Small Business Financing
Many entrepreneurs are faced with shoestring budgets when they first go into business. If this describes you, you might want to think about how you plan to finance your start-up.
Many businesses choose to borrow money to get their companies off of the ground. However, finding lenders can often be challenging. If you seek funding from a bank or other lending institution, it can help to try to take a look at it from their perspective. Consider asking yourself questions such as:
Why should they invest in you?
How safe will their investment be?
Put together some rock-solid answers to these questions, and be able to back up your defense with abundant detail.
Additionally, banks will evaluate your proposal on the following grounds:
Likelihood of Default and Repayment
You must be able to describe in detail your plans to repay the bank. Lenders will evaluate your cash flow and any collateral you put up to secure your loan. Banks prefer to lend to established businesses with proven track records and plentiful detail.
Banks will evaluate both your personal credit records and those of your company. Proper planning should include a review of your credit reports well in advance of seeking a loan. This way, you can be sure that, at the very least, your information is accurate.
Lenders want to see some level of equity in the business. This can be direct investments by you or your business partners, or simply equity developed from doing business. Ideally, lenders want to see that your company’s debt to equity ratio is less than 4:1.
Lenders want to see that you are willing to sacrifice some collateral in the case of default. This can be either business assets, or something valuable that you own personally (i.e. house, car).
Finally, the bank will want to learn more about you. After all, you are asking for both their money and trust, so you should be able to demonstrate why they will benefit from taking a chance. Lenders want to see some solid experience and background among the entrepreneurs involved in the start-up. Banks will evaluate your experience and education when making a decision as to whether or not you represent a good investment.