Small Business Financing Methods

Small business financing comes in a number of different forms. Typically, when an entrepreneur wants to start a new business then they approach their local bank as it relates to receiving a loan in order to launch their operations. However, obtaining a loan from a bank comes with a number of risks. As we have discussed before, you are almost certainly going to need to provide a personal guarantee as it relates to receiving the capital that you need for your new business venture.

Second, you may need to provide your home, car, and retirement accounts as collateral as it relates to your loan. As such, the risks related to this type of financing are extremely high as it relates to your personal financial situation. We strongly recommend that you speak with your certified public accountant as well as your financial adviser before you undertake a large debt obligation in order to launch or expand a new business venture. We are going to continue to touch on the subject of the risks relating to small business financing as we write about this subject.

Of course, and as we have mentioned before, you can always seek the assistance of a private investor as it relates to financing your business operations. However, there are significant risks involved when you are working with private funding sources due to the fact that they can take control of your business very quickly. As such, we recommend that you speak to your lawyer before you begin the process of raising capital from a private investor. This is not only due the risks that you business may face as you seek this type of funding, but also because you are going to need to comply with a number of securities laws as you obtain capital from private sources. Additionally, your legal counsel will be able to provide you with a tremendous amount of guidance as it relates to negotiating a proper deal with an angel investor or outside funding source.

Finally, all types of small business financing comes at a cost. Whether you are going to have to pay a significant amount of capital for a loan or sell your business to a third party there are issues that you are going to need to confront as it relates to your cash flow. One of the other things that we constantly recommend is that you develop an appropriate profit and loss statement and cash flow analysis that you can use to determine the cost of capital as it relates to your business venture.

Small Business Finance – Unorthodox Options

Working through the rigorous chain of processes, trying to secure a license or permit to start a business or trade can be difficult enough, now add to that the great worry for most; how do I raise the capital? For long this question has been recurring, experts in the field of business finance have turned out series of books and articles on the best ways of raising the necessary funding, but if one looks closer, you will discover that as the capitalist society is class ridden, so does it affect the rules as they relate to business finance.

I would want to draw attention to the funding options available to the poor, or putting it more correctly; the financially challenged. From my observation, it is clear to me that on average, the poor pay more for services than the well off in the same city. If you think this to be farfetched, then consider how much a family occupying a one room shack pay to buy water from a selling point on a daily basis as their deprived neighborhood is not connected to the mains, in contrast to what another family living in a wealthier suburb pays for a similar liter of water.

Over here in Nigeria, it is common to hear people patronizing finance houses and money lenders who charge as high as 10% to 15% interest rate per month. I believe you are wondering aloud “that’s Outrageous”, but to those securing such loans, they feel they are being done a favor. The fact is having a low or non existing collateral base, limits the option of being able to secure loans from the banks. They then look for funding anywhere they can find. This restricts their business prospect to acquiring stocks and getting rid of them (selling) as many times as possible before the debt matures. Such businesses have a relatively small non-current asset, also, long term planning and expansion is difficult.

Now with all said, there are some ingenious methods that are being taken advantage of. I will like to put forward a contributory scheme I thought of, it involves shop owners and trades men committed to making regular weekly contributions to a pool of fund, on attaining a minimum of twenty weeks of contribution, a member can apply for a loan that is double the total contribution made so far. It all adds up as half the members are active while the other half are not at any point in time. Now the cooperative must be formally structured with it accounts in line with best accounting standards, furthermore, its books must be subject to periodic audit. On the basis of this, I propose that the cooperative can then serve as a guarantor for further loan not exceeding the value secured from the cooperative. This is based on the financial requirement of a members’ business need.

With the role of the cooperative standing as a guarantor of further loans from the banks come more challenges. What if the member defaults? This creates the need for the cooperative to do the necessary background check on members’ credibility and also make sure only those with a track record of paying back their loans on time qualify for bank loan guarantee.

Taking a critical look at the entire deal, one will observe that members of such cooperative on average will be getting access to loans at below the bank interest rate. This will afford them the opportunity of having the financial flexibility to expand and entrench into the business assets that would generate better efficiency.

How to Get Small Business Loans – Revised

As an entrepreneur you have invested a substantial portion of your personal funds into your business start up. However, even as the business grows, you realize the need for more funds. You now consider getting some form of small business loans. Such loans come under many names and have some variation in the terms of use and payment. However, getting a small business loan needs some careful preparation on your part.

If you are a merchant, you can ask for and obtain a merchant cash advance. The money so obtained can be used for a variety of purposes as long as you can show that you have sufficient collections each day to meet the repayment schedule. The only areas where the lender will need convincing are your ability to repay and your willingness to do so. If your credit rating is good and your business model is such that there is a regular flow of customers, you should have no trouble in getting this advance.

Those looking for small business financing should also approach the Small Business Administration for help. If the SBA is convinced of your business plan and agrees to underwrite your loan amount, the risk to the lender is reduced. The lender is, therefore, more willing to consider your loan application positively. You might also be able to negotiate a lower rate of interest because of the lower risk to the lender. This will increase the profitability of your operations as well.

To ensure that you get your small business credit, make sure that the banker is aware that you have invested not just your time, but also your money in the venture. Credit unions and other lenders typically expect you to have invested between 25 and 50 per cent of the necessary capital.

You should approach small business lending institutions when you need small business loans. Such institutions have the mechanism to evaluate your small business or start up and have funds earmarked for this purpose. They are also more willing to lend at a lower rate of interest.

Use all the collateral your business has built up to obtain a business credit line. By pledging the assets of the business, whether it is real estate or machinery, you are reducing the risk to the lender. This kind of financing is much easier to obtain then a loan based just on the cash flow of a company. Of course cash flow is still important, but collateral helps to ease the process of obtaining the loan.

When applying for small business loans step into the shoes of the lender and vet your proposal thoroughly. You will find that you need to convince the lender of your ability to repay the loan from the cash flows generated by your business. Lenders are also concerned about your willingness to repay the loan. Here, your credit rating and credit history come into play. If you have a good credit rating, make sure that you highlight this to the potential lender.