key business finance

The majority of entrepreneurs need to borrow capital at some point. The good news is, at present there are countless distinct business finance programs. Regrettably, that's also the adverse news. In other words, the cash is out there, but it can be bewildering to decide which business loans to submit an application for, particularly because various business loans support certain things.

As soon as it comes to the financing popularity contest, equity funding is at present in fashion. Articles in the mainstream media with reference to 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.

key business finance

Why is equity so appealing? Because it feels like you are getting free cash during the startup phase. There are frequently no compensation obligations and no interest payments owing to equity investors. You will in addition have some voice in negotiating the cost of your stock, any dividend payments and the stance the backer will have in your business. If your company goes belly-up, it is their loss (unless, of course, your investors can confirm in court that you did not disclose unfavorable information that would have influenced their decision to invest).

In addition to providing funding, equity investors can be accommodating in other ways as well. They bring their business experience and lessons learned to bear on your business, moreover they can turn out to be a advisor. The best equity investors are those with familiarity in your business, know-how of launching a business, a cool temperament and a large bank balance. Some say choosing an equity investor is similar getting married-you're making yourself responsible to this person through thick and thin, so decide carefully.

key business finance

Before you go investor shopping, though, you ought to assiduously reflect upon just what you're promoting and what having equity investors in truth means for you and your company. Very few company's will ever be able to provide a good return on investment (ROI) for equity investors. The archetypal restaurant or retail store, for example, is unlikely to have any liquidity for its shares. And even if you plan to possess a high-growth tech business, the likelihood of reaching liquidity for your first investors is low. You have got to be sincere with yourself regarding whether your investors expect to be paid back.

key business finance

What about good, old-fashioned loans?

If the gloss of equity capital is stained by the reality of having to generate a respectable return on investment, you can fall back on the old familiar friend: a loan. The decent news concerning debt financing is that you are still entirely in charge of your company-your only task 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 fee, and if your lender is someone you know well, you could be able to get favorable repayment terms that can make the loan walk and talk much like an equity investment.

key business finance

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.

key business finance

In order to show that you�re worth the money, 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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