You may find you will need additional funds to open your business or to support operations through seasonal fluctuations. In most cases, you must approach a banker for a loan. Bankers are in the business of lending money, so they have guidelines for evaluating business loans. Generally, they prefer certain types of loans and business sectors. You’ll need to investigate the banks in your community and identify the ones that will lend to your type of business.
Before making a loan, bankers weigh several factors: your investment in the business, your credit history and credit score, your reason for needing the loan (use of funds), your working capital, your inventory, your collateral for securing the loan and, most important, your ability to pay it back (servicing the debt). Remember, 100 % financing is not available; the bank will expect you to make a personal contribution.
The bank will expect you to make a loan presentation that adequately illustrates your knowledge of the business, the competition, the market, the potential for sales, and the cost of doing business. Expect to present a business plan complete with cash-flow statements for at least twelve months, balance sheets, and three years pro-formas (projected profit-and-loss statements).
Grants and Small Business
You have heard advertisements suggesting that the government and others will “give” you money to start or expand your business. Others promise to reveal how to tap into the hundreds of millions of government and foundation grants available free to entrepreneurs and small business owners. Still others claim that each year over one million entrepreneurs get free money to start or expand a business.
Public and private grants are available for small businesses, but they are usually targeted at highly technical area of industry, schools and training programs and other governmental agencies. Additionally, grants are designed to address societal problems and have very distinct eligibility requirements. Not meeting the requirements set forth by a grant will automatically disqualify the applicant. It is important that potential business owners understand the technicalities of grants, before investing too much time in this limited area of financing.
For more information download the KSBDC publication, The Truth about Free Money and Grants.
You may have heard of angel investors or venture capitalists who invest money in small businesses. These investors are interested in high rates of return over a short period of time, usually five years or less, and often require that they are given ownership or management positions. Established and growing firms are the prime candidates for venture capital funds, not new business start-ups. There are exceptions of course. In recent years, “early-stage” seed funds to facilitate the commercialization of innovative ideas and technologies have become more available.
Retail and service sectors are not primary targets for venture capital funds.
Your local Small Business Development Center will explain the financing options available and help prepare you to meet with lenders to obtain financing.