Whether you are just starting up your business or your small business needs a little boost after the bad few months we have all experienced, there are ways to find the best finance deals for you.
Before you consider approaching any banks you need to ensure all your paperwork is in order. This should include your company registration, your identification, addresses and any other paperwork you feel may be necessary. If you already have a loan, be sure to take that with you as well.
Your business plan is the most important part of any loan process. Your business plan should clearly indicate what your business does when you intend to make a profit, how you intend to make a profit and outline your business practices.
Most banks will ask for a business plan. This plan should be a couple of detailed pages enabling the bank to see how you intend making money and paying them back. As you can understand they need to be sure that you are good for the money.
The most popular form of finance is approaching a bank, this is the solution that most businesses turn to when they need some extra cash flow, but the banks are the hardest to please.
Often they will also take your personal circumstances into account, there is no point even trying to apply for a loan if you don’t have a clean credit report on your name. Both you and your business can have marks, so ensure you are both clean before approaching any banks.
There are a number of good comparison sites online which help you determine which banks are offering businesses the best deals at the moment. Using your regular bank may not be the right option, even though it appears to be the most logical. Every bank offers different interest rates, repayment terms and amounts they are willing to offer.
Take your time to determine which banks have the best deals currently and then approach those banks before turning to your current provider. Of course, if your current business bank offers the best deal, then you already have a foot in the door.
If your business is already up and running and the bank has refused your loan, you can choose the guarantee system. This is a government scheme that covers seventy-five percent of the loan, but you do have to pay a two percent premium. The advantage is that you can go back to the bank offering the best deal and get the loan with a guarantor.
When looking for the best finance deals it’s a good idea to embrace technology. Rather than walking bank to bank searching for the great deals, you can search online and compare all the loans together to find the one that best suits your needs and requirements.
Searching online can save you a lot of effort and time; you can determine the best options and then make appointments with those banks. While some do enable you to apply online, applying in person enables you to take your business plan and any other paperwork with you to the meeting.
What Financing You Need for Your Small Business?
In order to determine how much financing your small business will need, you should estimate all the costs involved in organizing and setting it up and running your business until you start to generate sufficient income
and cash flow to cover your expenses.
Once you determine the initial amount you will need, you subtract the number of your own resources you plan to invest in the business, and the result is the amount of financing you need.
Each business is different and has different financing needs during the various stages of its organization, start-up, and operation. Some businesses may have a significant initial investment in property, plant, equipment, tools, supplies, and inventory.
In other businesses, it may be possible to start with much lower initial costs. What is important is to have as clear an idea as possible of how much you need to start. And although it is not a good idea to go into more debt than necessary, neither will it serve your business if the amount of financing you obtain is not enough to cover your needs.
Depending on the legal structure you decide to use, you can count on incurring certain costs to set up your business. For example, it may be necessary to seek legal or tax advice to initiate your activities. There could be permits or licenses required to operate your business.
If you need to lease space for offices, workshops, a warehouse, or some other facilities, you will probably have to pay a deposit and perhaps one or more months of rent in advance. Connecting utilities such as electricity, gas, and water may also mean deposits and installation costs.
You will need to pay premiums for the different types of insurance your business needs, and these premiums are paid in advance. Having a clear idea of all these types of organization and start-up costs will help you in determining how much initial financing you will need.
Working Capital Requirements
Based on the projections that form part of your business plan, you should have a reasonably clear idea about how long you will have to finance your operating expenses until you start to generate sufficient income to cover them. You will need to have readily available working capital to finance this period.
How much working capital you want to keep as a reserve to cover unforeseen costs will depend on your line of business and the magnitude of your estimated costs and expenses. In any case, you should have sufficient working capital to finance your operation over the first few months.
Scheduling Your Projected Disbursements
When thinking about the financing you need, based on the projections you have made of your costs and expenses, it is important to try to separate essential disbursements from those that are more discretionary.
You should go into debt only to cover those costs and expenses that are necessary to get your business started, or to finance an acquisition, expansion, or other opportunities that you know will add value to your business and produce a return that is sufficient to be able to repay the debt and leave you with a profit.
Then, the essential disbursements should be separated between fixed expenses and variable expenses.
Fixed or general expenses do not depend on the level of production or business activity. These could include rent, the base charge for utilities, administrative expenses, and insurance.
Variable expenses depend on the level of activity and could include materials and supplies, costs to ship products, commissions, and other selling expenses.
Once you separate your estimated expenses between fixed and variable, you can more precisely determine your financing needs.
You could do a spreadsheet including all the one-time disbursements you will make, such as organization expenses, start-up costs, and acquisitions of fixed assets, and the expenses that will continue over time, such as rent, materials, payroll, and taxes.
You can do this projection on a calendar basis, or as a timeline, based on when you have to disburse the funds. With this, you will have the information you need to determine how much financing you need, and when you need it.
This can be useful in scheduling your applications for loans, your use of a revolving line of credit, or taking cash advances from a credit card. By knowing when you will need the financing, you can take on debt when you need it and avoid unnecessary interest charges. Lines of credit are more flexible in this regard than traditional loans.
Debt or Equity Financing
How do you know if you should use debt or equity financing for your small business? Debt financing consists of loans that are repaid, and the business’s equity structure does not change. The cost of debt financing is interest.
On the other hand, equity financing consists of capital contributions. Part of the ownership of your business is shared with the investors. The cost of equity financing is the payment of dividends or shares of the profits.
Debt financing can be short, medium, or long term. Equity financing is long term. Whether you use debt or equity financing, or both, will depend on whether you want to share the ownership of your business.
When you are looking for financing, you should consider your business’s debt to equity ratio. This is the ratio between the amount you have borrowed and the amount you have invested in the business. Many times, the greater the amount you have invested in the business, the easier it is to obtain financing.
If you have a low debt to equity ratio, it may be convenient to seek debt financing. But if you have a high debt to equity ratio, it may be better to consider financing the business with additional capital contributions. When a business is overloaded with debt, it can be difficult to meet the due dates for installment payments.
Relatives, friends, and associates could be potential sources of loans, especially when the amounts involved are not large. It is a good idea to formalize and document these loans. They should be recognized as business obligations.
Banks and other financial institutions are probably the most traditional and common sources of debt financing.
Banks can offer short, medium, and long-term financing in the form of signature loans, lines of credit, second mortgages or home equity loans or lines of credit, and collateralized loans for the purchase of real property, vehicles, machinery, and equipment. It can be more difficult for a small business to obtain a loan from a commercial bank without some kind of guaranty.
The U.S. Small Business Administration has loan guarantee programs for small entrepreneurs. You can find information on their website at www.sba.gov, in “Financial Assistance” under the heading “Services”.
Also, many state and local governments have programs to stimulate the growth of small companies due to the positive impact they have on the economy and for employment. Many of these programs offer financing or loan guarantees.
You can find links to these state small business development agencies in websites such as the U.S. Department of Commerce Minority Business Development Agency at www.mbda.gov, and the Small Business Development Center Locator in the U.S. Small Business Administration website at www.sba.gov. Or you can do a web search by stated with the keywords “small business development”.
Depending on the size of your business, you may prefer to restrict equity financing to your own investment or those of you and your partners. This way, control over the business remains in your hands. If you need additional financing, just as in the case of loans, your relatives, friends, and associates could be potential sources of capital contributions.
A common source of third-party equity financing is from “angel” investors and “venture capital” investors. They are individuals or groups who are willing to invest capital in exchange for a better than average return on their investment.
They may specialize in a certain line of business or industry. Although they are willing to take risks, they take calculated risks, and many times prefer to invest in business once it has demonstrated its potential for generating profits and growth.
Angel investors may be more willing than venture capital investors to invest in smaller businesses that are in the start-up stage.
Many times, venture capital investors are interested in businesses that are growing and that could eventually become significant competitors on a regional, or even national or international level in a certain market.
These types of investors can take different approaches in terms of the degree of influence they want to exercise on the management of the business.
In general, some are more passive but could come to exert more influence in decision making, especially in strategically important times in the business’s development.
Turning over part of the decision-making authority and a portion of earnings can be seen as disadvantages of third-party equity financing, depending on what you want to achieve with your own business.
Read also: Unlocking Funds for Business Expansion
How to Fund Your New Small Business
Starting up a new business can be extremely exciting and rewarding, providing new opportunities and the chance to enjoy a far more exciting and comfortable future. However, most new small businesses will need a certain amount of cash injected into it for everything from set up costs and renting premises to new equipment and more.
Unfortunately, borrowing money for your small business or startup has become increasingly tough over the past few years, with a rising number of startups unable to get the finance that they need to get up and running. Whilst some startups have experienced delays as a result of this lack of lending others have been unable to start up at all.
The good news is that you can consider a range of options these days to get started with your small business. The first thing that you need to do as part of your business plan is working out how much you are going to need in order to get started.
Which means looking at the cost of premises if needed, equipment and stock, any initial salaries that you may have to pay out, setting up a website – pretty much everything that you will need to get things going.
Once you have worked out how much you need to borrow to set up and start running the new small business you need to work out where you are going to get it from. There are a number of options available to you, which include:
See a small business adviser at your bank:
He or she will be able to determine the viability of your business venture and will be able to offer advice on the likelihood of you being able to get a business loan from your bank
Use your equity:
If you are a homeowner and you have some equity in your home you could look at releasing some of this in the form of a secured loan, which you can then use to put into your business
Peer to peer or crowd lending:
This is where you go through a broker who has access to a network of individuals or groups who are interested in lending on an individual personal loan basis or even in the form of a business investment
Borrowing from loved ones:
You may have friends or family who are in a position to help you financially or who could pool finances together to help you get your small business up and running.
Alternative Sources of Funding for Small Businesses
As many small business and start-up business owners have experienced for themselves over the past few years, getting business finance has become increasingly difficult in the wake of the global financial crisis and the increased stringency being exercised by lenders.
This has had a huge impact on businesses in a number of ways, stifling the progression of some small businesses, reducing the number of new startups, and having a generally negative impact on the economy as a whole.
In an age when it has become increasingly important for small businesses to be able to compete not only on a national level but on an international one, the lack of funding availability has had serious repercussions for many businesses.
Whilst the banks may still be holding back when it comes to dishing out finance to small businesses and startup companies trying to get off the ground, there are alternative methods of funding that small business owners could consider. This includes:
Peer to peer lending:
This method of lending and borrowing has become more popular over recent years, as traditional lenders have increased their rejection numbers. This is where you can go through a broker who will try and connect you with registered individuals or groups who are willing to lend money. You can stipulate the terms that you want for the loan such as the rate of interest and the broker will then try and match you with suitable individuals or groups who are happy to lend you the money on that basis
This is a similar concept to peer to peer lending, where the money of a network of people is put together to provide funding for a business. The individuals in the network are able to lend as little or as much as they want, so it could be anything from £10 to $10,000 or more and the terms can vary from deal to deal, so you would need to make sure that you are happy with them before you proceed
Family and friends:
Some small business owners and start-up company owners may find that their family and friends are the people to turn to in order to get some funding for their business. Whilst this does reduce risks in terms of being penalized for missing a payment or being charged extortionate rates of interest it does come with emotional ties and risks that need to be considered.
Secured vs. Unsecured Business Finance Loans
Getting a loan was never easy. It became even tougher when the economic meltdown came. Most of the firms that provide loans are more cautious about their customers now. Many companies now require some sort of security before they provide you any sort of loan.
Although there are numerous kinds of loans available, we can broadly classify loans into two categories. The first one is the secured loan while the other one is the unsecured business loan. Both of the loans have their own pros and cons. We can break down these benefits and negative points in the following way.
The difference between secured and unsecured loans
To simply define the secured loans, we can say that the companies, in this case, require some sort of security. This makes sure that the bank can consume security in case you do not meet up with the payments. The unsecured loan is strictly in contrast to this.
This sort of loan is given completely on the basis of your credit history. No security is needed in this case and the company providing the loan gives you a loan according to your FICO score. Generally, the unsecured loan looks quite attractive but there is a catch too which is ignored by most of the customers.
Most of the customers who are getting a loan for business are looking for expanding their businesses. By getting a loan from the unsecured mode they can ensure that their business is secured without even providing anything for security.
The pros and cons of both types of loans
The biggest problem with these unsecured loans is that you have to pay higher interest rates. This is not the case with the secured ones. You have to provide some security in the form of your house, car or any personal property.
After the company has secured its position in your case, you are offered lesser interest rates. Both types of loans are provided by companies but the unsecured one is quite rare and provided by a few firms.
In case you need an urgent loan the unsecured loan can prove to be quite helpful as the process is quick whereas if you need a loan for your own business or any personal reason it is preferable to choose the secured one. You can get less interest rate by doing so.
Finding the perfect company to acquire loan
If you want to find companies providing these kinds of loans you can go to the internet and search for the firms in your country. There would be a list of such companies as they have seen a large increase in demand in recent years.
Now, every country in the world has numerous firms providing loans at competitive interest rates. So, it has become quite easy to find the company providing the loans.
In contrast to this, getting your loan application approved has become tough if you are applying for an unsecured loan. Nevertheless, you can always get a loan from the dozens of companies in the market.
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