Financing Tips for Small Biz Entrepreneurs
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From start-ups to 20 year old companies, I am asked everyday to help people find business financing for their companies. The answer is usually a function of the type of business, the time in business, the financial status of owners/business and what is needed to be accomplished with the money. I would like to lay out some basic guidelines and considerations when funding is needed. You will see that time in business has a big impact.
Pre-start-ups and Start-ups:
Getting money from an institution, such as a bank, at a very early stage is a nearly impossible task. Some types of businesses may qualify for SBA loans or even government grants (you do not have to pay these back), especially if they are minority/women owned. For these situations they are a possible source of seed funding.
Grants have tough approval criteria and often will top out at around $50,000. Check with your state government or a federal government website like grants.gov to see if you qualify. There are usually very stringent rules to qualify and the process can get lengthy. A third party lender may be a more accessible solution than a traditional bank or grant program but you will be required to put up significant personal collateral in either case. Equity in real estate is usually what the lender desires in this situation.
Without a doubt, you should have a business plan in place for yourself. Your written plan will also prove useful in obtaining a loan or a government grant. Appearing organized and calculated is always desirable when seeking funding.
If by choice or necessity you may need to be prepared to bootstrap your way through the first few years. This means possibly working from your home and having employees work out of virtual offices if possible. Some of the biggest companies out there like Hewlett-Packard and Apple started this way. With the technological world we live in, many types of businesses can work like this forever and nobody would know it.
Bootstrapping will also entail self-financing through savings, home equity and/or credit cards. Although they may be necessary, be very careful with all of these avenues. If equipment is an issue, a good credit score and collateral will get some sort of financing even for a start-up.
For those with especially sexy business plans, such as something in the technology, health science or environmental sectors, it is possible to get in front of Angel investors, VC’s and Universities to obtain seed money without a working company. This is very rare but with the right concept and management team already in place, a solid plan can get funded.
Don’t forget that the fastest place to find funding, besides your own money, is family, friends and vendors to your company. Just be careful in laying out the terms of the loans and credit to stay in control of the company and use of the advance or funding. Family and friends can be very difficult to deal with as partners or lenders.
Businesses with 2+ years in service:
After 2 to 3 years in business, you now have a shot at getting institutionally financed. Again, a business plan is a must as well as a solid personal credit history. As long as you are a legal business entity, you will see an influx of company credit card and loan opportunities. Establishing a line of credit with your bank or a reasonable rate credit card as soon as possible is a good idea.
It is always easier to get money when you don’t need it, so get it when you can in the form of credit. This way you don’t pay for anything you don’t use and it will be there when you need it. The highest credit limit usually available that is based solely on the company financials and your credit score, with no collateral, is $100,000.
At this point taking losses on your books for tax purposes should be reversed unless you feel you own a company that will never need outside money. I run up against people on a regular basis that need a loan or a line for whatever reason and they are doing ok or even very well but they can’t prove it to a bank. Your books backed up by your tax records are your only proof, so make good business decisions if you have a company that will need any type of financing including equipment leasing.
By the way, showing a loss or even a small profit trend will make a company very difficult to sell, with the possible exception of a cash-type business, such as a retail establishment.
Financial institutions are going to look at your personal credit, company and personal collateral, profit & loss, balance sheet and debt-to-equity ratios to determine if you can make your payment on a regular basis and cover it if something goes wrong. Be prepared to say “yes” if they want your house as collateral or you will not get much consideration.
If you aren’t willing to put up personal property it is a red flag. That says you are not confident in your ability to pay back the loan and therefore the lender will have no confidence either.
If you want equity funding with investors, the books should be clean too and the management team needs to be top notch. You should also be willing to lose a significant portion of the company shares to these investors and possibly lose a lot of operational control.
Parting points:
No matter how long you have been around, rest assured that you will be required to sign personally for any financing. You will have to personally guarantee money for you or your company. In rare cases, there are avenues around this requirement, but they come with a cost.
When you have the need for money, do your homework as to how much you really need and have all of your reasons for needing the money lined up. Just throwing out a number to a lender puts up the first red flag that you are not a good business person and may not use the money wisely or pay it back.
Also keep in mind that many institutions will require that some monies be used to pay off other debts to keep your ratios within limits and they will require that you use them as your primary bank. When other debts need to be paid, you should know that the lenders will pay them off for you and give you the remaining money in order to protect their interests in the deal.
Again, do your homework on why you need the money and how much you need. No lender is going to give you a large sum of money and let you pull a fast one on how it is used. So don’t even think you can try something like getting a debt consolidation loan and then using it to buy property. It won’t happen and it is fraud.
Keep in mind that a good relationship with your business banker is a must for any business owner. That relationship can make the difference in rules being bent or deficiencies being overlooked and it will avoid the hassle of changing banks because you had to go elsewhere to get a loan.
A relationship with other leasing and financing brokers is also important since they hold the key to many avenues of financing. They have established relationships with lenders and can offer funding vehicles you may not be familiar with.
Financing Tips for Small Biz Entrepreneurs - To learn more about this author, visit George J Sierchio's Website.
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