There are many options open to you when it comes to obtaining business finance.

Right now, this minute, specialty lenders right across the country are looking to fund solid companies and projects.

Each one has its own preferences with respect to the loans and equity investments they will make, but the cash is there available to finance the right opportunity.

And corporate lenders are not the only source of business finance, as we shall see.

Risk-Reward

However, whether it’s a corporate lender or your wife’s rich uncle, every potential source of business finance is going to be looking at the same things initially.

What is the chance of them losing their money (the risk) against what returns they stand to make for providing the funding (the reward) and the likelihood of you being able to pay it back (more risk).

Remember this fact throughout the application process and it will help you to see things from the lender’s side, and by doing so enhance your chances of successfully securing that finance you seek.

Common Lending Sources

Lending sources come in all shapes and sizes. They all have their own agendas and they are all trying to make a profit out of helping you.

In other words, look before you leap! Way up your options, know the costs involved and make an informed decision.

1. Corporate Lending Sources

a. Banks:

i. Overdraft Short term financing for relatively smaller amounts where the amount borrowed can be easily paid back out of cash flow. Higher cost than a loan but easier to obtain.

ii. Loan Longer term financing for larger amounts where the amount to be paid back and the interest can be scheduled over longer periods of time. The repayments have to be met from cash flow. Lower costs per annum than an overdraft, but total cost depends on term of loan.

iii. Secured or Unsecured Most bank loans of an amount over $25,000 and over a substantial period of time will need to be secured. This means that you need to offer the bank some collateral (usually property, your home) in return for them lending you the money. Then if you default on the loan the bank have the option to recover any money owed from the collateral.

Unsecured loans it in the current climate are normally only given for relatively small amounts and against your own credit rating as opposed to that of the business.

b. Venture Capital Investors

A venture capital financier is an investor who brings money to the table in exchange for future profits. They will be much more flexible than a bank to negotiate with and may well be able to stretch the risk reward envelope that little bit further.

c. Finance Houses

i. Equity Investment is where a lender is prepared to provide business finance for you in return for shares in your business. You will need to show the investor that the risk reward ratio is attractive enough for them to invest and you will have to be prepared to give a part of your business away in return for securing the required finance.

ii. Factoring - is a financial transaction whereby a business sells what is owed by its customers (i.e., invoices) to a third party (called a factor) at a discount in exchange for immediate money with which to finance continued business.

d. Leasing Companies

i. Leasing of business equipment (including cars) has become a very popular method of financing the acquiring of new capital items. There are 5 main advantages of leasing over outright purchase:

1. Improves cash flow – your outlay is normally between one and three months installments as opposed to the full items price

2. Easier to obtain a lease than to obtain a loan

3. Easier to keep pace with new technological innovations – upgrades are often part of the agreement

4. Leaves your capital available for other items

5. Can have balance sheet advantages

2. State Lending Sources

a. Small Business Administration (SBA)

The SBA is a federal agency charged with assisting small businesses in the US. An SBA loan is available to a small business based in the US. The loan comes  from private-sector lenders (banks, etc.) but is guaranteed by the SBA. The SBA has no funds for direct lending. SBA Financing Details:

i. Minimum funding limit is $100,000

ii. Funding available in as little as 45 days

iii. US Small Businesses only

b. Local State Government Loans & Grants

Available on a state by state basis, each state has a Small Business Development Center (SBDC) to help you find the right help and assistance locally.

3. Private Sources

a. Business Suppliers

An often over-looked option is to propose an investment opportunity to a business partner that stands to gain if your business grows. If your business expands one of the biggest gainers after you, is your main supplier. By helping finance that expansion they gain on the loan interest and they gain by the increased business they can look forward to.

b. Family or Friends

Nobody likes going cap in hand to family or friends but often they can be a great option. In a new start up situation especially where the perceived risks are high, they can be the only option. If a fair deal is struck on interest charges or shares in the business it can also be a mutually beneficial opportunity.

Summary

Obtaining finance for your business may seem at first a daunting task. But with the correct information to hand and a clear idea of your options, it soon becomes just another new skill that you acquired on the way to successfully establishing your very own business.

Don’t forget to look out for Part Two coming soon, where we will look at the reasons why businesses need to raise finance and the actual application process itself!

This article was written by Brian K Fitzgibbon CPA.

Brian is an experienced accountant and small business consultant. He runs his own business, lectures extensively on small business topics and has checked out and valued many hundreds of small businesses for buyers.

Brian is also the author of the highly acclaimed and invaluable
"How To Value A Business And Buy It Without Fear"
A do-it-yourself guide for first-time and experienced buyers alike.

To download a FREE Chapter from Brian's book please follow this link: "HowToValueBusiness.com"

March 14th, 2009 | Tags: business finance, buy a business, buying a business tips, how to get a business loan, loans | Category: articles | Subscribe to comments | Leave a comment | Trackback URL  |