Start up business financing

Why start up business financing?

Financing is a necessary part of business. Whether your are planning to start up a new business or expand an existing one, you will need some form of financing to go forward.

Alot of people dream about owning their own business. Some actually go forward while others keep dreaming. What is the difference between those that start their own business and those that don't? What seperates a successful entrepreneur and
an unsuccessful entrepreneur?

In my experience, alot of the problems that entrepreneurs face is the lack of financing. In many cases, it seems to be whether the prospective business owner has access to sufficient funds to turn their business dreams into reality. I've seen potential businesses close their doors even before they've opened. Why? One of the problems is their failure to secure adequate financing. It is difficult to guess how many businesses never even start because of that same lack of funding.

Just trying to figure out where to attain start up business financing or expansion can be confusing, frustrating and time consuming. It is the intention of business plan software reviews to help clarify business financing. Hopefully, after you have read this article, you will have a better understanding of how to attain business financing.

How much money do you need to get your business going?

This depends on the type of business you're going to get into. All things being equal, it is possible to get a rough idea of how much funds you'll need in order to get your business off the ground. To get an estimate of how much money you'll need for your business, you'll have to consider a few key factors.

What kind of product do you have?

Are you going to produce a product or offer a service. Generally, a service business will require less cash because it will require less capital costs such as material and equipment costs. High capital businesses such as manufacturing will generally require more cash because it will need to factor in costs of goods such as raw materials, equipment needed and expenses incurred.

Equity

Do you have the necessary personal equity to put into the business. I'm not going to lie to you. Know one is going to put up a dime unless you have a certain amount of personal equity into the business, generally cash. This figure is around 15 to 25 percent of the total estimated cost of the project. The amount of equity required is also influenced by other credit factors, such as management experience and adequacy of collateral.

Labor

Who's going to be working? Do you intend to do most of the work or are you going to hire outside help. Generally, you will want to contribute your own time to the business as the main source of labor. This is one way to control labor costs. Later, when your business starts to take off, you can hire additional help in order to meet demand.

Can you sustain a living?

I'd say 90 to 95% of all businesses don't see a dime of profit for the first six months of operation (sometimes even longer). It is neccessary to estimate how much personal expenses you are going to incur for the first six months of operation and plan how much you need to meet these expenses.

Estimating expenses

The following list is a general list that most busiensses will incur. Beside each one, take an estimate of how much each will cost. Remember that your business might have more orless expenses.

Lease/rent
Leashold improvements
Maintenance
Office equipment
Office supplies
Utilities (phone, electricity, heat, water)
Business licenses
Book Keeping
Labor
Advertising/marketing
Warehouse or factory space rental
Machinery and equipment rental
Raw materials

Total

Once you have estimated the amount expenses for your business, you will need to break down the figure into financing portions. For example, if you have a total estimated project cost of $50,000, how are you going to break this figure down into financing. Let's say you have 25% of the $50,000 in equity ($12,500), that leaves $37,500 that still needs to be financed. Almost all businesses will need some form of outside financing.

I stongly suggest you do a month by month cash flow for the first year. If you don't know how to do a cash flow statement, try working with your banker or accountant. By doing a cash flow statement, you will realistically estimate the amount of cash you need to sustain your business.

Types of financing

There are basically two types of financing, debt and equity. Deciding on which route to take will depend on the following components:

-How much control of the business do you want to give up

-How much debt are you comfortable with as compared to equity (called leverage)

What is debt financing

Debt is basically a legal promise to pay someone back a certain amount of dollars plus interest. In exchange for having lent you the money, an investor will want to be paid interest. The main advantage of debt is that you still have control of your business. The downside is the obligation to make the monthly payments to the lender no matter what.

What is equity financing

An equity investor will add capital into your business for a percentage of ownership. Equity financing involves no direct obligation to repay any funds. It does, however, involve selling a partial interest in your company.

The main advantage of equity financing is that you don't have the monthly payment obligations. The downside is that you lose a certain amount of ownership of you company.

Sources of financing

The following list are examples of possible sources of financing.

Personal savings

Personal savings are probably the number one financing source that most businesses take when starting a new business. The great thing about personal equity is that you don't have to pay anyone back and you still maintain 100% control of the business. Most lenders require that a reasonable percentage of your own funds be invested in your business, as an indication that you will work hard to make the business a success. As stated earlier, know one is going to lend you a dime unless you have some personal equity in the business.

Friends and family

Friends and family can be an important source of financing for your business. The number one advantage to this type of financing is that your friends and family will be a lot more understanding of you than someone who doesn't know you. The greatest disadvantage is that it can put your relationship at risk if things get shaky or there is a isunderstanding. It's important to keep the arrangement formal. This way it's more professional and it will help keep the misunderstandings down to a minimum.

The investment can take the form of a direct loan or an equity investment. It will depend on how well they know you.

Debt Financing

Banks

Banks can be a little tricky when you are trying to attain commercial financing for your business. Each bank operates differently and policies will differ. Banks may be one of the first sources that come to mind when you begin searching for additional business capital. Certainly, they will meet your most basic condition: they have money available to lend.
However, it may be difficult for a new business to borrow from a bank since lenders usually prefer to lend to established businesses. Of course, not all banks look at it this way. I suggest you approach your bank and get to know the commercial banker. From a banking stand point, it gives them more confidence when they are dealing with someone they know.

Insurance Companies

Certain insurance companies will invest a portion of their unused income into businesses. If you borrow from an insurance company, you can expect terms and interest rates similar to those available from a commercial bank. Try talking to your insurance officer about the companies policy on commercial loans. You can also request information booklets from your insurance company.

Leasing Companies

These types of compaines will lease or rent businesses various types of equipment. By renting rather than buying the equipment your business will need, you will be able to avoid many capital expenditures associated with the purchase of equipment.

Capital venture companies

Capital venture companies are companies that will invest in your company for a percentage of ownhership. These companies will invest in your company if they see the possiblity of high and quick returns. In other words, they want to make the highest return in the shortest amount of time possible. In general, venture capital firms are most interested in investing in new technology and can typically supply large sums of money. It's important to note that venture capitalists are not passive investors. They will want to play a major role in the direction of your company.

These companies can be found on the interent. Simply type in venture capitalist.com and you will come to a huge database.

Types of Loans

Banks and other financial institutions can assist you by providing funds through personal or commercial credit. Examples of personal credit include automobile loans, credit cards, and home mortgages. Commercial credit includes business loans;

Here are some of the options:

Short-term loans are one of the most common types of business loans and are usually for less than one year. They can provide interim working capital for a business temporarily in need of cash, and are typically repaid in a lump sum when inventory or accounts receivable are converted into cash.

Intermediate-term loans are often used for a business start-up, the purchase of new equipment, expansion, or an increase in working capital. The maturity dates range from one to three years.

Long-term loans generally are made for major capital improvements, acquiring fixed assets, or business start-ups. The term of the loan runs for periods of three to five years and is usually based in part on the life of the asset financed. Repayment is usually made in monthly or quarterly installments.

A line of credit offers you the ability to borrow money repeatedly, up to your credit limit, without having to reapply. A line of credit is particularly important to businesses that experience seasonal fluctuations. The lender generally will perform a review once a year, at which time the borrower is asked to provide updated financial statements.

You might also want to check out the internet. The following company provides small business loans and their approval process is super fast:

SmallBusinessLoans.com

SmallBusinessLoans.com has been facilitating lending on the internet since 1997. During the past 4 years they have handled over $50 billion in loan requests from small business owners across the country who have taken advantage of their premier funding sources and the internet to get the money they need in a quick, efficient and secure manner.

Simply follow this link to Small Business Loans and fill out a short application. They will review your application and will respond to you in 48 hours.

America One Funding

America One Funding provides small business and personal loans. Their specialty product is an Unsecured Signature Loan that can be used for any purpose, business or personal with no collateral required. Please note that this is only for the residence of the United States.

Free Government Grants

A huge database of available govenment grants.

The Credit Application Process

Applying for commercial credit can be tedious. It calls for more documentation than you might initially have expected and certainly a lot more than when you apply for consumer credit. For lenders, extending credit to an entrepreneur usually means customizing the loan to suit the credit needs of that business. So don' be disheartened by the amount of paperwork needed to accompany the application. Instead, be prepared!

Among the best assets you can bring to the lender is a well thought-out and documented business proposal. You need to clearly state the purpose of the loan (will the money be used for temporary working capital, buying equipment, or expanding facilities); the amount of funds needed and for how long; and a repayment schedule. Your business proposal should include the following information:

1) business description that tells the nature of the business, describes the product and its market, identifies its customers and competition.

2) personal profile that outlines the background and experience of each of the principals in a resume.

3) proposal that states the type of loan requested and its purpose.

4) business plan that outlines your corporate strategy for the next three to five years; it will aid you and the lender in determining whether the business will generate the cash flow needed to repay the loan.

5) repayment plan that tells how you propose to repay the loan or outlines a repayment schedule. The lender will be expecting you to repay the borrowed funds from the profits produced by the business. As a contingency, you might need to develop a plan on how you would repay the loan if the profits alone turned out to be inadequate.

6) supporting documentation will include copies of pertinent papers that support the information contained in your loan proposal-for example, a lease, certificate of incorporation, partnership agreement, letters of reference, contracts, invoices or vendor quotes.

7) collateral that you will use to secure the payment of the loan. Collateral can include business and personal assets such as inventory, equipment, and accounts receivable or real estate, stocks, bonds, and automobiles.

8) financial statements, both personal and for the business. The business financial statement should be provided for the last three to five years of operation including a year-to-date interim report. It should contain a balance sheet showing business assets and liabilities, and a profit-and-loss statement showing revenues and expenses. The lender uses this information to calculate a debt-to-worth ratio for the business. Be prepared to provide copies of tax returns for the business for this same period.

The personal financial statement should list your assets and your liabilities. Identify the names in which title to each asset is held and its fair market value. You should be prepared to provide copies of your personal tax returns. You may be asked for a list of credit references. Lenders will check your personal as well as your business credit rating.

Lenders will carefully examine your financial statements and business projections. As a borrower, you must be fully prepared to answer questions about them.

9) personal guarantees of the owners or other principals usually are required, even from an established business. The lender also may request another party's guarantee such as a cosigner or a surety, or may request a government guarantee from the U.S. Small Business Administration or other government agency.

In addition to the personal guarantee that you give, under the Equal Credit Opportunity Act the lender is allowed to require another person's guarantee should your application fail to meet the lender's standards of creditworthiness. If all or most of the assets listed on your personal financial statement are owned jointly with your spouse, or with someone else, the lender is likely to require such a guarantee. But the lender may not require that your spouse be the guarantor.

In the case of secured credit, the lender is allowed to obtain a spouse's or other co-owner's signature on certain documents when the applicant offers, as security for the loan, property that the two own jointly. In this case, the spouse or other co-owner may be asked to sign documents---such as a mortgage or other security agreement that would be necessary under applicable state law to make the property available to satisfy the debt.

Before you approach a lender, you might want to seek the advice of another, more experienced "set of eyes" to review your business proposal, particularly if you are a first-time borrower. By doing so, you'd be getting the loan package in shape to make it easier for the lender to reach a favorable credit decision. There are some business support groups whose members could counsel you on how your package looks. A qualified counselor might even discover that you really don't need more money, and instead suggest better inventory control, improved marketing techniques, or other changes that could actually solve your growth problems.

What if I'm not approved?

Most lenders, banks especially, are conservative in granting business loans. Given the obligation to their stockholders and depositors, they need to be sure there's a good chance the loans they make will be repaid.

If your application for credit is not approved, find out the reasons why. Some of the reasons that lenders often give for denying a business loan include, for example, insufficient owner's equity in the business; lack of an established earnings record; a history of slow or past-due trade or loan payments; or insufficient collateral. Finding out the reasons may help you qualify the next time you apply. The lender will keep you informed about the status of your application. If you are considered a "small business" (when your business revenues are $1 million or less, or when you are applying to start up a business), a lender has 30 days to let you know, either orally or in writing, whether or not you get the loan. The 30-day period begins after the lender has received all of the information needed to evaluate your credit request. If your application is denied, the lender must give you either:

-a written statement of the reasons for denial, or

-a written notice telling you of your right to obtain the reasons in writing. This notice may be given to you during the application process or at the time of the denial.

The lender also will keep for one year the records relating to your application.

Different rules apply for larger businesses (those with more than $1 million in revenues). Within a reasonable period of time after getting all the necessary information on which to base a decision, the lender must decide and let you know whether or not you get the credit. Then you'll have 60 days in which to ask for a written statement of the reasons why you were denied credit; this is important to remember because the lender need not notify you of this right. The creditor will keep records of your application for at least 60 days after telling you of the credit decision. If within the 60 day period you request that records be kept longer, or ask for a written statement of the reasons for denial, records will be kept for one year.

Remember, keep on trying!

Good Luck,

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