If you are preparing for expansion should you only finance through a SME loan – and if not what other financial alternatives are out there?
By: Hitesh Khan/
Finance business by choosing from a vast array of alternatives. Debt or equity? Secured or unsecured? Are you at start-up, already launched, profitable, looking for exit / succession funding? How much resources have you committed to financing business?
To get finance business, what does a lender or investor want from someone? What are some of the myths surrounding financial alternatives?
Probably the most common mistake we find among those seeking financing for their business is the idea that someone else will stake them to their dreams without them taking a large share of the risk.
Think about it – how much confidence will a lender or investor have in your proposal if you don’t have enough confidence in it yourself to put your own resources at risk?
So, the most basic rule to secure business finance is to commit yourself and your savings or resources to the business.
For a start-up business, which might not be able to obtain funds on credit, the owner will have to come up with capital, such as from personal savings. No matter where else you look for funding, the money you put in is a strong sign of good faith and commitment to other lenders. Consider borrowing from friends and relatives and /or selling off surplus assets to provide the funds you need.
For an established family business, financing is often needed for expansion or to assist with transition of ownership from one generation to the next. As part of our succession management program, you should always consider the economics to “build or buy” as part of their growth strategy. Given the current economy, there are many businesses to buy – but certainly not without expert advice”.
When considering financial alternatives, your business plan should tell you. Things like:
- initial operating expenses such as utilities, rent, payroll
- inventory and supplies to get started
- computer system, software
- fixing up your premises, office furniture, production equipment, delivery vehicle
- perhaps funds to buy an existing business rather than starting from “scratch”, etc.
To secure business finance, not all of these items require cash. Financial alternatives include renting or leasing and even barter or exchange.
And don’t forget the important questions in financing business that go with “how much?”
- When do you need it? Utilities are paid after the end of the month, except for a small deposit at the beginning. Payroll is incurred weekly or monthly. Rent is usually paid along with a deposit at the beginning of the month. Inventory can be built up gradually in some cases, and suppliers often grant extended payment terms.
- When are you going to pay it back? You will want to earn enough to start paying operating expenses from regular cash inflow. Inventory should turn over [be sold and replaced] several times a year so that you can typically sell it and collect for the sale in around 90 days. Assets like production equipment, delivery vehicles, computer system last longer and might take around 5 years to be paid off completely.
- What security do you have to offer?Also known as collateral, security is what a lender has to rely on if you don’t repay. It might be business assets and / or personal assets.
Follow these tips to ensure lenders look to finance business favourably:
1. Review your credit history for business financing
Lenders will thoroughly examine both your personal and business credit history before making a credit decision. Before you approach a potential lender, request a copy of your personal credit report. If you find errors in your credit report, contact the credit bureau.
2. Gather financial documents for business finance
You will likely need tax returns and financial statements for your business if you are applying for a term loan or line of credit. For a Small Business Administration loan, you may also need to present a formal business plan.
3. Determine how much capital your business needs before applying for business financing
Before you walk into the lending office or fill out a credit application form, figure out exactly how much money your business needs to borrow, and make sure it’s a realistic amount. If you’re not sure how much capital to ask for, consider consulting a financial professional. He or she will closely examine your cash flow and current debt load to determine how much financing you actually need. Also, be prepared to tell the lender how you plan to use the money.
For example, you may explain that you will use the capital to pay for additional office space, furniture or equipment.
4. Understand all your lending options to finance business
It’s important to identify all the lending options available to you and determine which one is the best choice for your business. You will also want to consider the process and the timing. For example, loan decisions below $100,000 may be based on your credit profile and basic information, while larger amounts may require a detailed review of your finances.
5. Consider payment terms for business financing
You also have to decide how long you will need to repay your credit. There are short-, medium-, and long-term loans, and they all have positives and negatives. For example, if you expect to be able to pay back the money quickly, a short-term loan may be the best choice.
While preparing to apply for credit, you’ll need to gather key information and required business documents to support your application. The requirements will vary greatly depending on the type and amount of credit, from basic information for a credit card to full financials for a major term loan.
For more complex loans, you may need to provide additional information for financial alternatives. For example, in the case of a commercial real estate loan you will need to provide some property related documentation.