FINANCING YOUR BUSINESS
Which Funding Option Is Best For You
There's no shortage of options if you're looking for money to start a business. Startup financing ranges from news-worthy venture capital rounds to credit cards, grants, and small business loans.
All entrepreneurs need to raise capital at some point -- whether to get their business up and running or accelerate growth.
But, every lending choice comes with advantages and disadvantages. Some have long repayment terms and others require you to give partial ownership to investors.
In this section, we will look at some of the many financing options available to you.
OWNER'S EQUITY INVESTMENT
As a rule of thumb, 25 to 30 percent of the business’ capital needs should be funded by its owner(s). This can come from savings, cashing in investments or the cash surrender value of an insurance policy.
If you don’t have adequate capital yourself, consider taking on a business partner who can put money into your startup.
FRIENDS AND FAMILY
This can be in the form of debt (a loan) or equity (giving the friend or family member ownership in the business in return for their investment).
If you pay off the balance in full every month, credit cards can work, but if you don’t, this can become expensive very quickly.
SALE OF CAPITAL STOCK
Depending on the legal form of your business, you may be able to raise capital by selling stock. Be aware this means giving up some ownership.
For most for-profit businesses, grants are not available. If you are starting a nonprofit organization, however, grants may be an option.
SBA GUARANTEED LOANS
These loans are made by banks, but a percentage of the loan is guaranteed by the Small Business Administration, making banks more willing to take a risk on your business.
Angels are individual investors, often former entrepreneurs, who invest in promising companies. They may form angel groups and invest together.
Also known as crowd financing and crowd sourced capital, crowd funding is an alternative method for raising financing for a business idea that gives business owners access to a broad swath of potentially interested investors via the Internet.
When reviewing your loan application, lenders look for good credit, a feasible business plan, adequate owner equity and sufficient collateral.
Perhaps most important, they look for management expertise and commitment. What real world experience do you and your key partners or employees have in managing this type of business?
Here is what you’ll need for a bank loan application:
Cover letter of introduction.
Summary of financial needs.
Business financial statements (3 years).
Business tax returns (3 years).
Projected cash flow statement (12 months).
Collateral (both business and personal).
Personal tax returns (3 years).
Personal financial statements.
The lender will also ask:
Are there any legal claims, liens or judgments against you or your business?
Are any assets pledged?
Are your tax returns and payments up to date?
Do you have any life insurance? If so, what is the face value or the cash value?
What are your monthly household income and expenses?
THE SIX Cs OF CREDIT
This includes trustworthiness, personal and business credit history, integrity, quality of references, experience in the business, etc.
This includes the money you have personally invested and your ability to save money and accumulate growth in owner’s equity.
This includes terms of the loan, local economic climate of industry, and the local economic climate of business
This includes the ability to repay the amount borrowed, how soon you can generate positive cash flow, when you will show a profit, etc.
This includes a secondary source of repayment, third-party guarantee, tangible assets, property, equipment, inventory, etc.
This includes where the money to repay the business debt will come from and how the loan proceeds will be used.