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Small Business Financing Options – Despite the Credit Crunch

There’s no question that the financial crisis and ensuing credit crunch have made it more difficult than ever to secure small business financing and raise capital. This is especially true for fast-growth companies, which tend to consume more resources in order to feed their growth. If they aren’t careful, they can literally grow themselves right out of business.

Amidst all the gloom and doom, however, it’s important to keep one thing in mind: There are still options available for small business financing. It’s simply a matter of knowing where to look and how to prepare.

Where to Look

There are three main sources you can turn to for small business financing:

Commercial Banks - These are the first source most owners think of when they think about small business financing. Banks loan money that must be repaid with interest and usually secured by collateral pledged by the business in case it can’t repay the loan.

On the positive side, debt is relatively inexpensive, especially in today’s low-interest-rate environment. Community banks are often a good place to start your search for small business financing today, since they are generally in better financial condition than big banks. If you do visit a big bank, be sure to talk to someone in the area of the bank that focuses on small business financing and lending.

Keep in mind that it takes more diligence and transparency on the part of small businesses in order to maintain a lending relationship in today’s credit environment. Most banks have expanded their reporting and recordkeeping requirements considerably and are looking more closely at collateral to make sure businesses are capable of repaying the amount of money requested.

Venture Capital Companies - Unlike banks, which loan money and are paid interest, venture capital companies are investors who receive shares of ownership in the companies they invest in. This type of small business financing is known as equity financing. Private equity firms and angel investors are specialized types of venture capital companies.

While equity financing does not have to be repaid like a bank loan, it can end up costing much more in the long run. Why? Because each share of ownership you give to a venture capital company in exchange for small business financing is an ownership share with an unknown future value that’s no longer yours. Also, venture capital companies sometimes place restrictive terms and conditions on financing, and they expect a very high rate of return on their investments.

Commercial Finance Companies – These non-traditional money lenders provide a specialized type of small business financing known as asset-based lending (or ABL). There are two primary types of ABL: factoring and accounts receivable (A/R) financing.

With factoring, companies sell their outstanding receivables to the finance company at a discount of usually between 2-5%. So if you sold a $10,000 receivable to a factor, for example, you might receive between $9,500-$9,800. The benefit is that you would receive this cash right away, instead of waiting 30, 60 or 90 days (or longer). Factoring companies also perform credit checks on customers and analyze credit reports to uncover bad risks and set appropriate credit limits.

With A/R financing, you would borrow money from the finance company and use your accounts receivable as collateral. Companies that want to borrow in this way should be able to demonstrate strong financial reporting capabilities and a diverse customer base without a high concentration of sales to any one customer.

How to Prepare

Regardless of which type of small business financing you decide to pursue, your preparation before you approach a potential lender or investor will be critical to your success. Banks, in particular, are taking a much more critical look at small business loan applications than many did in the past. They are requesting more background from potential borrowers in the way of tax returns (both business and personal), financial statements and business plans.

Lenders are focusing on what are sometimes referred to as the five Cs of credit:

o Character: Does the company have a strong reputation in its community and industry?

o Capital: Lenders usually like to see that owners have invested some of their personal money in the business, or that they have some of their own “skin in the game.”

o Capacity: Financial ratios help lenders determine how much debt a company should be able to take on without stressing the finances.

o Collateral: This is a secondary source of repayment in case a borrower defaults on the loan. Most lenders prefer collateral that is relatively easy to convert to cash, especially equipment and real estate.

o Conditions: Conditions in the borrower’s industry and the overall economy in general will play a big factor in a lender’s decisions.

Before you meet with any type of lender or investor, be prepared to explain to them specifically why you believe you need financing or capital, as well as how much capital you need and when and how you will pay it back (if a loan) or what kind of return on investment a venture capital company can expect. Also be prepared to discuss specifically what the money will be used for and what kind of collateral you are prepared to pledge to support the loan, as well as your sources of repayment and what measures you will take to ensure repayment if your finances get tight.

You should also ensure that your financial statements and records are current and that your internal control systems are adequate for handling the level of accounting and bookkeeping lenders and investors expect.

Small Business Financing – What Are Your Options?

In the meantime, one has a wide variety of options for small business financing. Fortunately, you have other resources to rely on, unlike just bank loans as it was in the past.

What are the options that are commonly overlooked?

Currently, many unconventional sources of finance are coming up as well, e.g. contract financing, which is one of the widest preferred options. Indeed, it is also known as purchase order financing. Following this option, a lender finances the purchase order rather than the manufacturer. Consequently, the lender gets the agreed portion of profit when the process is finished. This is known as purchase order financing.

What is the next option?

One more type of finance options is to think of grants for small businesses. But, one negative aspect of this option is the fact that grants are not considered that reliable. However, venture capital is one of the small business financing options that is best defined by many applicants. This is especially true since the firms, which fund the proposals presented, are from the small enterprises. The only limitation with these small business loans is that they just finance a very few ventures.

Do you have any other options?

You can avail finance for your small business by selling your debts and stocks in the mass market. But again, one thing you should know is that it is not a common method of getting any help because of its difficult procedures. A large number of small businesses are now funded with the help of debt finance through financial institutions like banks. In this context, banks provide small business owners a line of credit or loan with a repayment term and schedule, as well as, a rate of interest.

How can a financial institution make an educated decision?

In fact, financial institutions or banks will deeply look for how profitable your business is. So, to improve your chances of being financed, just prepare a good business plan. A plan will show them the prospects of your business and, therefore, it will increase your chances to get accepted.

Have you ever thought about the option of debt funding?

There are many private debt investors who invest on a small business through debt funding. To make it a win situation for them, they ask for some equity ownership stakes in return. Borrowers from any class can opt for equity options. Despite having a bad credit rating that may include bankruptcy, default, arrear, CCJ or IVA, one can apply for this option without any problem. Obviously, you will need to put in some efforts for making these financial deals cost effective.

What is the best choice that I can recommend you?

You can easily apply online for your loan. This will surely save a lot of time and endeavor. Concretely, this will help you to navigate through many varieties without leaving your home. In this context, it is recommended to compare a plenty of finance choices and choose the best solution for the small business system you have. Doing this, you will minimize the risk to waste your money. To get the best of a financial deal, you will need to put in some time in research. This will help you find out the right financial option for you. In this article, the message was to list different small business finance options and the best choice is your decision.

Small Business Financing – The Money For Small Businesses is Out There

There are so many sources of small business financing you can access everywhere. Entrepreneurs certainly can capitalize their businesses from these small business financing opportunities that will be elaborated one by one in this article.

Business financing is often to be found on certain sources of organizations such as government, banks, investors and venture capitalist. It is imperative to take note on what the lenders need when you propose loan to them. Lenders will want to know about your business history to see whether your business has executed the business beneficially or not. They will also review track record of your company management. Poor demonstrated proposals, incompetent collateral, inadequate cash flow and deficiency of management are the general causes of numerous small business failures and these will become negative considerations for them. What you need to bring to them are the opposite ones and also a proven positive credit history that will support you to get a loan.

Now let us discuss the four primary sources of small business financing.

Government Sources (Small Business Administration or SBA)

These sources are common loan guarantee programs that will cut down the risk for lenders. SBA is supported by business experts who will provide consultation to business owners before they submit their proposals to the lenders.

a. The 7(a) loan guarantee program: This program offers repayment guarantees ranging from 75-85ir% depending on the size of the loan. Typically, this program assists small business which lack of adequate collateral.

b. The SBA Low Doc loan program: The approval time of this program will be around two or three days after the Small Business Administration receive the applications. There is just one form to be filled in for these loans.

c. The SBA Express loan program: This program addresses loans up to $250,000. The interest rate of this program perhaps higher than the other SBA programs, but this program can be categorized as loan guarantee programs with quick procedure.

d. Micro Loans: The loans are brought in by non profit community based organizations for totals up to $35,000.

Common or Traditional Lenders

These lenders are primary sources of loans to small businesses. They are credit unions, banks and finance institutions. Many of these companies have professionally experienced addressing the business loans and hold a small business section.

Venture Capitalists

With a high profit potency, these sources are ordinarily business firms that are awaiting investment chances in businesses or companies.

Individual Investors

These are usually personal investors who have lower amounts to invest than venture capitalists with investments chain from $100,000 to $1 Million and they are searching beneficial opportunities in a broad diversity of businesses.

From above mentioned sources, we know that small business financing are available out there. Therefore it is time to prepare your proposal to approach the institution that match to your needs as well as your qualifications.