invoice financing

Generally entrepreneurs have to borrow funds at some stage. The good news is, at present there are scores of different business finance programs. Unfortunately, that is also the bad news. In other words, the money's at hand, however it can be bewildering to determine which business loans to submit an application for, particularly because numerous business loans fund particular things.

As soon as it comes to the financing popularity contest, equity funding is at present in fashion. Stories in the mainstream media as regards venture capital have glamorized the idea of promoting stock in your startup, and entrepreneurs across the world would a large amount favor to create funds in the form of equity instead of debt.

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Why is equity so appealing? Because it feels like you're being paid free capital during the startup stage. There are frequently no compensation obligations and no interest payments owed to equity investors. You'll also have some say in negotiating the price of your stock, any dividend payments and the status the shareholder will have in your company. If your business goes belly-up, it is their loss (unless, of course, your investors can attest in court that you did not release critical info that would have influenced their decision to invest).

Besides providing funding, equity investors can be effective in other ways as well. They bring in their business experience and lessons learned to bear on your business, and they can become a advisor. The top equity investors are those with experience in your industry, know-how of launching a business, a cool nature and a large bank balance. Some say choosing an equity investor is reminiscent of getting married-you are making yourself responsible to this individual through thick and thin, so choose prudently.

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Before you go investor shopping, though, you must fastidiously think about just what you are promoting and what having equity investors in fact means for you and your business. Very few businesses will ever be able to deliver a decent return on investment (ROI) for equity investors. The standard restaurant or retail store, for instance, is not likely to have any liquidity for its shares. And even if you plan to carry out a high-growth tech business, the probability of getting liquidity for your early investors is low. You ought to be truthful with yourself regarding whether your investors expect to be paid back.

invoice financing

What about good, old-fashioned loans?

If the shine of equity capital is marked by the reality of having to make a respectable return on investment, you can fall back on the old familiar friend: a loan. The good news as regards debt financing is that you're still totally in charge of your business-your solitary job 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 intervene in your business. Interest payments are typically a deductible business cost, and if your lender is someone you know well, you might be able to get helpful reimbursement 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.

invoice financing

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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