Financing Small Business

The primary reason most people do not follow through on a great idea or business plan is because they think the funds necessary to bring it to fruition are unavailable to them. There are various financing options open to new or expanding small businesses. The beginning entrepreneur has many potential backers for a good idea.

Aside from any personal resources, the budding small business can enlist the financial support of venture capitalists, “angel” investors and traditional banks. In addition to these, there are many government subsidized loans and grants for inventions, businesses and projects believed to positively impact the public or applicable business sector. In most cases, the personal credit history of the applicant will be evaluated as well as the project itself. This is especially so with traditional lenders like banks and credit unions. The benefit of approaching traditional lenders is that they are usually willing to counsel the applicant on the best way to improve their odds of being approved. Additionally, by taking the personal finances under consideration for the loan, banks evaluate the ability of the applicant to repay the loan should the project not yield the expected outcome or profit. In this way, the entrepreneur has the opportunity to weigh the potential financial risk of the venture.

Many lenders are more likely to approve a small business loan if the entrepreneur has personally invested some capital into the project. Personal property can be used as collateral to secure traditional small loans even when the applicant’s credit is not ideal. Non-traditional lenders will also look at a project in which the originator is personally vested more favorably. It shows a high level of confidence in the venture as well as the conviction of the person behind it. The project originator should keep track of all expenses incurred while working on the project from the very start. Money and time invested constitute “sweat equity” and can be a part of the loan evaluation if well documented.

Here are some of the most common resources for small business financing:

Traditional Lenders

These include credit unions, loan companies and banks. Most traditional financial institutions have separate divisions dedicated to small business finance. The most logical place to start is with an institution with which a relationship is already established. Although an established relationship can be beneficial, other banks or lending institutions should be considered, as well. There are different programs, criteria and benefits offered by different institutions that may prove to be better suited to the applicant or the project.

Venture Capitalists

These organizations or individuals typically invest in businesses or projects that will potentially yield high profits. In exchange for the investment, they expect to receive some amount of ownership. Unlike traditional lenders, the idea or business itself is of the most importance. Be sure to study the contract or agreement carefully. Depending on the amount of revenue projected, this may be a very equitable proposition. Research any group or individual you may be joining in this kind of partnership.

Microloans

These loans generally are granted by community based non-profit organizations. The application process varies by organization and the loan amount is usually under $35,000.

Investment Angels

These individuals or consortiums are looking for good investment opportunities. By far, these types of organizations are the most non-traditional as there is no standardized process or criteria. Again, this is one of those situations in which the idea is paramount. Investment angels tend to make large loans ranging from $100K to $1 million. There are several of these organizations, at least 170, in the United States and Canada. They don’t advertise as they deal in private monies, but they can be found through diligent internet research or by checking with the local SBA or chamber of commerce.

These are some resources for small business financing however any entrepreneur should conduct some research into the type of situation most appropriate for the project or business. Though the sources are very different, one common factor will be shared. The business plan or project proposal will be scrutinized much more than the individual applicant. The financing applicant should carefully prepare the proposal so that it is concise and informative. It should be easily readable by people who are not in the business yet articulate the technical aspects clearly and precisely. Once the presentation of the project or business is prepared, there is no reason not to try as many financial prospects as possible to find the most advantageous financing options.