Financing your business
Get the capital your business needs.
Many businesses fail because of inadequate financing. When starting a new business,
it is essential that you have enough liquid capital to fund all of your needs.
It isn't enough to have sufficient financing for your business. You also need knowledge
and planning to manage it well. These qualities help entrepreneurs avoid common
mistakes like securing the wrong type of financing, miscalculating the amount required,
or underestimating the total cost of borrowing money.
You can obtain the best financing for your business when you anticipate your needs
rather than waiting to look for money under pressure. Here are some things to think about:
- Risk: All businesses carry risks, and the level of risk will
affectthe availability of financing alternatives as well as their total costs.
- Development stage: Your needs are usually most critical during
the transitional stages your business may experience.
- Purpose: When requesting additional capital, be very specific
about what it will be used for (to help dismiss any hesitation the lender may have).
- Industry status: Different industry conditions require different
approaches to money needs and sources. Businesses that are growing will often receive
more funding with better terms than those that are in decline.
- Seasonal or cyclical: Seasonal businesses usually need short
term financing. Loans for cyclical industries, such as construction, are intended to
support a business through depressed periods.
- Management team: Management is usually one of the most important
elements lenders look at.
- Business plan: If you don't have a
business plan, make writing one your first priority.
All capital sources will want to see yours for the start-up and growth of your business.
Not all money is the same
There are two types of financing: equity and debt financing. When looking for capital,
you should consider the relation between money you've borrowed and dollars you've
invested in your business. The more money owners have invested in their business,
the easier it is to attract financing. If your firm has a high ratio of equity to
debt (equity is greater than debt), you should probably seek debt financing. However,
if your company has a high proportion of debt to equity (debt is greater than equity),
experts advise that you should increase your ownership capital (equity investment)
for additional funds. That way your ownership won't be questioned.
Equity financing
Most small or growth-stage businesses use limited equity financing. Additional equity
often comes from non-professional investors such as friends, relatives, employees,
customers, or colleagues. However, the most common source of professional equity
funding comes from venture capitalists. These are institutional risk takers and
may be groups of wealthy individuals, government-assisted sources, or major financial
institutions. Most specialize in one or a few closely related industries.
The SBA
licenses investment companies and minority enterprise investment companies (MSBIs),
which offer equity financing.
Debt Financing
There are many traditional sources for debt financing; such as, banks, savings and
loans, commercial finance companies, and the U.S.
Small Business Administration (SBA) are the most common. Northwest Community uses the same experts and guidelines to help underwrite the borrowing of start-up capital for businesses who operate on a local level.
State and local governments have developed many programs in recent years to encourage
the growth of small businesses. Family members, friends, and former associates are
all potential sources, especially when capital requirements are smaller.
Many lenders prefer to offer short-term demand loans, seasonal lines of credit,
and single-purpose loans for machinery and equipment. They may be reluctant to offer
long-term loans to small firms.
The SBA guaranteed lending program encourages lenders to make long-term loans to
small firms by reducing their risk and leveraging the funds they have available.
The SBA's programs have been an integral part of the success stories of thousands
of firms nationally.
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