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 take a 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 capitalist 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. Your credit history will also be under scrutiny. A good credit history will help you to get a loan.
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.
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 which lack sufficient collateral, by providing repayment guarantees ranging from 75-85% depending on the size of the loan.
b. The SBA LowDoc loan program: There is only one form to fill out for these loans and approval time is rapid (within 36 hours from when the SBA receives the applications. These loans are only for amounts up to $15,000 but they can be used for start-up businesses.
c. The SBA Express loan program: This is another quick-procedure loan guarantee program, but it covers loans up to $250,000. The SBA guarantees 50% of these loans, and interest rates in this program may be higher than in the other SBA programs
3. Venture Capitalists: These are typically firms that are seeking investment opportunities in companies with a high profit potential. Usually when you take money from a Venture Capitalist firm it means that you have to 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.
Prepare your proposal carefully, and approach the institutions or individuals that best match your needs and capacity.