business plan finances

Most entrepreneurs need to borrow money at some point. The good news is, at present there are countless different business finance programs. Regrettably, that is in addition the sorry news. In other words, the cash is at hand, but it can be confusing to decide which business loans to make a claim for, in particular because various business loans finance certain things.

As soon as it comes to the financing popularity contest, equity funding is presently in fashion. Articles in the mainstream media regarding venture capital have glamorized the idea of selling stock in your startup, and entrepreneurs across the world would much choose to raise funds in the form of equity rather than debt.

business plan finances

Why is equity so appealing? Because it feels like you are in receipt of "free" capital throughout the startup phase. There are frequently no settlement obligations and no interest payments appointed to equity investors. You will furthermore have some input in negotiating the outlay of your stock, any dividend payments and the stance the financier will have in your company. If your business goes belly-up, it is their loss (unless, of course, your investors can corroborate in court that you didn't reveal vital info that would have influenced their decision to invest).

Likewise providing funding, equity investors can be accommodating in other ways as well. They bring their business experience and lessons learned to bear on your company, moreover they can turn out to be a advisor. The preeminent equity investors are individuals with know-how in your industry, know-how of launching a business, a cool disposition and deep pockets. Some say choosing an equity investor is like getting married-you're making yourself accountable to this individual through thick and thin, so select carefully.

business plan finances

Before you go investor shopping, though, you must carefully reflect upon just what you're promoting and what having equity investors in reality means for you and your business. Very few company's will ever be able to release a good return on investment (ROI) for equity investors. The archetypal restaurant or retail store, for example, is not likely to have any liquidity for its shares. And even if you plan to boast a high-growth tech business, the probability of getting liquidity for your first investors is low. You have got to be honest with yourself about whether your investors expect to be remunerated.

business plan finances

What about good, old-fashioned loans?

If the sheen of equity capital is marked by the realism of having to create a respectable ROI, you can fall back on the old familiar friend: a loan. The nice news about debt financing is that you are still entirely 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 meddle in your business. Interest payments are typically a deductible business expense, and if your lender is someone you know well, you may perhaps be able to get helpful reimbursement terms that can make the loan walk and talk much like an equity investment.

business plan finances

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 plan finances

In order to attest that you�re worth the cash, you�ll 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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