What is Capital?
We listen and effectively respond to your needs and
those of your clients. We are experts at translating
those needs into marketing solutions that work, look
great and communicate well. How will you finance your
business? The majority of the funding will need to
come from you. Personal savings or loans from family
and friends finance the majority of business start-ups.
Other sources of funding may include bank loans, partners
and private investors.
Where Do You Find the Money?
Personal Sources
Personal sources of funds may include checking and
savings accounts, personal loans, second mortgages,
profit sharing, retirement accounts from former jobs,
certificates of deposit, personal assets that can
be sold or credit card borrowing. While credit cards
are sometimes used, this type of unsecured debt can
be problematic for a new business. Often times, entrepreneurs
do not include a plan on how they will pay back the
money. Financial contributions from family, friends
and colleagues may result in a desire to have a voice
in how your business is managed.
Debt and Equity Financing
Banks are the primary providers of formal loans. Most
banks will make a personal loan to good customers
with a good credit rating. Commercial banks, savings
and loans, credit unions and finance companies also
provide funding. These institutions will require collateral,
be concerned with your character and reputation, want
to know about the cash flow of the business and your
willingness as the borrower to risk your own money. You might want
to talk to a
personal financial advisor to get financial advice.
Types of Financing
Financing is typically categorized into two fundamental
types: credit finance
debt financing and equity financing.
Debt financing means borrowing money that is to be
repaid over a period of time, usually with interest.
Debt financing can be either short-term (full repayment
due in less than one year) or long-term (repayment
due over more than one year). The lender does not
gain an ownership interest in your business and your
obligations are limited to repaying the loan. In smaller
businesses, personal guarantees are likely to be required
on most debt instruments; commercial debt financing
thereby becomes synonymous with personal debt financing.
Equity financing describes an exchange of money for
a share of business ownership. This form of financing
allows you to obtain funds without incurring debt;
in other words, without having to repay a specific
amount of money at any particular time. The major
disadvantage to equity financing is the dilution of
your ownership interests and the possible loss of
control that may accompany a sharing of ownership
with additional investors.
Selecting Your Financial Institution
How do you determine from which institution to seek
business purpose financing?
- Use an attorney or
certified public accountant who is familiar with your
type of business.
- Shop around and talk to different bankers to find
one with an understanding and appreciation of your type
of business.
- Network with other small businesses.
- Research several institutions to find the one
that is the best fit for you. (Banks offer different
business services and their rates will vary.)
Questions to ask a financial institution/banker may
include:
- Have they financed this type of business before?
- What is the average size of the loans they finance?
- What are their professional backgrounds, especially
in terms of whether they are commercial or consumer
lenders?
- Do they have the level of lending authority you
need?
When meeting with the financial institution/banker:
- Make an appointment - do not walk in "cold"
to make a loan request.
- Remember that first impressions are lasting.
- Be prepared - the better prepared you are, the
better reception you'll get
- Find out how they handle loan requests - verbal
presentation first, submitting a written loan request
prior to meeting face to face.
- Follow up on any questions for which you do not
have answers.
- Listen carefully to their suggestions or proposals.
- Set a timeframe for follow-up/review.
Questions you may be asked:
- Do you have experience operating a business?
- How committed are the chief operators to the business?
- Can the business repay the loan? (will the cash
flow be greater than debt service?)
- Can you repay the loan if the business fails?
(is the collateral sufficient to repay the loan?)
- How will your business collect its bills?
- How will your business control its inventory?
- How will your business pay its bills?
- How will your business control expenses?
- Will you have any discretionary cash flow?
- What is the future of the industry?
- Who is your competition and what are their strengths
and buisness weaknesses?
When you meet with a potential lender, you should bring:
- A resume
- A listing of personal assets
- Credit references and those of any partners
- Business License or Trade Name Certificate
- Company
Corporation, LLC or Incorporation Documents
- A detailed business plan
What are THE FIVE "C's" of CREDIT?
Banks are not charitable institutions. They are in
business to make (not lose) money. So, when a bank
lends money it wants to ensure that it will get paid
back! To maximize the possibility of being paid back,
the bank wants to make sure that the borrower can
pay back a loan and that such obligations have been
met before. The bank must consider the five "C's"
of Credit each time it makes a loan.
Capacity refers to your ability to repay the
loan. The prospective lender will want to know exactly
how you intend to repay the loan. The lender will
consider the cash flow from the business, the timing
of the repayment, and the probability of successful
repayment of the loan. Payment history on existing
credit relationships --personal and commercial-- is
considered an indicator of future payment performance.
Prospective lenders also will want to know about your
contingent sources of repayment. *
Capital is the money you personally have invested
in the business and is an indication of how much you
have at risk should the business fail. Prospective
lenders and investors will expect you to have contributed
from your own assets and to have undertaken personal
financial risk to establish the business before asking
them to commit any funding. If you have a significant
personal investment in the business you are more likely
to do everything in your power to make the business
successful. Banks will want to see what type of investment
you plan to make in the business. In some cases, it
may need to be at least 25% of the total amount needed
to start your business.
Collateral or "guarantees" are additional
forms of security you can provide the lender. If for
some reason, the business cannot repay its bank loan,
the bank wants to know there is a second source of
repayment. Assets such as equipment, company owned vehicles -
including business assets such as paid-for
used
trucks, buildings, property, accounts
receivable and in some cases inventory are considered
possible sources of repayment if they are sold by
the bank for cash. Both business and personal assets
can be sources of collateral for a loan. A guarantee,
on the other hand, is just that--someone else signs
a guarantee document promising to repay the loan if
you can't. Some lenders may require such a guarantee
in addition to collateral as security for a business loan.
Conditions focus on the intended purpose of
the loan. Will the money be used for working capital,
additional equipment, or inventory? The lender will
also consider the local economic climate and conditions
both within your industry and in other industries
that could affect your business.
Character is the general impression you make
on the potential lender or investor. The lender will
form a subjective opinion as to whether or not you
are sufficiently trustworthy to repay the loan or
generate a return on funds invested in your company.
Your educational background and experience in business
and in your industry will may also be reviewed.
Your personal credit report and FICO credit score will also
help the banker determine your character. It is likely
a good idea to try and clean up any small outstanding
issues on your credit report. Use a credit card cleanup
service such Credit
Card Cops or credit card, consumer credit and money
matters web site such as RE6
Organization which has information to help you deal
with personal credit improvement issues. The quality
of your references and the business background and experience
of organizers, owners and employees also will be taken
into consideration. |
