How To Secure Financing For Your Small Business
Once you have started running your own business and feel the need for capital infusion to support your expansion plans, you need to finalize your source of funding. You have many options. We will examine the most widely used options and how you can go about securing your loan. You can apply for loans through Commercial Lenders, seek grants from the government or opt for specialized financing from Credit Unions or local organizations.
All these lending institutions will ask for similar information along the lines below:
- Purpose of loan
- How the proceeds would be utilized
- Key personnel in the business and their prior experience/track record
- Any credit history for the business and its principals in their individual capacity
Loans from Commercial Lenders
You can approach a Commercial Bank for your loan. The first option should be the existing bankers with who the business has a relationship. The pricing of the loan would depend on the credit history of the business and its principals and the inherent business risk.
Government grants are provided to qualified businesses. In this instance, the small business needs to operate in an area that qualifies for these grants. These grants generally need not be repaid. However, a substantial sum of money is unlikely to be available through this route.
Credit Unions and local organizations
Credit Unions and Small Business Administration are good sources of lending. Credit Unions have a strong affiliation to the geography they operate in and have close community ties. The Small Business Administration (SBA) would be helpful, especially in those cases where the credit history of the borrowers is not so strong. The SBA operates through participating institutions and you would be applying for finance from one of these institutions.
We had earlier looked at the questions that most lenders are likely to ask. You should have documents that support your responses to these questions. A list of the most important documents is provided below:
A sound Business Plan– this should highlight how you intend to grow the business, who your customers are, what the risks are, various alternative courses of action and evaluation of the same, the profile of the Principals and their monetary contribution to business. A justification for the loan should be included here.
Credit NeedsJustification – This document should include the extent of working capital required, long term financing needs, any collaterals that can be pledged as security, projected Cash Flows for the next 2-3 years, projected financial statements including Balance Sheet and Profit and Loss Accounts along with the contribution from the Principals who own the business. This document should also include how the proceeds of the loan would be utilized.
Credit Reports–The personal Credit Reports of Principals in the business and that of the business would be used to determine the eligibility for loan and the pricing of the loan.
Most lending institutions would have a Checklist that lists down the documents that need to accompany the loan application. Usually a good Business Plan, strong financial commitment from the Principals coupled with their past track record should help you secure the loan you are looking for.
Daniel Guidotti is a blogger at Cap Credit. He is a financial expert and offers advice on investment, saving and more in his articles.