How To Finance Your Small Business


If you have a great business idea or plan, or you would like to
expand your existing business, don’t let a lack of funds stop
you in your tracks. There is a wide variety of financing
available for small businesses. Let’s take a look at the
financing opportunities that small business entrepreneurs can
take advantage of.

While the financing sources comprise diverse institutions, such
as banks, government sources, venture capitalist and “angel”
investors, it is useful to look at what all lenders, regardless
of category, want when they loan money or invest in a business
enterprise.

When you seek money for an already existing business, lenders
will be interested to know about the history of your business;
whether it has a track record of good management and good
performance. Lenders will be keen to know whether you have the
ability to repay a loan and will look at your present cash-flow
to see whether it is sufficient to enable you to meet your
current obligations as well as to take on extra debt.

Your credit history will also be under scrutiny. A good credit
history will help you to get a loan. If you have had problems in
the past, it is best to bring these to the attention of the
lender yourself and explain how you have turned the situation
around.

You can also bolster your chances of getting a loan by putting
up collateral. This reduces the risk for the bank in case you
default. And finally, if you can show that your own personal
money is invested in your enterprise then lenders will have more
confidence in the proposition.

Many small business loans are turned down due to poorly
presented proposals, inadequate collateral, insufficient cash
flow and a lack of management experience.

These are the general points that lenders and investors are
interested in, now let’s look at the main sources for small
business financing.

1. Traditional Lenders: Banks, credit unions, and finance
companies are the main source of loans to small businesses. Many
of these institutions have a small-business department and are
experienced in handling small-business loans. The most logical
place to start is with the institution which handles your
business and personal banking. You should do your best to get to
know the manager and personnel at the bank. So don’t try to save
time at the ATM! Being friendly with the bank staff will not
guarantee you a loan but it will make it easier for you to make
your loan presentation.

2. Government Sources, the Small Business Administration (SBA):
The programs of the SBA work in conjunction with the traditional
lenders, as they are mostly loan guarantee programs that reduce
the risk to lenders in case of default. Some of the popular SBA
programs are as follows

a. The 7(a) loan guarantee program: This program helps
businesses which lack sufficient collateral, by providing
repayment guarantees ranging from 75-85% depending on the size
of the loan.

b. The SBA LowDoc loan program: There is only one form to fill
out for these loans and approval time is rapid (within 36 hours
from when the SBA receives the applications. These loans are
only for amounts up to $15,000 but they can be used for start-up
businesses.

c. The SBAExpress loan program: This is another quick-procedure
loan guarantee program, but it covers loans up to $250,000. The
SBA guarantees 50% of these loans, and interest rates in this
program may be higher than in the other SBA programs

d. Microloans: These are loans for amounts up to $35,000 which
are made by non-profit community based organizations.

3. Venture Capitalists: These are typically firms that are
seeking investment opportunities in companies with a high profit
potential. Usually when you take money from a Venture Capitalist
firm it means that you have to give up some ownership and
control to the investors. If you are thinking of going in this
direction, then it is imperative to investigate the VC firm, and
make sure that it has good references.

4. Angel Investors: These are individual investors who are
looking for good opportunities in a wide variety of businesses.
You don’t have to be a high-tech company to attract these funds.
Angels have smaller sums to invest than venture capitalists, and
their investments range from $100,000 to $1 Million. There are a
good number of angel investors in the U.S. and Canada, with at
least 170 investment groups or angel networks spread around both
countries. You can find the angels by making a search on the
Internet, looking for angel associations in your particular area
of business. You can also inquire with your local small business
librarian, the chamber of commerce, your local SCORE office and
with other non-competitive businesses.

As you can see from this brief survey, the money for small
businesses is out there. Prepare your proposal carefully, and
approach the institutions or individuals that best match your
needs and capacity.