Financing Your Business
One of the leading causes of business failure is insufficient start-up capital. Therefore, a crucial element for business success is adequate financing. Not only are funds required for start up, but also to cover initial operating losses and provide for growth.
As a general guide, one should have sufficient cash to cover at least one year's operating expenses, which includes the owner's salary and money to make regular loan payments. Almost all business operators hope their business will grow, yet some fail because, after a successful start, additional capital is not available to meet the increasing financial demands of an expanding business. It is crucial that the business plan contain a detailed analysis of all capital requirements.
Once you have determined the amount of capital required to both start and continue the business until it generates enough cash to sustain itself, it is time to find a source of money.
Sources of Funding:
Personal Assets
The best source of funding is your personal resources, such as savings accounts and other marketable securities and investments that are readily converted into cash. Even if you do not have sufficient personal funds to entirely finance the business, plan on using those funds, because most lenders require that you do this before they will commit to a loan. Remember, showing others you are willing to use your own funds indicates your confidence in your business and your willingness to take the risk.
Family and Friends
An excellent source of funding is your family and friends. Either can make a capital investment in the business in return for partial ownership or as a loan. Usually, family or friends will lend their money at a lower interest rate than a commercial lender and with mutually agreeable terms for repayment.
It is very important in your dealings with family and friends that you carefully review your business plan with them so that they understand all the risks involved. Family and friends should not be encouraged to invest in your business if they cannot afford to risk their funds.
It is recommended that a written agreement with the individual providing funds be prepared.
Banks
Banks are the most common source of borrowed capital. Historically, commercial banks have been the single largest source of loans to business. Today, however, both savings banks and savings and loan associations make business loans.
It is very important to establish a cordial working relationship with your banker. Pick a bank that makes loans to your particular type of business and one with which you feel comfortable. Your banker can be a valuable partner in helping to determine the right financing package for you.
A bank normally requires that first-time borrowers invest from 25 to 35 percent of their own money before the bank will consider a loan. For example, if the business plan shows a need for $100,000, the borrower would have to have $25,000 to $35,000 of his and her own money in order to obtain $65,000 to $75,000 from the bank. In the case of a restaurant, the bank may require the borrower to invest 50 percent of his or her own money.
Banks require that you have a good personal credit record and, in most cases, will require some form of collateral to secure the loan. Collateral can be in the form of assets used in the business or personal assets, including the unused equity in your home.
Loan and Finance Companies
These are companies that specialize in making personal loans for business purposes. Some of the larger companies make business loans as well as personal loans.
Suppliers
In order to encourage sale of their products, many suppliers provide retailers with shelving, display cases, refrigeration units and so on at very favorable terms. Caution should be used when financing assets through a supplier; be sure you understand any commitment you have to make regarding purchasing the supplier's product in the future.
Also available from many suppliers are extended payment terms, enabling you to sell the merchandise before having to pay for it. A supplier may offer goods on consignment.
Leasing Companies
An alternative to purchasing equipment with borrowed funds is to lease the equipment. Items commonly leased are office furniture, automobiles, trucks, computers and production machinery. The leasing company maintains ownership of the item, although sometimes agreements can be made by which you become the owner after a specified time period.
Leasing allows you to conserve initial capital and offers flexibility in acquiring the use of equipment for only a limited period of time.
Private Investors
Some investors specialize in making loans to businesses. In many cases, the investor(s) will require a partial ownership of the business. Care should be taken in dealing with private investors to see that your interests are properly protected. Investors can sometimes be found in classified advertisements.
The Loan Proposal
When you approach a lender or investor for the purpose of obtaining funds for your business, you must have the means of telling your story in a straightforward and convincing manner. The best way to do this is with a written loan proposal, presenting all the pertinent information in a logical format.
Although a well-done proposal requires a considerable amount of work, the effort is usually worthwhile. It indicates to a prospective lender or investor that you thoroughly understand your business and its financial demands. The proposal must be thorough, concise and neat. It may be submitted in longhand, but it is worth the money to have it typed. Cash flow charts may be submitted in writing.
The proposal should answer most of the questions that will be asked by a prospective lender and should present a convincing picture. Tell it like it is, being totally honest. Overstatements of facts and figures will not serve you well in the long run and will be challenged by an astute lender. If you cannot prepare this yourself, get help. It will pay off!
Exhibit bellow provides an outline of a typical loan proposal.
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Outline for a Loan Proposal
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I. Cover Page
A. Name, address and telephone number
B. Name and title of principal(s)
C. Amount of loan (investment) requested
D. Purpose of the loan (investment)
E. Repayment terms of the loan
II. Description and Summary of the Business
A. Length of time the business has been operating
B. The business's historical trend
C. The nature of the business What does it do?
D. What is unique about your product line or service?
E. What or who is your market?
F. The business's competition
G. The business's long-term growth plan
H. Trends in your industry
III. Management
A. Your management experience
B. Your management team
1. Table of organization
2. Brief resume of key individuals and their responsibilities
3. Current staff or work force level and future needs
4. Existing backup
C. Your accountant and attorney
IV. The Loan (Investment) Request
A. Justification of the loan
B. Details of the loan request
1. Amount needed
2. How the funds will be used
3. Collateral available for a loan and its value
4. Repayment terms of the loan
5. Ability to repay a loan
V. Financial Data
A. Financial statements
1. For an existing business, three years of historical and any interim statements
2. Balance sheets
3. Profit and loss or income statement
B. Projected cash flow analysis for at least the next 12 months, including loan (investment)
C. Sources and amounts of any other loans or investments to be put into the business
D. Personal financial statement
VI. Credit Information
A. Banks at which you maintain accounts
B. Banks at which you have borrowed money
C. Trade suppliers
D. Other creditors
VII. Miscellaneous
A. If incorporated, copy of articles of incorporation
B. If renting, copy of lease
C. Type and amount of business insurance coverage
D. Aging of accounts receivable
