Financing Your Business

Small Business Loans

A common misconception business owners often have is that they can get a loan from the government. This is not usually the way it really works. Government agencies generally do not make loans directly to business owners. Instead, they provide a guaranty to banks and lenders for money lent to small businesses. This means that if you default on your business loan, the government will pay a portion of the loan back to the bank, thereby reducing the risk of the lender and making loans available to business owners who might not otherwise qualify.

What does this mean for you? The first place to start looking for a loan is with local lenders. The lender will have all the forms you'll need to apply for government-backed loans, and will work with the government on the application process, making it easier on you.

You may also want to look at state and local government agencies and local non-profits. Some of these organizations sometimes provide loans directly to businesses, which means you won't need to go through a bank.

Applying for a Loan

Although there are literally hundreds of loan programs available for you to take advantage of, they will generally ask for the same basic information to evaluate your loan application. It is very important for you to pay close attention to these requirements. Prepare your answers in advance and remember that while you must be accurate, you are also selling your company and yourself to the lender. They must believe in you!

Here are the basic things you should prepare in advance:

1. Loan Application Form
   • Why are you applying for this loan?
   • How will the loan proceeds be used?
   • What assets need to be purchased, and who are your suppliers?
   • What other business debt do you have, and who are your creditors?
   • Who are the members of your management team?

2. Personal Background
   You will very likely need to provide some personal background information, including previous addresses, names used, criminal record, educational background, etc. This is nothing personal, but they want to know who you are.

3. Resumes
   This may be more important for a new business, but it is very common for a lender to ask about your work experience. They want to know how your previous experience will affect your role in the business. Is your background in the same industry? Do you have management experience? Have you worked in marketing? This is very much like a job interview. Be ready to sell your past experience and how it will help to make you successful in this business.

4. Business Plan
   Every loan program will require a business plan to be submitted with the loan application. The business plan should include a complete set of projected financial statements, including profit and loss, cash flow and balance sheet.

5. Personal Credit Report
   Your lender will obtain your personal credit report as part of the application process. You should beat them to the punch. Know your credit score, credit problems, etc. Inaccuracies and blemishes on your credit report can hurt your chances of getting a loan approved. It’s critical you try to clear these up before beginning the application process.

6. Business Credit Report
   If you are already in business, you should be prepared to submit a credit report for your business. As with the personal credit report, it is important to review your business’ credit report before beginning the application process.

7. Income Tax Returns
   Most loan programs require applicants to submit personal and business income tax returns for the previous 3 years. They will look for progressing revenues in your business or, at the very least, consistency. Be prepared to discuss the ups and downs in extreme detail. Show the banker that you understand the financials!

8. Financial Statements
   You may also be required to provide projected financial statements either as part of, or separate from your business plan. It is a good idea to have these prepared and ready in case a program for which you are applying requires these documents.

9. Bank Statements
   Many loan programs require one year of personal and business bank statements to be submitted as part of a loan package.

10. Accounts Receivable and Accounts Payable
    Most loan programs require details of a business’ most current financial position. Before you begin the loan application process, make sure you have accounts receivable and accounts payable.

11. Collateral
    This is an important area, because collateral requirements vary greatly. Some loan programs do not require collateral. Loans involving higher risk factors for default require substantial collateral. Strong business plans and financial statements can help you avoid putting up collateral, so this is another reason to sell yourself strongly. In any case, it is a good idea to prepare a collateral document that describes cost/value of personal or business property that will be used to secure a loan.

12. Legal Documents
    Depending on the business you are in and the loan’s specific requirements, your lender may require you to submit one or more legal documents. Make sure you have the following items in order, if applicable:
    
    Business licenses and registrations required for you to conduct business
    Articles of Incorporation or Organization
    Copies of contracts you have with any third parties
    Franchise agreements
    Commercial leases

13. Organizing Your Documents
    Keeping good records is essential for running a successful business, but even especially critical when applying for a loan. Make sure required documents are orderly and accurate. All information you provide will be verified by your lender and the organization guaranteeing the loan. False or misleading information will result in your loan being denied. Finally, make sure you keep personal copies of all loan packages.

Where to find loans:

For starting, acquiring and expanding a small business, 7(a) loans are the most basic and most used type loan of SBA's business loan programs. Borrowers must apply through a participating lender institution.

http://www.sba.gov/financialassistance/borrowers/guaranteed/

If your business is located in a rural community, you might consider the the U.S. Department of Agriculture (USDA)

http://www.rurdev.usda.gov/rbs/busp/b&i_gar.htm?cm_sp=ExternalLink-_-Federal-_-USDA

Are you a verteran? You might try this...

http://www.business.gov/start/veteran-owned/

If you are in a declared disaster area and are the victim of a disaster, you may be eligible for financial assistance - even if you don't own a business.

http://www.sba.gov/services/disasterassistance/?cm_sp=ExternalLink-_-Federal-_-SBA

Small Business Grants

Grants are not typically provided for starting or growing a business. However, grants are available to non-commercial organizations, such as non-profits and educational institutions in areas such as, medicine, education, scientific research and technology development.

The rules and requirements for grants are very different from loans. They may not require repayment or they might require that you match the funds being put up. If you are in one of the above listed groups, it might be worth your time to complete more research here…

http://www.business.gov/finance/financing/grants/

or here...

http://www.sba.gov/smallbusinessplanner/start/financestartup/SERV_GRANTRES.html

Seed & Venture Capital Financing

Venture capital is a specific type of funding which is typically reserved for early-stage start-up companies that have high growth potential. The industries targeted for this funding generally include biotechnology, information technology and manufacturing. Venture capital investments are often made as cash investments in exchange for shares in the company.

Small Business Investment Companies (SBIC)

Congress created the Small Business Investment Companies (SBIC) program in 1958 to help small U.S. companies raise capital. SBIC's are privately owned and managed investment firms designed to supply venture capital and start-up financing to small businesses. There are certain SBA size requirements for a small business to be eligible for SBIC financing,. The SBIC Program defines a company as "small" when its net worth is $18.0 million or less and its average after tax net income for the prior two years does not exceed $6.0 million. When you contact an SBIC, you'll need to present a professional business plan that addresses your company's operations, management, financial condition and funding requirements.

Small Businesses in Economically Distressed Communities

If your business is in a low-income area, there are special venture financing options available to you. First, there is a special type of SBIC called Specialized Small Business Investment Companies (SSBIC). SSBIC's provide assistance solely to small businesses owned by socially or economically disadvantaged persons. Secondly, you may be eligible for New Markets Venture Capital (NMVC) financing. Modeled after the SBIC program, the NMVC program makes equity investments in small businesses located in economically distressed communities in urban and rural areas. NMVC financing is available in limited areas, and available from these venture capital firms.

For information on New Markets Venture Capital Financing, click here:http://www.sba.gov/aboutsba/sbaprograms/inv/nmvc/INV_NMVC_INDEX.html?cm_sp=ExternalLink-_-Federal-_-SBA

For a nationwide listing service that connects entrepreneurs with angel investors, click here:http://www.active-vp.com/

What are Tax-Exempt Bonds?

Tax-exempt, industrial revenue bond programs are an excellent financing option for small manufacturers who are looking to expand operations and/or upgrade their facilities. They are issued by a state or local government agency on behalf of a private business. Once issued, tax-exempt bonds can be sold in the open market or can be purchased by investors. Interest income earned by the bond purchaser is exempt from state and local taxes, which allows the lender to pass savings to the borrower in the form of lower interest rates.

Think of tax-exempt bonds as being very similar to conventional loans. They are not grants. Borrowers are required to pay back the principal plus interest. Applicants have to demonstrate how their projects will ultimately create jobs and demonstrate a positive impact on the local economy. Unlike conventional loans, they typically offer longer-term financing at lower rates than conventional financing allows.

It is important to note that tax-exempt bonds are not intended for small scale projects. They usually fund projects over a million dollars, however, mini-bonds con occasionally be issued.

The goal of these bonds is to create new jobs and economic growth.  Businesses eligible for tax-exempt bonds include manufacturing businesses and non-profit organizations. Tax-exempt bonds of up to $10 million can be issued to finance up to 100% of an eligible project.

Application requirements and processes vary by state and locality. Contact your state or local economic development agency to obtain information about available tax-exempt bonds.