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One
key to a successful business start-up and expansion
is your ability to obtain and secure appropriate financing.
Raising capital is the most basic of all business activities.
But, as many new entrepreneurs quickly discover, raising
capital may not be easy; in fact, it can be a complex
and frustrating process. However, if you are informed
and have planned effectively, raising money for your
business will not be a painful experience. This discussion
focuses on ways a small business can raise money and
explains how to prepare a loan proposal. This information
can also be found on the IRS website.
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Finding the money you need
There are several sources to consider when looking
for financing. It is important to explore all of
these options before making a decision. |
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Personal
saving: The primary source of capital
for most new businesses comes from savings
and other forms of personal resources. While
credit cards are often used to finance business
needs, there may be better options available,
even for very small loans. |
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Friends and relatives: Many entrepreneurs look to
private sources such as friends and family
when starting out in a business venture. Often,
money is loaned interest free or at a low
interest rate, which can be beneficial when
getting started. |
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Banks
and credit unions: The most common sources
of funding, banks and credit unions, will
provide a loan if you can show that your business
proposal is sound. |
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Venture capital firms: These firms help expanding companies grow in exchange for equity or partial ownership. |
Borrowing money
It is often said that small business people
have a difficult time borrowing money. This
is not necessarily true. Banks make money
by lending money. However, the inexperience
of many small business owners in financial
matters often prompts banks to deny loan requests.
Requesting a loan when you are not properly
prepared sends a signal to your lender. The
message is that your loan would be a high-risk
one.
To be successful in obtaining a loan, you
must be prepared and organized. You must know
exactly how much money you need, why you need
it, and how you will pay it back. You must
be able to convince your lender that you are
a good credit risk.
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SBA loan maturities
Loan
programs from the Small Business Association
(SBA) are generally intended to encourage
longer term small business financing, but
actual loan maturities are based on the ability
to repay, the purpose of the loan proceeds,
and the useful life of the assets financed.
However, maximum loan maturities have been
established: 25 years for real estate; up
to10 years for equipment (depending on the
useful life of the equipment); and generally
up to seven years for working capital. Short-term
loans are also available through the SBA to
help small businesses meet their short term
and cyclical working capital needs.
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Types of business loans
Terms of loans may vary from lender to lender,
but there are two basic types of loans: Short-term
and long-term.
Generally, a short-term loan has a maturity
of up to one year. These include working-capital
loans, accounts-receivable loans and lines
of credit.
Long-term loans have maturities greater than
one year but usually less than seven years.
Real estate and equipment loans may have maturities
of up to 25 years. Long-term loans are used
for major business expenses such as purchasing
real estate and facilities, construction,
durable equipment, furniture and fixtures,
vehicles, etc.
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How to write a loan proposal
Approval of your loan request depends on how
well you present yourself, your business,
and your financial needs to a lender. Remember,
lenders want to make loans, but they must
make loans they know will be repaid. The best
way to improve your chances of obtaining a
loan is to prepare a written proposal.
A good loan proposal will contain the following
key elements:
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General Information
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Business name, names of principals, Social Security number for each principal,
and the business address. |
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Purpose of the loan - exactly what the loan will be used for and why it is needed. |
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Amount required - the exact amount you need to achieve your purpose. |
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Business Description
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History
and nature of the business - details
of what kind of business it is,
its age, number of employees and
current business assets. |
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Ownership structure - details on your company's legal structure. |
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Management Profile - Develop a short statement on each principal in your business. Provide your:
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Background |
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Education |
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Experience |
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Skills |
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Accomplishments |
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Market Information
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Clearly define your company's products as well as your markets. |
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Identify your competition and explain how your business competes in the
marketplace. |
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Profile your customers and explain how your business can satisfy their needs. |
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Financial Information
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Financial
statements balance sheets and
income statements for the past
three years. If you are starting
out, provide a projected balance
sheet and income statement. |
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Personal
financial statements on yourself
and other principal owners of
the business. |
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Collateral you would be willing to pledge as security for the loan. |
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How your loan request will be reviewed
When
reviewing a loan request, the lender is primarily
concerned about repayment. To help determine
this ability, many loan officers will order
a copy of your business credit report from
a credit-reporting agency. Therefore, you
should work with these agencies to help them
present an accurate picture of your business.
Using the credit report and the information
you have provided, the lending officer will
consider the following issues:
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Have
you invested savings or personal
equity in your business totaling
at least 25 percent to 50 percent
of the loan you are requesting?
(Remember, a lender or investor
will not finance 100 percent of
your business.) |
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Do
you have a sound record of credit worthiness
as indicated by your credit report,
work history and letters of recommendation?
This is very important. |
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Do
you have sufficient experience
and training to operate a successful
business? |
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Have
you prepared a loan proposal and
business plan that demonstrate
your understanding of and commitment
to the success of the business?
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Does
the business have sufficient cash
flow to make the monthly payments?
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