Financing Your Small Business
Most businesses will need financing at some point. Business owners have two general options for obtaining financing – equity or debt. Equity financing involves investing either your own money or money from other investors in return for owning a portion of the business. Debt financing involves borrowing money from some organization that is willing to lend it. Businesses are commonly financed using both options. Very few lenders will finance 100% of any deal. On the other hand, most people (even if they could finance the entire project from personal funds) prefer to borrow money. The business person, for example, would finance the business by investing personal savings and borrowing money to complete the amount needed for the deal. If the company is incorporated, the savings invested (equity) may be issued in the form of stock. Almost every organization or individual who has money to invest in your business will require some form of a business plan. The business plan should tell the lender or investor all they need to know for them to make the right financing decision.
What Lenders Need
Lenders are going to review your personal credit history. If your credit report shows slow or bad credit, borrowing money will be difficult. Lenders will also want you to supply all or some of the following information. Ideally, these items would be included in the financial section of your prepared business plan.
- An explanation of how much money you want to borrow (how you will use the money, the period of time for which you want the loan, and how you want the re-payments to occur).
- Personal Financial Statement that shows what you own, owe, and earn (assets, liabilities, and annual income).
- Historical financial statements or income tax returns from the last three to five years or longer if the data exists. This is required only if you are purchasing an existing business.
- A Projected Income Statement for the business for three to five years.
- A Projected Balance Sheet for the business for three to five years.
- A Projected Cash Flow Statement (broken down monthly for the first year), for three to five years.
- A Debt-Service Coverage Analysis that shows how the income from the business will cover the loan payments.
The United States Small Business Administration has a number of programs that can help lenders make loans that may fall shy of the institution’s lending criteria. These loans can help lenders make very small (micro-loans) and very large loans. The SBA loan programs can be beneficial to both the borrower and the lender. The SBA loan programs work as follows:
- You request an SBA guaranteed loan through your bank.
- You, with assistance from a loan officer, complete an SBA loan application packet.
- The completed application is forwarded to SBA by your loan officer.
- If SBA approves the application, the SBA will guarantee a portion of the loan and the bank will give you the loan.
- Finally, you re-pay the bank.
SBA requires the same financial information that any lender would require. For the most up-to-date information about these loans and other SBA loan programs, visit the SBA loan program website.
The ASBTDC neither lends nor administers grants. However, business consultants can assist small business owners in meeting their operating challenges. For more information on grants, see our Frequently Asked Questions.
The ASBTDC can assist you by providing free one-on-one professional consulting on preparation of loan requests, financial analysis, and budget development. Other consulting areas include: advice on operating challenges in existing businesses, review of business plans and strategies, and guidance in starting new businesses. Consultants can provide general business advice; however, they cannot provide specific tax, accounting, or legal advice.
Our Center has various research materials to help in preparing business plans and loan proposals. Some of the resources include: sample business plans, industry financial ratios, start-up guides, and books on various business topics.
We offer various training seminars on financing options, budgeting, and cash flow. Check our current training schedule for upcoming financial seminars.