Chapter Six: Raising Money for a Small Business
One key to a successful business start-up or expansion is your ability to obtain appropriate financing. Raising capital is the most basic of all business activities.
There are several sources to consider when looking for financing. Explore all your options before making a decision. These include –
- personal savings,
- friends and relatives,
- banks and credit unions, and
- venture-capital firms.
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 aware of the bank’s loan policies. Lending institutions generally require fully secured loans and sufficient commitment of capital by the borrower.
Types of Business Loans
Short-tern loans are paid back in less than one year. Types of short-term loans include
- accounts receivable and
- revolving lines of credit.
Log-term loans generally have maturities of more than one year but less than seven years. Real estate and equipment loans may have maturities of up to 25 years. Long-term loans are used for major business expenses such as –
- furniture and fixtures,
- commercial mortgages and
- real estate
Applying For a Loan
Approval of your loan request depends on how well you present yourself, your business plan and your financial needs to a lender or investor. The best way to improve your chances of obtaining a loan is to prepare a thoughtful and professional proposal. The proposal is your business plan with a few important additions.
- In the executive summary, state the purpose of the loan and the exact amount required. Explain specifically what the loan will be used for and why it is needed.
- In the financial information section, include personal financial statements on yourself and other principal owners of the business, if this will be a partnership. Also identify the collateral you would be willing to pledge as security for the loan.
What Lenders Look For
Many loan officers will order a copy of your credit report from a credit-reporting agency. Therefore, you should work with these agencies to help them present an accurate picture of yourself. The lender will also look at your work history and letters of recommendation. Using the credit report and the information you have provided; the lending officer will consider the following issues.
- Do you have a sound record of credit worthiness?
- Do you have sufficient experience and training to operate a successful business?
- Have you prepared a loan proposal and business plan that demonstrates your understanding of, and commitment to, the success of the business?