investor days and weeks after your initial meeting.
Tips.
Talk to numerous lending institutions before you pick a loan. Some will have better interest rates, while others will have better repayments.
Consult with family members first. Getting a small loan from them can avoid dealing with greedy credit lenders.
Get some experience in the business before you start your own. If you want to start a restaurant, make sure you have worked in a restaurant before. If not, you will wind up purchasing outside help which will cost you astronomical amounts of money.
Warnings.
Talk to a lawyer and a financial advisor to avoid colossal mistakes. The biggest regret of many first-time small business owners is not consulting with a professional before they begin the process.
If you are a person living paycheck-to-paycheck, it is best to wait to start a small business. If the business goes down hill quickly, you could lose your assets, and your life savings.
Take a year to save up money and make a detailed plan. You do not want to go into small business owning head first.
When it's time to finance a business, there can be substantial work involved to facilitate this step. Every small business is different, and businesses in different industries and sectors have different ways of going about getting credit. There are various costs which widely range over the span of particular sectors. However, for the core process of securing the financial assistance that a business owner needs for a start up, some basic guidelines and principles will help create effective programs and a solvent business model. Estimate the costs of doing business, find out what you need to borrow money, and then research your financing options.
Estimating Costs of Your Business.
Determine the one-time costs of your business. These are costs that will only occur at the very beginning of opening your business. These include mileage (getting to a location), market research, advertising, and training. You will also need to look up any fees which will occur, such as a lawyer or consultant fee.
Calculate the recurring costs of your business. These are costs that you will have to pay over and over again, usually on a weekly, bi-weekly, or monthly basis. These include costs of utilities, insurance, wages, etc. Recurring costs are generally larger than one-time costs, and span a length of 10-30 years depending on your financing options. Calculate not only the total cost over the lifespan of your business, but also that on a yearly, and bi-yearly basis.
Ascertain whether costs are fixed, or variable. Fixed costs are those which will not change. The cost of your utilities, or your administrative costs are all fixed. Variable costs are those which will change over time. This includes wages, insurance, and shipping/packaging costs. The best way to keep all this information organized is to create a spreadsheet (use Excel). That way you can graph out this information, and view it multiple ways(bar graph, line chart, etc.).
Create a balance sheet. If you are just starting a small business, it is important that you write out balance sheets, which include: assets, liabilities, and equity. Each of these three categories will help you keep track of the finances of your business, and make it easier to pay your bills.
Liabilities = current liabilities(accounts payable, accrued expenses, notes payable, current long-term debt) + non-current liabilities(non-current long-term debt, notes payable to shareholders and owners, contingent liabilities)
Equity = Assets - Liabilities
Develop a cash flow analysis. This measures money which goes in and out of your business. This is then broken down into operational activities, investment activities, and financing activities. This analysis will help you determine when you break even, and can start reinvesting/expanding your business. Once more, the best way to do this is to create a spread sheet. Find all of your financial statements and gather them together before you start to analyze.
Operational = net income, loses of business, sales, and business expenditures.
Investment = purchases and sales of property, assets, securities, and equipment.
Financing = cash flows of all your loan borrowing and repayment.
Borrowing Money for Your Business.
Use equity financing to start your business. Equity financing usually comes from a primary investor, or other business. They will provide you a sum of money, in exchange for part-ownership of your company. This is a good option because investors look further down the road than a loan company, and you will have more money on hand. However, the investors will naturally want to interfere, and change aspects of your business model.
There are networks online which can set you up with a primary investor.
You can also check out private equity firms, which contain a vast array of specialized and experienced investors.
Remember, that small business owners generally use very little equity financing. It all depends on your business model, and the potential for growth.
Start your business using debt financing. Debt financing is when you take out a loan, usually from a bank or lending institution. This is a great option because the bank will have no say in how you run your business. The loan is tax deductible, and you can get short-term or long-term loans. However, you must have the loan repaid in a certain amount of time, and if you don't, you could have a hard time getting capital investment.
Talk to your local bank, or lending institution about the qualifications for specific loans. You will probably have to fill out some paperwork to determine whether or not you are qualified.
When using a local bank, you may be able to set up a personal relationship. This way, you can postpone a few payments if you fall on hard times.
Find out about credit scores and ratings. The higher your score is, the less risky you are to investors. In many cases, the initial business loan will be based on the borrower's own personal credit score. However, in some cases where a business is already operational, a business plan and other documents can provide for a different kind of credit specifically for the continued operations of that enterprise.
Use the online company TransUnion or EquiFax to determine your credit score. It is important to get an independent analysis, otherwise your own calculated score could be biased.
The main focus of the score is how long you have maintained a credit line, and how many monthly payments you have made on time.
If you have no prior experience taking out credit, it may be hard to get a loan. It is best to start using a credit card on small things like gas, or grocery store trips. Then gradually build up. Show the creditors you are a responsible client.[12]
Maintain an adequate debt to equity ratio. You want to make sure that the total debt and liabilities of your business is no more than four times the equity in the business. Equity simply means any retained earnings and cash injections by investors. In order to start out with equity, the owner of the business usually has to put in anywhere from 20-40%. This will maintain an adequate debt to equity ratio, and allow you to get a loan.
Put up collateral to start your business. Before you get a loan, the lending institution or bank will ask for collateral. This means you risk some of the items you own. In the case you cannot repay the loan, the bank can seize your property. Collateral usually includes homes, cars, furniture, equipment, stocks, bonds, etc. this is a scary proposition, so you need to be sure that your business will be financially successful beforehand.
Shop around for different lenders. There are a variety of lenders who may or may not be willing to issue new business loans, and all of these potential lenders have their own terms and conditions. Talk to various lenders and ask them about what kinds of loans are available. Evaluate loans by timeline. Lenders will offer various short-term, long-term or revolving-credit loans to business owners. Look at which ones suit the needs of a startup the best.
Look at secured and unsecured business loans. Secured loans actually use existing assets as collateral. For example, the person trying to start a business can use his or her home, or other property, as collateral and get lower interest rates for the loan. However, this leaves the assets vulnerable to seizure in cases of nonpayment. Unsecured loans rest solely on the borrower's credit score. See which of these types of loans best matches desired risk.
Select the best deals. You want a loan that has the lowest interest rates and most favorable terms for repayment.
Financing Your Business.
Get a bank loan. Small, local banks have received more strict standards after the financial crash of 2008. However, large investment banks such as JP Morgan Chase and Bank of America have received a set of moneys from the Federal Reserve to lend out to small businesses. This is your best option to go with, although it takes the long to pay off. Local banks will set you up with a contract, and a monthly payment. The other benefit is that you can get this loan postponed if you are having trouble paying it off.
Place your home up as collateral. Banks will generally allow you to borrow up to 75-80% of your home's worth, as long as you have at least 10-15% already down on your home. This is great because the loan will have a much lower interest rate than a credit card. Talk with your financier, or local mortgage company for more detailed information.
Use your credit card. This is a very dangerous game to be played. You need to stay on top of your monthly payments. If you fall behind, you get trapped in a death spiral. However, when carefully managed, credit cards can be great to get out of an emergency. Only use a credit card occasionally, when you are experiencing a hole you know that you can get out of.
Tap into your 401(k) plan. You will need a financial expert who can start up a C Corporation which you can then roll your retirement assets into. This is also a risky business, because you are tapping into your nest egg. This should only be done if you have more money put away in a savings account, or if you are independently wealthy.
Try loaning money from your friends and family. Ask who would be willing to make a contribution, or purchase a percentage of the company. Go about asking members of your church for donations. Let local businesses to partner with you. You might make some acquaintances, and make some deals (you make cheese, they make wine, a chance to exchange).
Pledge your future earnings. Some companies, or peoples, are willing to gamble and put money upfront, if you are willing to commit a certain percentage of future profits. This is a gamble because they, and you, are betting that you will be able to earn enough in the future. There is usually a contract involved, guaranteeing that they will at least get some money back, so keep that in mind.
Kickstart your business. Crowd funding, in the age of the internet, has become a very popular way to finance businesses. Write a description of your business idea online, at sites like Kickstarter, and convince people to donate to your business. You will want to be really descriptive, and excited in your word choice. The downside of this is that it could take months or years before you raise enough money.
Secure an SBA loan. SBA (Small Business Administration) is a branch of the Federal Government that supplies loans to businesses struggling to get off the ground. However, there are a number of qualifications. You had to have been denied a loan from another bank before. You have to meet the government's definition of a small business. You will also have to meet other restrictions, depending on the type of SBA loan. Go to the SBA's website, and fill out a form if you think you might meet these qualifications.
Attract an angel investor. These are wealthy individuals who like to bet on the financial success of start-up businesses. Angel investors are usually found at private-equity, and venture capital firms. You will want to bring someone older, who looks like he has had experience in business before. Be passionate about your idea when you present, and know all of the financial details before you walk in the room. Keep in contact with the investor days and weeks after your initial meeting.
Tips.
Talk to numerous lending institutions before you pick a loan. Some will have better interest rates, while others will have better repayments.
Consult with family members first. Getting a small loan from them can avoid dealing with greedy credit lenders.
Get some experience in the business before you start your own. If you want to start a restaurant, make sure you have worked in a restaurant before. If not, you will wind up purchasing outside help which will cost you astronomical amounts of money.
Warnings.
Talk to a lawyer and a financial advisor to avoid colossal mistakes. The biggest regret of many first-time small business owners is not consulting with a professional before they begin the process.
If you are a person living paycheck-to-paycheck, it is best to wait to start a small business. If the business goes down hill quickly, you could lose your assets, and your life savings.
Take a year to save up money and make a detailed plan. You do not want to go into small business owning head first.
