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.
Warning Signal:
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.
What Lenders Consider
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:
- 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, and 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. Long-term loans are used for major business expenses such as purchasing real estate and facilities, construction, durable equipment, furniture and fixtures, vehicles, etc.
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:
- Have you invested savings or personal equity in your business totaling at least 25 to 50 percent 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 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.
Impressive Statistics:
The SBA guaranteed more than 50,000 loans totaling $19.2 billion to America's small businesses in fiscal year 2014 that otherwise would not have had such access to capital. It also provides assistance to small businesses and aspiring entrepreneurs through its Small Business Development Centers located throughout the United States and its territories.
The 7(a) Loan Guaranty Program
The 7(a) Loan Guaranty Program is the SBA's primary loan program. The SBA reduces risk to lenders by guaranteeing major portions of loans made to small businesses. This enables the lenders to provide financing to small businesses when funding is otherwise unavailable on reasonable terms.
SBA Express Loan Program
The SBA Express Loan Program features an accelerated turnaround time of 36 hours for SBA review in response to an application. Capital is available to businesses seeking loans of up to $350,000 without requiring the lender to use the SBA process.
MicroLoan Program
The MicroLoan Program provides small loans up to $50,000. Under this program, the SBA makes funds available to nonprofit intermediaries; these, in turn, make the loans. The average loan size is $13,000.
CAPLines Program
The CAPLines Loan Program helps small businesses meet their short-term and cyclical working-capital needs. The maximum CAPLines loan is $5 million.
Export Working Capital Program
The Export Working Capital (EWCP) Loan provides advances for up to $5 million to fund export transactions from purchase order to collections. This loan has a low guaranty fee and quick processing time.
Disaster Assistance Loans
SBA provides low-interest Disaster Assistance Loans to businesses of all sizes, private non-profit organizations, homeowners, and renters. SBA disaster loans can be used to repair or replace items damaged or destroyed in a declared disaster.
Certified Development Company (504) Loan Program
The CDC/504 Loan Program provides growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings.
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.
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