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Determining Your Eligibility
New businesses will often face resistance when they seek financing. It's important to realize that this is completely normal; facing rejections doesn't mean it's time to give up. A business owner may need to apply for loans at multiple locations before getting a "yes." Sometimes it's merely a matter of getting the word out about your great concept.
"If you have a unique and profitable idea, you may find that the money you are seeking may actually find you," says Alan Guinn, managing director and CEO of The Guinn Consultancy Group, Inc. based in Bristol, Tenn. "I know that's counterproductive to all the business school courses you took, or all the advice you've received from your accountant or attorney. But great financing seeks great ideas. New ideas. Something new, different and exceptional. If you have that idea and if you have the ability to generate a business like that, you'll find someone to marry you with the money you need...or they'll find you."
When you do approach a lender or investor for money, they'll often look for several things before agreeing to hand over money. Those include:
- Whether You Can Show Business Revenue
A lender will want to see some revenue before committing to handing over money, but most lenders understand that a new business needs capital to start generating noticeable income. Gather financial reports and use them to demonstrate that you have income coming in that you can use to pay off the loan.
- How Long Your Business Has Been in Operation
Lenders will inevitably look at a company's history as a sign that it has what it takes to last. However, a new business owner shouldn't feel daunted by that. Your job history alone may be sufficient to prove that you have what it takes to run a successful company in a specific industry.
- Whether You Own a Big or Small Business
The Small Business Administration (SBA) Office of Advocacy defines a small business as one that has fewer than 500 employees, but each institution has its own standards for small business loans. Lending institutions may also categorize companies based on total revenue. It's an important distinction since some loan and grant programs are available only to small businesses.
- Whether You Have a Viable Business Plan
Before approaching a lender, business owners need a high-quality professional business plan that details the concept, resources, and goals for that business. Small businesses compete with much larger corporations for financing, so it's important to have a professionally presented plan when the application is filed - or when you approach venture capital or angel investor, partners.
- What Kind of Personal or Business Credit Score You Have
A business' credit score will come into play when seeking financing. For new businesses, this often defaults to the owner's personal credit score, since the company hasn't been around long enough to build a credit score.
- How Much You're Asking For
Newer businesses may find it easier to land funding if they ask for a smaller loan. As Guinn points out, businesses may need a smaller amount than they think. "You need just exactly what you need to start probably less than half of what you expect, and maybe even less to prove out your concept," Guinn said.
How to Create a Business Plan
Many new business owners feel daunted at the prospect of creating a business plan, but nobody knows a business better than its founders — and that passion will come across on the page. A business owner should first step back and think about the concept that kicked off the idea in the first place, since that concept is what will often sell a financial institution or angel investor on that business's viability.
"If it's a great idea or concept, you won't have to work hard to sell it," Guinn says. "People will want to be a part of it."
With your concept in mind, here is a step-by-step guide to help you create a business plan that gets results.
Plan Your Spending Strategy
Before you put anything on paper, take the time to think about your financing goals. How much money are you seeking? How will you put that money to use? Your plan needs to be written with those goals in mind, since your lender will be most interested in how the money will be spent.
Have a Vision
If you haven't already, you'll also need to come up with your company's vision, mission statement and core values. Those will come into play throughout the business plan and will show that you have a corporate vision in place that will stay with you as you grow.
Write an Executive Summary and Describe Your Business
The executive summary introduces the lender to the funds you're seeking, as well as how you intend to use them. Instead of having to scan your entire report to determine where they fit in, having this information up front lets a financial institution know exactly what you're seeking from the start. Once that is in place, work on a description of your business concept, the industry it operates in and how any planned growth might impact the structure you've already built for your company.
Discuss the Market and Competition
The sections that follow will require you to gather information and summarize it in an easy-to-understand format. This includes a description of the existing market and how your company will fit into that market. You'll need to demonstrate that you've done thorough research into what consumers are interested in purchasing, as well as any existing competition that interferes with your ability to reach out to those customers.
Describe Your Team
Anyone who reads your business plan will be interested in learning about your team. In addition to each staff member's qualifications, you should also include information on how they contribute to the business's daily operations. This will help potential lenders understand how management and employees work together to move the business forward.
Create Your Budget and Revenue Forecast
An important part of any business plan is its financials. You'll first need to have all of your business's past financial information, which will help you as you outline your sales forecast and budget, both of which are vital components to any financial plan. You'll also need to demonstrate your business's cash flow in black and white, including all income that comes into your business each month and every dollar you spend.
As a final piece of counsel, Guinn recommends turning to experts for advice. "If you are intimidated by securing financing for your business, talk with someone who has successfully raised funding previously and let them share what they did to secure their funding," he says. "Often, those who fund projects may be seeking other projects and you can be introduced to lenders who are seeking a new investment."
Glossary of Business Financing Terms
The language of financing can sometimes seem overwhelming. Here are a few common terms every entrepreneur needs to know:
Refers to the money a business owes on a short-term debt. This debt generally has a deadline by which it must be paid to avoid going to collections. On a balance sheet, payables are listed as a liability.
The money a business is owed by its customers. Like accounts payable, this debt generally has a short turnaround time during which payment must be made. On a balance sheet, receivables are listed as an asset.
Refers to loan options available to a business outside of the traditional bank or credit union. These might include online lenders, crowdfunding and invoice factoring. Alternative lenders often have less stringent credit requirements.
A person who offers to invest in startups and small businesses, often on a case-by-case basis. Many entrepreneurs find angel investors through their social and professional circles, although some websites exist that help connect angel investors to promising startups.
Annual percentage rate (APR)
The interest a person or business pays on a debt. This is calculated by multiplying a rate for a payment period by the number of periods in a year. Financial institutions are required to disclose this figure as an annual rate to make it easier for consumers to compare rates.
A business is granted financing based on its assets, which typically include inventory and accounts receivable. Usually, lenders advance a business 70 to 80 percent of its receivables and 50 percent of its inventory.
A loan where a lender agrees to provide a short-term loan to help a borrower transition from one phase to another. In business terms, it generally is used to help a business operate until promised funding comes through. For example, if a business owner needs to re-stock inventory but is financially dependent on a customer who is late on payment, he or she can take out a bridge loan to cover current expenses.
A document that describes a business's short- and long-term goals, as well as its strategy for eventually attaining those goals. It also includes information about the company, including team members, organizational structure and financial details.
Similar to a payday loan, a cash advance is a small temporary loan available either directly from a financial institution or through a credit card. Since cash advances carry a high-interest rate, they're intended to be used only as a last resort and can become overwhelming in a short amount of time if they aren't paid off quickly.
The process of obtaining financing from a large number of voluntary participants, often through dedicated websites or social media.
Loans specifically dedicated to helping a business acquire necessary equipment (e.g. an oven for a restaurant or a tractor for a farm). The equipment itself usually serves as collateral.
This type of financing refers to the process of securing funding in exchange for shares in a business. The term covers a wide range of funding, from hundreds of dollars provided by friends or family members to large corporate initial public offerings (IPOs).
A cash advance based on a business' outstanding invoices. The business provides copies of invoices as required to cover the amount they need to borrow. Factoring companies operate separately from financial institutions, earning money off the interest on the short-term loan.
A document that describes a business's assets and liabilities. This data is often reported to business partners, investors and sometimes the public, depending on an organization's size and setup.
A microlender is a person or organization that provides financing in small amounts to businesses or consumers who don't qualify for traditional loans. Financial institutions often don't deal in such small amounts, which has driven the need for an entity that loans money in smaller increments.
A microloan is a short-term loan in low dollar amounts, generally given to startups or self-employed professionals. According to the SBA, the average microloan is $14,735.
Instead of going to a financial institution, businesses can use services that match them with private lenders (often individuals) who are willing to issue loans. Since the process operates entirely online, peer-to-peer lenders have reduced overhead, which helps keep operational costs down.
Investors lend money in return for a percentage of revenue on an ongoing basis. The revenue percentage replaces the repayments a traditional loan would require a business to pay.
A loan where lenders require collateral to serve as a protection against default. In many cases, startups and small businesses choose to use personal homes as collateral, but entrepreneurs can also use business assets.
Small Business Administration (SBA)
A government organization designed to provide support and resources to the 30+ million small businesses in America. As the majority employer in the country, small businesses are seen as vital to the economy and the SBA was set up to ensure they thrive.
A business or venture that has recently begun operations. Although there is no set limit on how long a company can be called a startup, generally a company can get away with using the term for the first few years, even if a great deal of revenue has begun coming in.
A loan that is given without any collateral. This type of loan is usually granted on the basis of the success of an entrepreneur's business or personal credit rating, and interest rates are usually higher
This type of financing is provided by investors based on the growth potential investors see during a pitch meeting and/or by reading a company's business plan. While this type of funding is considered high-risk for investors, it can also produce great reward if the business becomes a success.
Securing loan dollars through an online lender as opposed to one that has brick-and-mortar locations. Many small business owners are attracted to this form of lending due to the higher approval rates and less stringent credit score requirements compared to institutional lenders.
The measurement of a company's current financial health, calculated by subtracting its current liabilities from its current assets. Financial institutions use this figure in the form of a ratio that determines whether the business has enough working capital to cover its short-term debt.
Working capital loans
A short-term loan that can help a business meet its daily expenses until income begins coming in.
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