small business finances

Most entrepreneurs must have access to capital at some time. The good news is, at hand there are lots of different business loan programs. Unhappily, that's additionally the bad news. In other words, the funds are out there, but it can be baffling to determine which business loans to submit an application for, particularly since scores of business loans fund certain things.

As soon as it comes to the financing popularity contest, equity funding is currently in vogue. Articles in the mainstream media on the subject of venture capital have glamorized the idea of selling stock in your startup, and entrepreneurs across the board would to a large extent wish to create funds in the form of equity more readily than debt.

small business finances

Equity is so appealing because it feels like you are in receipt of "free" money throughout the startup phase. There are usually no repayment obligations and no interest payments owing to equity investors. You will also have some say in negotiating the price of your stock, any dividend payments and the stance the financier will have in your business. If your business goes belly-up, it is their loss (unless, of course, your investors can attest in court that you did not disclose crucial info that would have influenced their decision to invest).

Besides providing funding, equity investors can be valuable in other ways as well. They pass their business experience and lessons learned to bear on your company, plus they can turn out to be a board member. The top equity investors are individuals with knowledge in your industry, 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 are making yourself held responsible to this person through thick and thin, so select cautiously.

small business finances

Before you go investor shopping, though, you ought to fastidiously reflect upon just what you are promoting and what having equity investors in reality means for you and your company. Very few businesses will ever be able to provide a decent return on investment (ROI) for equity investors. The mainstream restaurant or retail store, for instance, is not likely to have any liquidity for its shares. And even if you plan to possess a high-growth tech business, the possibility of attaining liquidity for your first investors is low. You have got to be truthful with yourself regarding whether your investors expect to be remunerated.

small business finances

What about good, old-fashioned loans?

If the sheen of equity capital is marked by the reality of having to produce a respectable ROI, you can fall back on the old familiar friend: a loan. The decent news in relation to debt financing is that you're in spite of everything totally in charge of your business-your solitary job 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 interfere in your business. Interest payments are typically a deductible business fee, and if your lender is someone you know well, you may perhaps be able to get helpful repayment conditions that can make the loan walk and talk much like an equity investment.

small 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.

small business finances

In order to corroborate that you are 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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