Securing Financing for a Small Business
Securing Financing for a Small Business:
Most commonly start up funds for small businesses are sought through traditional loans secured through banks, savings and loan companies, credit unions or the Small Business Association (SBA). The funds can be used for start-up capital, the purchase of equipment and acquisition of inventory.
The loans are approved based on the ability of the borrower to repay, history of bills being paid on time (both personal and business) and amount of debt. The borrower has to show the ability to generate enough cash flow to cover the loan payment in addition to covering operating expenses. The personal and business credit reports are checked to ensure that prior bills or loans have been paid on time. Sometimes lenders will even speak with the businesses suppliers and vendors to ask about payment history as well. Likewise, if it is found that the person or business applying for the loan has an increased debt to income ratio; it is likely that the loan may be denied.
There are three types of sources for repayment that the bank will require. First, the business must show, or intend to prove, positive cash flow. This should include operating costs to cover the loan and continue to support the business. Next, the lender will require that the business have collateral to cover the loan in the event that it is not paid. This collateral may be the resale value of property or inventory which will meet or exceed the loan amount. Or the bank may consider a blanket lien which will cover all of the business assets.
Additionally, when making loan decisions, the banking institution will also want to ensure that the borrowers can show the expertise needed to successfully run and grow a business. Such strengths include management, marketing, financing and accounting education and experience.
If the traditional route isn’t an option, and the existing business is in need of cash, there are some alternative business financing options. These include trade credit, receivables and purchases orders, credit cards or retirement funds.
Trade credit is when a business works with existing suppliers to get discounts on future orders and extended payments on previous orders. Doing this in conjunction with collecting on the receivables a company has outstanding may lighten the financial burden while bringing in positive cash flow.
Receivables and purchase orders are companies that will purchase existing accounts receivables, some for as much as 90 percent, and collect from the debtors independently. The cash advance companies (not banks) who specialize in this area of collections will help a small business when immediate cash is required. It will also free up the small business to focus on strengthening the areas of financial instability instead of bill collecting.
Traditional personal and business credit cards can be used for cash advances or to pay suppliers or vendors when necessary although there can be higher interests rates and fees attached. There are also credit card advance companies (not banks) which will advance cash based on future credit card sales receipts. These facilities are paid back when the business generates credit card sales. When sales are higher, the repayment is higher. If credit card sales are lower, the payment will then be lower also.
It is possible to use funds from a retirement account such as an IRA or 401(k), for start up cash for a business. There are several companies that can set up a structure for funding to go directly to the business and thereby avoid a taxable distribution and penalties. There are pros and cons to doing this. On the upside, there is no need to worry about lenders, selling the business to investors or credit. On the downside, if the business isn’t successful, the bulk of retirement will be lost.
http://smallbusiness.com/wiki/How_to_secure_financing_for_your_small_business