manage business finances

Nearly all entrepreneurs have to have access to funds at some time. The pleasant news is, there are many different business finance programs. Alas, that is additionally the adverse news. In other words, the cash is at hand, however it can be baffling to decide which business loans to make a claim for, in particular since several business loans finance certain things.

As soon as it comes to the financing popularity contest, equity funding is presently in vogue. Stories 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 much favor to raise cash in the form of equity rather than debt.

manage business finances

Why is equity so appealing? Because it feels like you're receiving free money during the startup phase. There are customarily no reimbursement obligations and no interest payments payable to equity investors. You will furthermore have some shout in negotiating the outlay of your stock, any share payments and the rank the shareholder will have in your company. If your company goes belly-up, it is their loss (unless, of course, your investors can corroborate in court that you didn't unveil critical info that would have influenced their decision to invest).

In addition to providing funding, equity investors can be valuable in extra ways as well. They bring their business know-how and lessons learned to bear on your company, plus they can become a board member. The preeminent equity investors are those with understanding in your business, know-how of launching a business, a cool nature 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 decide carefully.

manage business finances

Before you go investor shopping, though, you should prudently reflect upon just what you're selling and what having equity investors in actuality means for you and your company. Very few company's will ever be able to hand over a decent return on investment (ROI) for equity investors. The conventional restaurant or retail store, for example, is not likely to have any liquidity for its shares. And even if you plan to have a high-growth tech business, the possibility of getting liquidity for your first investors is low. You should be honest with yourself about whether your investors expect to be paid back.

manage business finances

What about good, old-fashioned loans?

If the shine of equity capital is tarnished by the reality of having to make a respectable return on investment, you can fall back on a loan. The nice news with reference to debt financing is that you're still totally in charge of your company-your single undertaking 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 intervene in your business. Interest payments are typically a deductible business expense, and if your lender is someone you know well, you may possibly be able to get positive reimbursement conditions that can make the loan walk and talk much like an equity investment.

manage business 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.

manage business finances

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