4 Ways To Secure Financing
As a small business owner, the task of finding enough money to operate and grow your business can be daunting as there are numerous financing options available. It is important to acquaint yourself with all of the options so you can best determine which suits your needs and how to finalize the deal. Here are some of the most common lenders:
- Angel investors and venture capitalists: Angel investors are generally willing to take more risks than banks and tend to invest for longer periods of time. Most often, the maximum amount they will invest is $1 million. Venture capitalists, however, usually invest more but require tougher investment criteria and look for high-growth businesses with the greatest profit potential. Typically, venture capitalists invest with the goal to cash out in three to five years, so most aren’t interested in very young businesses. They also usually require a piece of your company and a seat on the board of directors - diminishing the level of control you have over your business.
- Commercial bank loans: These loans are preferable because they do not require you to surrender any equity or company control. However, repaying these loans can be a strain on younger companies with limited cash flow. Many new companies will not be able to get financing from a commercial bank because of a lack of operating history and substantial collateral, but businesses seeking $100,000 or less may qualify for unsecured loans based upon the owner’s personal credit history or assets.
- Small Business Administration loans: SBA loan guarantees make a significant difference when applying for a commercial loan. The federal government does not provide the loan, it sets guidelines for loans that are made by lenders, community development organizations and other lending institutions that are partnered with the Small Business Administration. To qualify, businesses must demonstrate an inability to qualify for conventional financing with reasonable repayment terms and prove they have enough cash flow to repay the loan. The government is essentially vouching for the business, guaranteeing to the lender that the loan will be repaid.
- Home-equity loans: These are an attractive alternative to other loans because they typically offer the lowest interest rates available. However, you must carefully consider all the potential ramifications of risking your home to fund your business. A home equity loan provides a one-time lump sum of cash at a fixed interest rate and payments. There are also home equity lines of credit, which are more like credit cards. Lines of credit provide a fluctuating balance with interest due on the oustanding balance. The most important criteria for securing the financing for your business needs are: good personal credit history, good business history and a thorough business plan that demonstrates the feasibility of your operating model. In short, a strong business plan must provide enough detail to answer any questions a lender might ask, which will in turn increase the probability of getting a loan.
When creating your business plan, state the amount of money you’re looking to obtain and explain how you intend to use it to help your business. Be prepared to offer details about how each penny will be use – such as whether it is to fund operations or purchase new equipment. Next, state when you’ll repay the loan. You must be able to convince the lenderthrough financial statements and cash flow projection that you’ll be able to repay the loan.
Finally, address what will happen if you don’t get the loan. Lenders want to see persistence and a deep commitment to your venture. Let them know that you plan to approach as many lenders as possible to secure the funding necessary to grow your business.
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