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For the most part entrepreneurs need to borrow money at some moment. The pleasant news is, at present there are countless distinct business finance programs. Alas, that's also the adverse news. In other words, the capital is out there, except it can be confusing to determine which business loans to make a claim for, in particular because many business loans fund particular things.

As soon as it comes to the financing popularity contest, equity funding is now in fashion. Stories in the mainstream media regarding venture capital have glamorized the idea of promoting stock in your startup, and entrepreneurs across the world would a large amount wish to raise cash in the form of equity more willingly than debt.

business credit insurance

Why is equity so appealing? Because it feels like you are getting "free" money during the startup phase. There are generally no compensation obligations and no interest payments owed to equity investors. You will in addition have some input in negotiating the price of your stock, any share payments and the position the investor will have in your company. If your company goes belly-up, it's their loss (unless, of course, your investors can show in court that you didn't reveal critical info that would have influenced their decision to invest).

In addition to providing funding, equity investors can be supportive in extra ways as well. They bring their business knowledge and lessons learned to bear on your business, also they can become a board member. The preeminent equity investors are individuals with understanding in your business, experience launching a business, a cool temperament and a large bank balance. Some say choosing an equity investor is comparable getting married-you are making yourself answerable to this person through thick and thin, so decide carefully.

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Before you go investor shopping, though, you should prudently think about just what you're selling and what having equity investors in fact means for you and your business. Very few company's will ever be able to hand over a good return on investment (ROI) for equity investors. The archetypal restaurant or retail store, for instance, is unlikely to have any liquidity for its shares. And even if you plan to come up with a high-growth tech business, the possibility of accomplishing liquidity for your first investors is low. You should be sincere with yourself regarding whether your investors expect to be paid back.

business credit insurance

What about good, old-fashioned loans?

If the sheen of equity capital is tarnished by the realism of having to generate a respectable ROI, you can fall back on the old familiar friend: a loan. The pleasant news with reference to debt financing is that you are still totally in charge of your company-your single duty to your lender is to make your payments on time, as spelled out in your promissory note. As long as you do that, your lender has no right to pry in your business. Interest payments are typically a deductible business outlay, and if your lender is someone you know well, you might be able to get helpful settlement conditions that can make the loan walk and talk much like an equity investment.

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There are several ways to create this flexibility:

• Defer the start date of repayment by adding a "grace period." Startup loans often have a six- to 12-month grace period before repayment starts, providing entrepreneurs with some time to ramp up the business.
• Capitalize interest. Your lender can also capitalize the deferred payments so they don't lose interest funds during the grace period. This allows you to pitch a lender by suggesting a much longer grace period (if you think you'll need more than 12 months).
• Use interest-only payments. If your lender wants to be repaid immediately, offer to make interest-only payments for a period of time to keep your monthly budget in check.
• Institute graduated payments. You can create a unique repayment schedule with low payments at the start of the loan and higher payments at the end when your business is proven.

For lenders who are very cautious about making a loan, you can offer to provide collateral on the loan, such as a lien on your car or home equity. Be careful, though: If your business isn't yet well established, taking on this type of risk too early could be a bad move.

Another solution that some entrepreneurs have used to find a happy middle ground between debt and equity financing is convertible debt, which is simply debt that converts to equity as the business grows.

business credit insurance

In order to prove that you are worth the cash, you will want to prepare some documentation. First, your personal credit history is relevant to your small business loan � especially if your business does not have a long operating history. They will assume that you operate your business in the same manner that you manage your personal finances. Bring your credit history with you to reference as necessary.

Next, bring financial statements for your business. You’ll need to show your business’s financial health. They want to know how much it’s worth and how much money you’re moving. If you’re serious about small business loans, then you’ll also want to prepare detailed pro-forma statements. These give projections about what your business will be worth going forward.

Finally, be sure you have an updated business plan. By preparing a detailed business plan, you’ll already have your financial statements and pro-formas prepared. Banks award small business loans to those that have everything spelled out and planned. I strongly suggest that you prepare a plan with as much detail as possible – including bios of you and your partners, your track record, your strategies and advantages, and more.

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