Find Money You Need
One key to a successful business startup and expansion is your
ability to obtain and secure appropriate financing. Raising capital
is the most basic of all business activities. But, as many new entrepreneurs
quickly discover, raising capital may not be easy; in fact, it can be
a complex and frustrating process. However, if you are informed and
have planned effectively, raising money for your business will not be
a painful experience. This information summary focuses on ways a small
business can raise money and explains how to prepare a loan proposal.
Sources to Consider
Personal savings: The primary source of capital for most new
businesses comes from savings and other forms of personal resources.
While credit cards are often used to finance business needs, there
may be 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 source of funding,
banks and credit unions, will provide a loan if you can show that
your business proposal is sound.
Venture capital firms: These firms help expanding companies
grow in exchange for equity or partial ownership. Be sure to visit
ACE-NET, SBA's Angel Capital Electronic Network. ACE-Net gives new
options to both small companies looking for investors and investors
looking for promising opportunities.
Borrowing Money
It is often said that small business people have a difficult time borrowing
money. 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 sends a signal to your lender. That
message is: High Risk! To be successful in obtaining 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.
SBA Loan Maturities
SBA loan programs are generally intended to encourage longer 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:
twentyfive 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. Shortterm loans are also available
through the SBA to help small businesses meet their short term and cyclical
working capital needs.
Types of Business Loans
Terms of loans may vary from lender to lender, but there are two basic
types of loans: shortterm and longterm. Generally, a shortterm
loan has a maturity of up to one year. These include workingcapital
loans, accountsreceivable loans and lines of credit. Longterm
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. Longterm loans are used for major business expenses such
as purchasing real estate and facilities, construction, durable equipment,
furniture and fixtures, vehicles, etc.
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 would be willing to pledge as security for the loan.
How Your Loan Request Will Be Reviewed
When reviewing a loan request, the lender is primarily concerned about
repayment. To help determine this ability, 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 help them 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? (Nobody will finance 100% of your business)
- Do you have a sound record of creditworthiness 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?
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.
SBA Regional Offices
http://www.sba.gov/index.html
