4 Ways to Finance Your Business The first step in building your business, or creating sustained growth, is a solid business plan.
By Lucinda Honeycutt •
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Starting a business is an exhilarating endeavor. The prospect of offering a new product or service to the world, designing one's own future, and creating a legacy are why many people step into the world of business. Yet, there are many mundane facets that must be addressed. One of these is obtaining the requisite funding to begin the business or to facilitate growth.
The first step in convincing an individual or company to invest in your business, is a solid business plan. Some of the categories that need to be included within a business plan are a company description, market analysis, organization and management, product line or service, marketing and sales. For those interested in financing their business with outside capital, a funding request and financial projections must also be included. Once all of the information is gathered it is time to approach a creditor. One of the most popular methods of funding a business is a business loan.
1. Business plan.
A business plan is a map for the upcoming three to five years for a company. It is comprised of several components and is meant to be a living document, one that is able to grow and change as the needs and abilities of the business change. The first step of creating a business plan is designing a thoughtful executive summary that encapsulates the entirety of the business plan and references the company goals and profile. The company description should provide the salient details of what the business does, why it is different from similar competitors and the primary markets it will target. A market analysis should be completed prior to beginning a new venture. This will create a clear picture of the industry, outlook of the industry, information about the target market and potential market share available. An organization and management section will help define organizational structure, details about ownership, management profiles and qualifications of a board of directors. It is then time to describe in detail the product line or service the business intends to offer and the marketing and sales methods which will be implemented.
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2. Funding request.
If part of the purpose of putting together a comprehensive business plan extends to submitting a funding request from potential investors, this will become a section of the business plan. Within it one should include the amount of funding the company requires and the projected amounts for the upcoming five years. Details of how the funding is to be implemented should be explained in detail, as well as the preferred type of funding and associated terms. Finally, any important financial plans for the future should be outlined. These include buyout plans, selling the business, debt repayment or ensuring the company is acquired. All of these are important considerations for any individual or company considering funding the future of the business.
3. Financial projections.
Including a financial projections section in the business plan allows stakeholders to get a big picture of where the company intends to go over the coming years. While it may be tempting to put goals and hopes in this section, it requires hard data. This section should only be completed after a market analysis has been completed and realistic and clear objectives outlined. This allows a business to allocate resources effectively.
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Historical financial data is an important component of creating solid financial projections. Creditors will want the information for the past three to five years of an established business. Businesses that are new will obviously not have this information, but any financial history available should be included. Items such as balance sheets, cash flow statements and income statements should all be included. Any business assets such as buildings, vehicles or machinery that could be used as collateral should also be included.
Prospective financial data needs to be created to give creditors a clear understanding of how the businesses is expected to thrive and grow. The first year of data can be provided in monthly or quarterly segments, while the following four years can be yearly. Documents which should be included are forecasted balance sheets, capital expenditure budgets, income statements and cash flow statements. All projections should be in line with the funding requests.
The end of this section should include a brief analysis of the financial information provided including trend analysis for historic and prospective financial statements. Images such as graphs and charts can be far more impactful than pages of data and should be included.
4. Business loans.
There are several ways to approach securing a business loan. The Small Business Administration (SBA) offers several loan programs designed to accommodate a variety of needs. The other option is to approach banks or other private lending entities. It is best to take the time to explore all available options before committing to one path.
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The primary loan programs offered by the SBA include general small business loans, the microloan program, disaster loans or real estate and equipment loans. General small business loans are most commonly referred to as a 7(a) Loan. This is the most common type of loan offered by the SBA and provides financial assistance for businesses that meet specific requirements. There are several specialty loans in this classification. As the name suggests, the Microloan Program offers businesses short-term loans which are most frequently used for inventory, supplies, working capital, furniture or other equipment. Real Estate and Equipment Loans are more commonly referred to as a CDC/504 Loan. These loans are primarily for the purchase of major fixed assets such as real estate and equipment, but they can also be used for construction, remodeling and landscaping. Disaster Loans are low-interest loans designed specifically to assist business owners in rebuilding after a major disaster.
While the SBA does offer many solutions for businesses in need of additional funding there are strict rules in place about which businesses qualify. Those businesses that do not qualify will need to explore loans from banks or other creditors. The qualifications and terms from each lender will be different and should be given consideration. With so many options it can be difficult to even know where to begin. One of the first steps in deciding what business loan to pursue is to compare rates. The interest rate of a loan is one of the most important considerations when deciding which loan to secure because it can make a significant difference in the amount your business will eventually repay. While securing the funds is the primary goal in the immediate future, the business must avoid paying too much over the life of the loan.
The first step in building your business, or creating sustained growth, is a solid business plan. If the business is well established it may be time to create a new business plan that fully explores the growth potential and makes it clear for those you will approach for financing. Compiling all of the information the lender will want to see early allows the company to anticipate issues and address them in order to make the process of securing financing go more quickly. The type of business loan one decides to pursue can have a long-lasting effect on the future of the company and should be researched and deliberated over as thoroughly as any other major business decision.
