How To Raise Money For Your Business
One key to a successful business
start-up 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. 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.
Finding the Money You Need
There are several sources to
consider when looking for financing. It
is important to explore all of your options
before making a decision.
Personal savings:
Most new businesses are started with the primary
source of capital coming from savings and other
forms of personal resources.
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, may 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.
Borrowing Money
Banks make money by lending
money. However, the inexperience of small
business owners in financial matters often prompts
many banks to deny loan requests. You
must know exactly how much money you need, why
you need it and how you can pay it back.
You must be able to convince your lender that
you are a good credit risk. Requesting
a loan when you are not properly prepared sends
a signal to your lender. That message is ...
"High Risk!"
Seek assistance from the Small Business
Development Center before you visit a
bank.
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 good
loan proposal will contain the following key
elements:
- General Information
- Business name, names of principals,
social security number for each principal,
and the business address.
- Purpose of the loan: State exactly
what the loan will be used for and why
it is needed.
- Amount required: Request the
exact amount you need to achieve your
purpose.
- Business Description
- History and nature of business:
Give details of your business's age, number
of employees and current business assets.
- Ownership structure: Provide
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.
- Financial Information
- Financial statements: Provide
balance sheets and income statements for
the past three years. If you are
just starting out, provide a projected
cash flow and income statement.
- Personal financial statement:
Prepare a personal financial statement
on yourself and other principal owners
of the business.
- Collateral: List collateral you
would be willing to pledge as security
for the loan.
Short-Term Loans
Short-term loans are paid back
in less than one year. Types of short-term
loans are:
- Working-capital loans;
- Accounts-receivable loans; and
- Lines of credit.
Long-Term Loans
Long-term loans have maturities
greater than one year, but usually less than
seven years. Real estate and equipment
loans, however, can go up to 25 years. Long-term
loans are used for major business expansions,
purchases of real property, acquisitions and,
in some instances, start-up costs. Types
of long-term loans include:
- Equipment;
- Commercial mortgages;
- Furniture and fixtures; and
- Vehicles.
How Your Loan Will Be Reviewed
When reviewing a loan request,
the bank official 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% to 50% of the loan you are requesting?
(Remember, a lender or investor will not finance
100 percent of your business.)
- Do you have a sound record of credit
worthiness 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 monthly payments
on the amount of the loan request?
To be successful in obtaining a loan, you must
be prepared and organized.
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