Q1. Where Are The General Places To Acquire Money For A Small Businesses?
Although the reason many people start a business is to gain economic independence, most new business owners put little effort into financial planning. They have the mistaken belief that it will not be difficult to raise additional money if their business is doing well and making a profit, or if their idea is a sound one. Whatever reason you have for getting into business, you will not stay in business long unless you make a profit or have an independent source of financing. Keep in mind, almost any new business will likely require more available money than was originally thought necessary. Most businesses soak up money in ways that were never dreamed of, and if you know and expect this from the beginning, you will be better off in the long run.
There are several ways to finance a business. Nearly 75% of small business owners obtain funds through FFA – Friends, Family and Assets. The remaining percentage utilize local lending options, which involve applying for loans. Whatever your financial situation, it is important to do your research thoroughly in order to take full advantage of the choices available. All businesses have risks and opportunities blended together, so wherever you go to find financing, present a good plan that demonstrates your, and the company’s, ability to reduce risk and profit from the opportunities.
Our discussion of money as it relates to the small business person focuses on the basics of borrowing, including the importance of the credit report and other items that must be considered when applying for a loan. We also address different financing sources including both loans and grants. This area wraps up with a brief look at the importance of a thorough business plan when applying for a loan. The business plan itself is looked at in its entirety in a separate section.
Q2. What Are The Options For Borrowing Money?
It is often said that small business owners have a difficult time borrowing money. 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.
The financial 4 Cs Credit rating, Capacity to repay, Capital and Collateral – listed below, include the criteria lenders will weigh heavily when considering you for a loan. Paying attention to these areas and ensuring they are in good shape will save you many headaches throughout the financing process.
The degree to which a borrower feels a moral obligation to pay his/her debts, measured by the credit and payment history.
Capacity to repay
A subjective determination made by a lender based upon an analysis of the borrower’s financial statements and other information.
The amount of capital in a business is equal to the total of capital from debt and equity. Lenders prefer low debt-to-asset and debt-to-worth ratios and high current ratios. These indicate financial stability.
An asset owned by the borrower, but promised to a lender against non-payment of the loan. The amount of collateral varies from lender to lender. The closer the collateral value is to the loan amount, the more comfortable the lender will be that the loan will be repaid
Your banker can assist you in preparing to apply for a loan. Additionally, he or she will have a good working knowledge of the economic and business picture in your area. They will be able to draw on their own experiences to provide you with information on area business trends and practical advice. Take great care in choosing a bank and a banker because a strong relationship with your banker from the beginning will prove to be a most valuable asset. Listed below are some dos and don’ts that can help strengthen the relationship with your bankers:
- Make an appointment and allocate enough time.
- Tell it straight, good and bad.
- Be prepared.
- Ask questions if you don’t understand something.
- Have a definite plan but be flexible.
- Keep your banker informed.
- Negotiate rates after presenting the loan request.
- Be impatient.
- Make promises you can’t keep.
- Ask “how much” you can borrow.
- Negotiate interest rates over the telephone.
- Spend money before you ask for it.
- Change banks solely for a better interest rate.
- Ever surprise your banker.
Q3. What Grants Are Available To Start A New Business?
You may have heard that there is free money out there to be given away to small business owners. This is not necessarily true-most small business owners obtain financing through loans and their own personal funds.
The difference between a grant and a loan:
A grant is essentially “free money” that does not have to be paid back. A loan is “borrowed” money that will need to be repaid, often with interest. The government’s grant program is very limited and described more below. The government’s loan program is through the Small Business Administration (SBA). SBA loans are guarantee loans made through local lenders. For more information on SBA loans see our other publications.
While grants provide money that does not have to be repaid, they often require the recipient to provide matching funds. For example, you may need to come up with $10,000 before the grantor will give an additional $10,000.
Eligibility Requirements of Grants
Grants all have different requirements for eligibility. However, the majority of grants are given by foundations to groups of people who are looking for money to support a good cause. Examples may be:
Scientific or medical research
Most grants do not fund the usual retail, service, or manufacturing business idea. The federal government has a business loans and grants search tool on the business.usa.gov website.