financial business advice

The majority of entrepreneurs need to borrow money at some moment. The good news is, at present there are several different business loan programs. Unhappily, that is in addition the bad news. In other words, the capital is at hand, but it can be perplexing to decide which business loans to make a claim for, especially because countless business loans support particular things.

As soon as it comes to the financing popularity contest, equity funding is now in vogue. Articles in the mainstream media on the subject of venture capital have glamorized the concept of promoting stock in your startup, and entrepreneurs across the board would to a large extent wish to create money in the form of equity instead of debt.

financial business advice

Why is equity so appealing? Because it feels like you're in receipt of "free" cash throughout the startup period. There are by and large no refund obligations and no interest payments owing to equity investors. You'll furthermore have some say in negotiating the cost of your stock, any dividend payments and the rank the backer will have in your business. If your company goes belly-up, it is their loss (unless, of course, your investors can show in court that you did not unveil important information 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 in their business experience and lessons learned to bear on your company, moreover they can become a board member. The best equity investors are those with knowledge in your industry, familiarity launching a business, a cool disposition and a large bank balance. Some say choosing an equity investor is reminiscent of getting married-you're making yourself held responsible to this person through thick and thin, so choose carefully.

financial business advice

Before you go investor shopping, though, you must fastidiously reflect upon just what you're promoting and what having equity investors in reality means for you and your company. Very few businesses will ever be able to release a decent return on investment (ROI) for equity investors. The normal restaurant or retail store, for instance, is unlikely to have any liquidity for its shares. And even if you plan to have a high-growth tech business, the possibility of reaching liquidity for your first investors is low. You have got to be honest with yourself about whether your investors expect to be paid back.

financial business advice

What about good, old-fashioned loans?

If the sheen of equity capital is marked by the reality of having to generate a respectable ROI, you can fall back on the old familiar friend: a loan. The pleasant news about debt financing is that you're in spite of everything fully in charge of your company-your solitary duty to your lender is to achieve your payments on time, as spelled out in your promissory note. As long as you do that, your lender has no right to intrude in your business. Interest payments are typically a deductible business amount, and if your lender is someone you know well, you may well be able to get flattering repayment terms that can make the loan walk and talk much like an equity investment.

financial business advice

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.

financial business advice

In order to demonstrate that you are worth the money, 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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