business finance notes

The majority of entrepreneurs find it necessary to borrow money at some moment. The good news is, at hand there are scores of distinct business loan programs. Sorry to say, that is additionally the adverse news. In other words, the capital is out there, however it can be bewildering to elect which business loans to apply for, particularly for the reason that many business loans support certain things.

When it comes to the financing popularity contest, equity funding is currently in fashion. Stories in the mainstream media with reference to venture capital have glamorized the concept of selling stock in your startup, and entrepreneurs across the board would a large amount favor to create money in the form of equity rather than debt.

business finance notes

Why is equity so appealing? Because it feels like you're being paid free money through the startup phase. There are generally no repayment obligations and no interest payments payable to equity investors. You will furthermore have some voice in negotiating the price of your stock, any share payments and the status the investor will have in your company. If your company goes belly-up, it is their loss (unless, of course, your investors can confirm in court that you didn't reveal important information that would have influenced their decision to invest).

Besides providing funding, equity investors can be valuable in other ways as well. They pass their business know-how and lessons learned to bear on your business, moreover they can become a advisor. The finest equity investors are those with familiarity in your business, know-how of launching a business, a cool personality and a large bank balance. Some say choosing an equity financier is similar getting married-you're making yourself answerable to this individual through thick and thin, so select carefully.

business finance notes

Before you go investor shopping, though, you must sensibly reflect upon just what you are promoting and what having equity investors in actuality means for you and your company. Very few company's will ever be able to release a decent return on investment (ROI) for equity investors. The usual 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 likelihood of accomplishing liquidity for your first investors is low. You should be honest with yourself about whether your investors expect to be paid back.

business finance notes

What about good, old-fashioned loans?

If the shine of equity capital is stained by the realism of having to generate a respectable ROI, you can fall back on a loan. The pleasant news regarding debt financing is that you're still totally in charge of your business-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 cost, and if your lender is someone you know well, you may perhaps be able to get positive reimbursement conditions that can make the loan walk and talk much like an equity investment.

business finance notes

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 finance notes

In order to attest that you�re worth the capital, 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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