Access To Capital
When you’re starting a business, access to capital is essential. But it is not enough to simply have sufficient financing; knowledge and planning are required to manage it well. These qualities ensure that entrepreneurs avoid common mistakes like securing the wrong type of financing, miscalculating the amount required, or underestimating the cost of borrowing money
When a lender analyzes a business loan application they look at the 8 C's of lending:
Credit - It must be good.
Collateral - Something of value to secure the loan.
Cash Flow - Ability of the business to repay the loan from operations.
Capacity - Your personal ability to repay the loan.
Capital - Your cash investment or down payment.
Character - You!
Conditions - Anything that can affect your business (industry, economy, etc.)
Commitments - Your will to succeed.
1. You will need good credit. If there are any problems on the report that can be remedied before meeting with a banker, do so. A lender may be able to make exceptions if you can document that a negative report was due to circumstances beyond your control. Include a detailed written explanation with supporting information in your financing proposal. However, if the report shows that you are irresponsible and you have not demonstrated a willingness to repay obligations, the lender will be unable to make a loan.
2. There is no such thing as 100% financing. You are going to have to put some money into the business and the more the better.
3. A bank will require you to personally guarantee the loan even if you are incorporated. There is no way to avoid putting personal collateral at risk. If necessary this could include your house.
4. Some businesses are easier to finance than others are. Since over 60% of all small business start-ups fail within 5 years, lenders know that the odds are against a new business being around long enough to repay a loan. An existing business is easier to finance if profits are sufficient to repay the loan. Also, many sellers are willing to hold some of the financing. Franchises are generally easier to finance than independent start-up businesses.
5. The process is not quick. If you must have the money to open by a certain date, make your loan application as far in advance as possible.
6. THERE IS NO SUCH THING AS A GRANT OR FREE MONEY. We have never heard about anyone - anywhere - who got free money from the government to open any type of for-profit business. Grant money is typically available only to NON PROFIT ORGANZATIONS.
7. The Small Business Administration does not lend money. The SBA does have a guaranty program that is designed to provide more security to lenders so that they will lend money to small ventures which would be too risky for a regular bank loan. SBA guaranteed loans are made and processed by a bank, with the SBA guaranteeing up to 85 percent of the loan. Interest rates and repayment terms are negotiated between you and the lending institution. SBA does limit the interest rate the lender can charge and there is a small guaranty fee. Contact a business counselor at the GRSBDC for additional information on SBA programs.
SBA Loan Programs
The following are some of the more popular types of SBA loan guaranty programs available to both start-up businesses and existing businesses:
• Basic 7 (a) Loan Guaranty: This is the SBA’s most flexible business loan program. The 7 (a) serves as the SBA’s primary business loan program to help qualified small businesses obtain financing. Loan proceeds can be used for most business purposes including working capital, machinery, equipment, furniture and fixtures. The typical borrower is an existing business.
• Microloan 7(m) Loan Program: This program provides short term loans for up to $35,000.00 to small businesses and not-for-profit child care centers for working capital or the purchase of inventory supplies, furniture, fixtures, equipment or machinery. Small businesses must apply directly to one of the SBA's local intermediary lenders: REDC, New Visions or New Ventures.
• SBA Express, Patriot Express, Community Express: Participating banks use their documents and procedures to approve and service loans. This loan program makes it easier and faster for selected lenders to provide small business loans up to $35,000 or less
• 504 Loan Program: Provides long term fixed rate financing to small business to acquire real estate, machinery or equipment for expansion or modernization. Restricted to for-profit businesses.
For more information on these programs, see SBA Loan Programs
Additional Resources
American Bankers Association http://www.aba.com/Issues/Issues_SmallBusiness.htm
REDC Community Capital Group http://www.redcfinance.org/
New Visions New Ventures - http://www.nvnv.org
