How to finance 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.

Banks
Banks ... Banks are the primary financing vehicle, other than owner's savings, for small businesses.

Personal Loans
Personal loans are a great back-door alternative when seeking financing for a small business venture.

Friends and Relatives
You, like most of us, are probably reluctant to ask friends and relatives for money. But a lot of people do, at one stage or another, when they are running their own businesses.

Lease Financing
Leasing is a super financing alternative if you are seeking funding to obtain business equipment. Finance companies, banks and many firms that sell high-priced equipment, will lease to you.

Factoring
Factoring refers to a practice whereby you sell your receivables for a discount before they are due. Historically, factoring has been heavily used in some industries, such as the garment industry.

Venture Capital
Despite all of the attention venture capital firms get in the business press, they actually finance very few businesses. The better venture capital firms are deluged with proposals from budding entrepreneurs. But most of these entrepreneurial proposals are inappropriate to the goals of venture capitalists.

Going Public
Going public, that is, selling stock or debt to the general public, is an extremely complex and massive undertaking. 

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 60% 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 your 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 least.

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 than 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.

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 banker's 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 bank 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 of 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.