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Financing - Entrepreneur's Toolkit
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Banks, Credit Unions and the SBA
The financing of a small business is the greatest obstacle for an entrepreneur when starting a new business. Developing a sound strategy for obtaining the proper type and amount of financing is crucial for the long-term success of any business opportunity. Raising capital is the most basic of all business activities.
In the early stages of starting your business, you may need to obtain financing for the basics necessary just to open the doors. These include:
Purchase a Business
You may need to acquire the capital to purchase a new building or an existing business.
Start-up and New Growth Financing
These costs can include professional fees, inventory, equipment, deposits, marketing materials, and working capital.
Equipment Acquisition
Part of operating a new business is the purchase of equipment -- whether it is kitchen appliances for a restaurant or mowing equipment for a lawn service. Many commercial banks provide loans for this type of financing.
There are several sources to consider when looking for financing. It is important to explore all of your options before making a decision.
Your savings and your family’s savings are viable sources of funds and show future creditors that you are willing to personally stand behind your business. This type of faith is what banks and other creditors like to see before lending money to a small business operation.
An advantage to financing a business through personal or family savings is that it is less costly than bank financing. Reducing risk and expenses early in the life of a business are two factors that will help insure long-term success. For these reasons, you should give this financing option every consideration.
Banks, Credit Unions & the SBA
The most common sources of funding, banks and credit unions will approve a loan if you can demonstrate that your business idea is sound and that you have good credit, good character, adequate collateral, and the experience necessary to succeed.
It is often said that entrepreneurs have a difficult time borrowing money. This is not necessarily true. Banks make their 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 red flag to the lender that you are 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.
Loan terms vary from lender to lender, but there are two basic types of loans: short term and long term. Generally, a short-term loan has a maturity of up to one year. These include working-capital loans, accounts-receivable loans and lines of credit. Long-term loans have maturities greater than one year but usually less than seven years. Real estate and equipment loans may have maturities of up to 25 years. Long-term loans are used for major business expenses such as purchasing real estate and buildings, construction, furniture, fixtures, and vehicles, etc.
Virtually every small business loan through a bank is a secured loan. This simply means the business, or the business owner, has pledged assets as collateral for the loan in case the business is unable to repay the debt. An unsecured loan means that no collateral has been pledged.
Approval of your loan request depends on how well you present yourself, your business, and your financial needs to the lender. Remember that they are in the business of making loans, and they must know you will repay. This is where your business plan comes into play. Your business plan and loan proposal plays a very important role in the acquisition of your loan approval.
The business plan is an excellent tool to present to a banker when financing is needed. A good business plan tells the banker that you have put a great deal of thought and effort into this decision. A well presented business plan will let the banker know that he is dealing with a serious, well informed prospect which will give him more faith in you as an entrepreneur.
If a business plan is to be submitted to a bank, it is important to realize how a banker analyzes a business plan and what questions a banker will ask during this analysis. A banker's job is to assess the degree of risk in each proposed loan and to be satisfied that the loan can be repaid by the borrower. A banker does this by analyzing a number of things:
- Nature of the business
- Purpose of the loan
- Amount of the loan
- Ability to repay the loan
- Character/management skills of the business owner
- Adequate credit history
- Collateral
To convince a banker or potential investor of the merits of a loan request, you must present complete, well-organized information, which addresses these and other concerns. It is important to remember that the proper packaging of a loan proposal can be an important step in getting it approved.The Small Business Administration (SBA), established in 1953 by the Department of Commerce, is one of the best sources for small business loans. However, the SBA is authorized only to make loan guarantees through participating banks and other institutions.
To obtain information about the SBA loan programs, contact the state SBA office in Birmingham at (205) 290-7101 or www.sba.gov. Some of their other products include factor financing, and various lines of credit.
Barter Financing
Set up a mini-business within a similar, existing business space.
Landlord Financing
Negotiate to have your landlord pay for some needed upgrades, add that to the rent and amortize it over the life of your business’ lease; or negotiate free rent for a piece of the business.'
Use Other People’s Credit
If you can’t get sufficient credit, have an acquaintance’s business buy the inventory or supplies you need, then pay the total back according to the supplier’s term.
Contract Financing
If yours is a service business, negotiate to have customers prepay services through one-year, all-inclusive contracts.
Concession Sales
If you are a retailer, sublease part of your retail space to vendors whose products complement your own.
Staged Financing
Look for financing in stages, starting with enough to help you get your business up and running so that you can improve its profitability.
Trade Credit
Negotiate aggressive payment terms and credit from suppliers.
Leverage Future Commitments of Business
To increase your business’ credibility and likelihood of receiving financing from a bank, leverage future commitments of business as documented in letters from customers.
Buy a Business
There are many ways to finance the purchase of an existing business. It is not uncommon to be able to negotiate financing from the seller for as much as 80 percent of the purchase price, or to repay the purchase price incrementally from future cash flows. It is also easier to get bank financing for an existing business than for a start-up.
Set up a Home Office
Save on office space rent and get home business tax deductions.
Participate in an Incubation Program or Coworking Space
It takes the right mix of tools, networking and know-how for entrepreneurs to succeed in today's competitive environment. The Montgomery Chamber Business Resource Center offers valuable integrative services to prospective and new business owners. We work holistically with resource and commercial partners throughout our ecosystem.
- Business Development and Support
- Coworking
- Incubation
- Domestic Soft Landing
- Minority Business Development
- Training
- Mentoring
- Counseling
- Advocacy
- Recognition
- Financing Resources
- Business Support
- Resource Referrals
Contact the Chamber Business Resource Center at 334-832-4790 or visit montgomerychamber.com.