In addition to drive, ambition and a great deal of planning, starting and expanding a small business generally requires capital. Capital may come from family, friends, lenders or others. This Financial Guide provides an overview of how to get the capital you need to start or grow your business.
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One key to successful business start-up and expansion is your ability to obtain and secure appropriate financing. Raising capital is one of the most basic of all business activities. But as many new entrepreneurs quickly discover, raising capital may not be easy. In fact, it can be a complex and frustrating process and professional guidance should be considered, especially with regard to financial information needed for the loan proposal.
This Financial Guide focuses on ways a small business can raise money and explains how to prepare a loan proposal.
Finding Sources of Money
There are several sources to consider when looking for financing. It is important to explore all of your options before making a decision. These include:
Personal Savings
The primary source of capital for most new businesses comes from savings and other forms of personal resources. While credit cards are often used to finance business needs, there may be better options available, even for very small loans.
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, will 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
It is often said that small business people have a difficult time borrowing money, but this is not necessarily true. Banks make money by lending money; however, the inexperience of many small business owners in financial matters often prompts banks to deny loan requests.
Requesting a loan when you are not properly prepared sends a signal to your lender. That message is: "High Risk!" To be successful in obtaining a loan, you must be prepared and organized. You must know exactly how much money you need, why you need it, and how you will pay it back. You must be able to convince your lender that you are a good credit risk.
Key Review Factors
The bank official who reviews the loan request is focused on repayment. Most loan officers request a copy of your business credit report to determine your ability to repay. The lending officer will consider the following issues while using the information you provided and the credit report:
- Have you invested at least 25% or 50% of savings or personal equity into the business for the loan you are requesting?
- Do your work history, your credit report and letters of recommendation show a healthy record of credit worthiness?
- Do you have the training and experience necessary to operate a successful business?
- Do your loan proposal and business plan document your knowledge of and dedication to the success of the business?
- Is the cash flow of the business sufficient to make the monthly payments on the requested loan?
Short-term Loans
A short-term loan generally has a maturity date of one year. These include:
- Working capital loans
- Accounts receivable loans
- Lines of credit
Long-term Loans
Long-term loans generally mature between one and seven years. Real estate and equipment loans are also considered long-term loans but may have a maturity date of up to 25 years. Used for:
- Purchasing real estate and facilities
- Construction
- Durable equipment
- Furniture and fixtures
- Vehicles
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.
General Information
- Business name, names of principals, social security number for each principal, and the business address
- Purpose of the loan: exactly what the loan will be used for and why it is needed
- Amount required: the exact amount you need to achieve your purpose
Business Description
- History and nature of the business: details of what kind of business it is, its age, number of employees and current business assets
- Ownership structure: 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
- Profile your customers and explain how your business can satisfy their needs
Financial Information
- Financial statements: balance sheets and income statements for the past three years
- If you are just starting out, provide projected balance sheets and income statements
- Personal financial statements on yourself and other principal owners of the business
- Collateral you would be willing to pledge as security for the loan
How Your Loan Request 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:
Key Review Questions
- Have you invested savings or personal equity in your business totaling at least 25 to 50 percent of the loan you are requesting?
- Do you have a sound record of credit-worthiness as indicated by your credit report, work history and letters of recommendation?
- 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 the monthly payments on the amount of the loan request?
SBA Programs
The SBA offers a variety of financing options for small businesses. The SBA's assistance usually is in the form of loan guarantees; i.e., it guarantees loans made by banks and other private lenders to small business clients. Generally, the SBA can guarantee up to $3.75 million or 75 percent of the total loan value. The average size of an SBA-guaranteed loan is $368,737.
Whether you are looking for a long-term loan for machinery and equipment, a general working capital loan, a revolving line of credit, or a "microloan," the SBA has a financing program to fit your needs.
7(a) Loan Guaranty Program
The SBA's primary loan program. Features include:
- Maximum guarantee: 85% on loans up to $150,000
- Maximum guarantee: 75% on loans over $150,000
- Maximum exposure: $3.75 million
- No balloon payments or prepayment penalties
- Flexible repayment terms
Microloan Program
Provides small loans up to $50,000. Features include:
- Average loan size: $13,000
- Can be used for working capital, inventory, equipment
- Cannot be used to pay existing debts
- Cannot be used to purchase real estate
- Personal guarantees required
SBA Express Loan
Accelerated processing with 36-hour turnaround. Features include:
- Maximum loan amount: $350,000
- Maximum guarantee: 50%
- Fast processing: 36 hours
- Lender approval process
- Same uses as 7(a) program
504 Loan Program
Long-term, fixed-rate financing for major fixed assets. Features include:
- Maximum SBA portion: $4-5 million
- 40% of project cost (SBA-backed)
- 10 or 20 year terms only
- Must create/retain jobs
- For real estate, equipment, construction
Disaster Assistance Loans
Low-interest loans for businesses affected by declared disasters. Types include:
- Physical Damage Loans: Up to $2 million for repair/replacement of damaged assets
- Economic Injury Loans: Up to $2 million for operating expenses during recovery
- Military Reservists Loans: Up to $2 million for businesses affected by employee deployment
- Mitigation Assistance: Up to 20% increase for disaster-resistant improvements
Government and Non-Profit Agencies
U.S. Small Business Administration
The SBA has offices located throughout the United States. For the one nearest you look under "U.S. Government" in your telephone directory, call the SBA Answer Desk at (800) 827-5722, or visit the SBA website for a list of SBA District Offices.
Contact Information:
- Phone: (800) 827-5722
- Website: sba.gov
- Local offices available nationwide
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