From the U.S. Small Business Administration

Financing Your Business Start-Up

One key to a successful business start?up and expansion is your ability to obtain and secure appropriate financing.  Raising capital is the most basic of all business activities.   But, as many new entrepreneurs quickly discover, raising capital may not be easy; in fact, it can be a complex and frustrating process.  However, if you are informed and have planned effectively, raising money for your business will not be a painful experience.

Finding the Money You Need

There are several sources to consider when looking for financing.  It is important to explore all of your options before making a decision.

Personal savings:  The primary source of capital for most new businesses comes from savings and other forms of personal resources.  While credit cards are often used to finance business needs, there may be better options available, even for very small loans.

Friends and relatives:  Many entrepreneurs look to private sources such as friends and family when starting out in a business venture.  Often, money is loaned interest free or at a low interest rate, which can be beneficial when getting started.

Banks and credit unions:  The most common source of funding, banks and credit unions, will provide a loan if you can show that your business proposal is sound.

Venture capital firms:  These firms help expanding companies grow in exchange for equity or partial ownership.  A good starting place for businesses and investors alike is the U.S. Small Business Association's Angel Capital Electronic Network. 

Borrowing Money

It is often said that small business people have a difficult time borrowing money.  This is not necessarily true.

Banks make money by lending money.  However, the inexperience of many small business owners in financial matters often prompts banks to deny loan requests.

Requesting a loan when you are not properly prepared sends a signal to your lender.  That message is: High Risk!

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 able to convince your lender that you are a good credit risk.

Types of Business Loans

Terms of loans may vary from lender to lender, but there are two basic types of loans: short?term and long?term.

Generally, a short?term loan has a maturity of up to one year.  These include working?capital loans, accounts?receivable loans and lines of credit.

Long?term loans have maturities greater than one year but usually 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 purchasing real estate and facilities, construction, durable equipment, furniture and fixtures, vehicles, etc.

Required Information

Most lenders and venture capitalists will require the following items: a funding request indicating the desired financing, capitalization, use of funds and future financing; financial statements for the past three years, if applicable; current financial statements; monthly cash flow financial projection, including the proposed financing for two years;  and projected balance sheets, income statement and statement of changes in financial position for two years including the proposed financing.

Finance for the Long Term 

One of the major causes of small business failure is inadequate start-up financing.  Admittedly, it is more difficult for small businesses to obtain financing than their larger competitors.  However, the owner who borrows too little up-front money may quickly see the business close down because of lack of capital to keep the operation running.  

Many over-eager entrepreneurs open their doors without the necessary funds to keep the business going until the profits begin to roll in.  They have only enough for a couple of months' rent, some fixtures and minimum inventory.  

Before you open for business, it is critical to plan how much cash you will need.  That amount depends on the type of business you are opening (sales and manufacturing need more; service businesses need less) and the type of person you are.  You also should ask yourself what you need the money for; how much you need; does the amount allow for unexpected developments; how and when you will repay the money; can you afford the cost of borrowing; and what is the outlook for business in general and your business in particular? 

By carefully planning your financial projections, you can avoid some of the financial crises that arise from a future shortage of funds.

Before you fill out your loan request -- no matter who the prospective lender is -- find out what documentation you will need.  For example, banks and the U.S. Small Business Administration require a resume of the applicant's education and work experience with emphasis on experience related to the particular business; a personal financial income tax statements for at least the two previous years; the aforementioned business plan; and credit references.  Finally, borrow carefully and be careful not to overextend yourself.

Ten Commandments of Smart Corporate Financing

How to Write a Loan Proposal

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