Category: 
January 27, 2010
If there were only two reasons for a business to fail they would be poor financing and poor management or planning. You can’t over-emphasize the importance of financing your business. Financing the business is not a one time activity as some might think. It is necessary whenever the need arises such as when expanding, modernizing etc. At this stage you need to understand the importance of exercising extreme caution and plan the utilization of capital. A wrong decision here can haunt your for the life of your business.
Are You Sure You Want To Raise External Funds?
For start-ups, it’s understandable that you need to raise capital through loans. But what about expansions and upgrades? Make sure that external financing is an absolute must before you apply. It is critical that you organize your finances at transitional stages but only after you make sure that you can’t do it yourself, either permanently or for some time. Equally important are the criteria of risk, the cost of not financing and how well it contributes to specific and overall goals of the company.
FINANCING TYPES
Equity Financing: Equity financing involves selling off of your shares (mostly partially) in return for cash and giving away that portion of ownership and rights to profits. Equity financing can be sought from private investors or venture capitalists. This brings about proper capitalization opening access to debt financing. Equity finance doesn’t need to be returned like loans unless your partner wants to withdraw.
Debt Financing: Debt financing is loan financing against some kind of guarantee of repayment. The guarantee can be collateral, a personal guarantee or a promise. Lenders restrict the use of debt finance to inventory, equipment or real estate. You need to properly structure the debt and the rule of thumb for doing so is giving long term debt for fixed asset loans and short term for working capital. The reason is that fixed assets generate cash flow over their lifetimes and have the benefit of lower interest rates as opposed to working capital loans.
Sources of Finance:
You can choose finance sources depending on your circumstances and the amount required.
1. Family and Friends: Small and short-term working capital requirements can be financed quickly through your own resources or through family and friends. The benefit here is the absence of the interest component (mostly.) This method of raising finances is handy even in early stages of business. You should be mindful, though, that disputes over money are the main reason that close relationships turn sour.
2. US Small Business Administration: This is the most prominent source for debt financing. The SBA doesn’t lend money directly but organizes and guarantees loans through various lenders and sources under its umbrella. Local governments, banks, private lenders, etc. disburse loans immediately to businesses approved by the SBA. SBA loans are available for various business purposes and at the lowest interest rates available.
3. Venture capital: Raising venture capital is organizing financing through selling shares whose value equals the finance you require. Essentially this means selling a portion of the ownership and control rights. It is essential that a proper valuation of your business’s worth is made before the deal is done.
Financing a business shouldn’t be hard provided you have established your credentials as a good manager, have collateral/assets, a convincing cash flow statement, genuine need, a proven track record, good credit history and a robust plan. This should not just save your business from collapsing but also allows it to grow and succeed.
About Author
Tony Jacowski is a quality analyst for The MBA Journal. Aveta Solution’s Six Sigma Online offers online six sigma training and certification classes for lean six sigma, black belts, green belts, and yellow belts.
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You could try looking into financing from other companies, as opposed to banks and financial institutions. They would be the only ones willing to take a gamble on a business proposition, but even then, unless your plan is absolute gold, it can be tough to find an interested party.
Speak with every company you plan on looking into for loans, and speak with them personally. Obviously, terrible credit could affect decisions in certain ways, and your credit is definitely going to be checked. But, your loan suppliers will be more interested in your idea for a business, and the potential it has to make THEM money, too.
There are quite a few grants and loan books available to the public where you can research many of the terms and conditions for company loans. Interestingly enough, a halfway decent one is: Matthew Lesko's book – you know – that little annoying guy who wears the neon suits pocked marked with question marks. There are actually some really decent resources in his books, but there is also a bunch of junk, so just read it thoroughly.
You should be able to get a business off the ground, even with not-so-good credit. You'll need to offer some kind of collateral against the loan you're taking out, NOT including the real estate of the actual business – your house for example, and any other assets you may own, depending on the size of the loan. If anyone asks that you do this, be extremely wary – or be 100% positive that this company idea isn't going to eventually fall into Chapter 7 bankruptcy – where you could be forcefully required to sell all of your assets to pay off your creditors. It is a completely legal practice, and many people end up losing EVERYTHING when their business goes under. You have to remember this at all times,. because many fledgling businesses never make it past their first year. Starting a business is not easy, especially if you're wanting to build a brick & mortar establishment, so just weigh your options carefully.
So, to answer your question: it is possible to obtain small business financing even with questionable credit, but only if you look in the right places. Don't walk straight up to your bank or credit union asking for the loan, because they'll just look at your credit and laugh. Instead go to a popular bookstore like Barnes & Noble or Walden Books, and in the Business section you'll find plenty of books on companies that finance other companies. Buy one of those books and start doing your research. Don't settle on anything until you are satisfied with the terms being offered. Sorry for not quoting any good sources to try first, but you should really be the one who finds a financing company that is right for you.
SBA – The SBA provides short- and long-term loans to eligible, credit-worthy start-ups and existing small businesses that cannot obtain financing on reasonable terms through normal lending channels.
Note, however, that SBA does not provide direct loans. Rather, the agency provides guarantees to loans availed through SBA's partner lending institutions, which includes many community banks. The applicant must satisfy the lender's requirements before he or she can ask for a guaranty from the SBA, unless the borrower is deemed prequalified based on the person's character, credit, reliability and experience (prequalification is for loans $250,000 or less).
Read SBA's qualification requirements:
http://www.sba.gov/financing/preparation/requirements.html
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I'm confused. Are you talking about mutual funds, small business, credit unions, or commercial banks and/or their relationships?
I don't know who might be a good source of financing on this deal, but here's a source that may very well be able to point you in the right direction. And if you do decide to open this or any other business, they can provide a wealth of great information on how to do so.
Service Corps of Retired Executives (SCORE): A national organization sponsored by the Small Business Administration (SBA) of over 13,000 volunteer business executives who provide free counseling, workshops and seminars to prospective and existing small business people. There are 389 chapters nationwide. For more information, call them at 1-800-634-0245 or visit their web site at: http://www.score.org
A lot of credit unions I've talked to won't do business financing at all. The ones that do likely will have the same qualifying rules as the banks. Are you trying to buy/setup a business or business property? or both? Have you looked into an SBA (small business admin.) loan? They are very friendly to women and minorities. Otherwise your options are hard money or private lenders. Email me if you would like some names.
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I'd like to respond to Johnathon to this before I answer.
Just because a company needs a source of funding, that does NOT mean they are struggling financially with their current setup. It may mean however, that they wish to expand their services and need some financial backing.
Anyway, back to the question at hand. There are many sources of alternative funding for small business. They all vary, depending on who your clients are, but I will list a few with a description for each.
The first option, factoring, is a practice wherein one company purchases a debt or invoice from another company. It refers to the acquisition of accounts receivable, which are discounted in order to allow the buyer to make a profit upon collection of monies owed.
PO Funding covers the supplier expenses associated with a specific purchase order. It enables you to make sales that exceed your current financial capabilities and provides a solid platform for growth. When used properly, purchase order financing can help you grow your company by enabling you to accept larger orders.
A Merchant Cash Advance, otherwise known as credit-card-receivable
funding, is an increasingly popular solution for small businesses looking for a flexible form of business capital. As use of credit cards grows as a form of payment at a greater variety of businesses, more small business operators are able to tap into a previously unrecognized form of capital: their credit card receipts.
So, to sum it up. Your three options are Invoice Factoring, PO Funding, or Merchant Cash Advances.
Hope this helps
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