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Small
Business Money Guide
Financing
Your Business
Financing
is frequently difficult for the small business to obtain, and
especially so for start up businesses. An understanding of how
bank lending works, how to apply, and what other alternatives
are available may lead your search to a successful conclusion.
Financing is a vital consideration in any business venture.
Lack of capital is a major cause of business failure. You
must know not only how much money you need to start the project
but how much working capital will be needed to carry you through
the first few difficult months of operation. Plus, you will need to find sources of financing that meet
the needs of your particular business at terms you can afford.
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11 Tips on Borrowing Money
1.
It
is very difficult to borrow the funds to start a new business.
Failure rates are very high. Since
over 80% of all small businesses are gone in 5
years, the odds are against any business being
around long enough to repay a typical 5-year loan.
2.
A bank will require you to personally guarantee the
loan. This is true no matter how the business
is organized. Being incorporated makes no
difference. The bank will also want collateral. They will
ask for yow house, and they will take it if things
go wrong. So please be very careful.
3.
You are going to have to put some money into the
business. A conventional bank loan will require
anywhere from 20 - 50%, depending on how risky the
business is perceived to be. There are loan
programs that require less under certain
circumstances.
4.
You will need excellent credit. If you have had problems
in the past, be prepared to explain them.
Credit problems due to some one time event, like an accident
that kept you out of work, might not
count against you. Whatever you do be up front with your bank.
They will find out about it anyway.
5.
The process is not quick. If you must have the money to
open by a certain date, make your loan
application as far in advance as possible. Allow several months
at east.
6.
Borrow enough money. You are not doing anyone any favors
if you just borrow enough to get in
trouble. Do not assume that the bank will loan you more money if
you need it. It is not the
banker’s job to determine if the loan amount and the business
plan are accurate.
7.
Do your homework. Nothing sours a relationship with a
banker more then an applicant who hasn’t
made an effort to prepare a decent business plan. Why should
they waste their time on you if you
won’t put some time into this business? Plus, it is likely
that the person with whom you are
dealing will have to present your plan to someone else, like a
loan committee. If your plan is not
complete enough to sell itself, your chances of approval are
slim. This book contains a fairly
detailed business plan outline which lists of lots of supporting
documents that you may need. The
SBDC’s How to Start a Business book contains a short business
plan example that may give you
some ideas. The SBDC also gives seminars on financing and
business plan preparation and our
counselors are available to help you through the business
planning process.
8.
Learn from your mistakes. If you are rejected by the
first bank you contact, try to find out why.
You may be able to fix the problem, or add more information to
your plan to ease another bankers
concerns on the subject. You may even have to put the
application on the shelf for awhile if the
problem will take time to correct.
9.
There is no such thing as a grant. We have never heard
about anyone -anywhere - who got free
money from the government to open any type of business.
10.
Not all businesses are created equal; some are easier to
finance than others. Buying an existing
business is a whole different world. If the current earnings of
the business are sufficient to pay the
loan, you have a much better chance of securing financing than
if you started the same business
from scratch. Many sellers will hold some of the financing,
which means that they act as the bark
and you make payments to them directly. All of
this reduces the bank’s risk, and increases your
chances of getting the
loan. Keep in mind that seller financing opens up some new
issues like:
will the seller subordinate his financing to the bank? Has
he/she inflated the price to cover this
risk? Any business sale, particularly one with this added
wrinkle, requires the review or an
independent attorney and very Likely an accountant. Franchises
are also typically easier to
finance, but have their own peculiarities.
11.
The amount you need makes a difference on where and how
you should apply. Many banks will
not process an SBA loan for less than $25,000 others $50,000.
Other programs will gladly loan
$5,000 or even $500. And not surprisingly, the amount of
paperwork usually increases with the
size of the loan. Check the Loan Source Guide In this book for
ideas.
Types
of Capital
Start-up capital
Start-up capital is the money you need to
spend before the business opens. The amount varies widely
depending on the type of business and typically includes any or all of the following:
1. Seed
money - for research and planning
2. Security deposits on a lease
3. Any
construction, renovations, signs needed at business location
4.
Equipment - the tools of the trade, office equipment,
etc.
5.
Inventory
6.
Labor - hiring and training staff
in advance of opening
7. Legal and
accounting fees
8.
Deposits for phone, utilities, insurance
Working
capital
Working capital is the money needed for the
day-to—day expenses of the business. You must have enough
working capital available to pay all your bills until the
business becomes profitable enough to support itself. In some
businesses this is several months, but in others it can be much
longer. Typical operating expenses include:
1.
Taxes
2.
Payroll - wages, social security, unemployment taxes
3.
Utilities
Utilizing your assets and rights.
Customer and employee financing
Supplier
financing options
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Use increased buying to obtain discounts
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Explore the option of direct loans
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Assume accounts payable arid negotiate terms
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Involve suppliers in your business operation
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Develop prepay options
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Expand credit availability from suppliers
Seller
financing options
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Lease the
business
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Use balloon financing options
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Lease the hard assets instead of purchasing
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Reduce inventory
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Entice seller with perks
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Establish a rapport with the seller
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Consider utIlizing the seller as an employee in
exchange for certain guaranteeS. i.e. Intangibles
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Negotiate the holding of your escrow check
Loan
Source Guide
Financing a small business is a difficult
undertaking. But it is possible. First, contact your banker. He
or she will explain your banks available loan programs and help
you determine whether or not they will work for you. If
conventional bank lending does not seem feasible for you,
consider the loan programs
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