If you are looking to make any major improvements in your business, whether it is a second location, new equipment, or an additional product line, you most likely need business financing. But getting financing for your business can be intimidating. Despite this economic downturn, banks are still lending. However, the way banks are lending to small businesses has changed pretty significantly and they are more cautious about where the money is going, especially when considering a loan to new businesses with no track record. As a result, you may need to consider a number of options to get the money you need, whether you are looking to launch a business or need additional financing for an existing enterprise. However, before you look into alternative financing, talk to a SCORE mentor about the various factors that influence which financing option will suit your needs:
According to the U.S. Small Business Administration, factors financing institutions take into consideration include determining the specific uses for which you need the money, whether your business is seasonal or cyclical, and whether you plan to expand. Work with your SCORE mentor to create a written business plan that will help you clarify your financing needs.
Types of Financing
Common types of financing include bank loans, SBA loans, crowdfunding, receiving funds from a venture capitalist (in which you take on investors in exchange for providing them with an ownership stake), or borrowing from friends and family members. If your small business is engaged in scientific research and development (R&D), you may qualify for federal grants under the Small Business Innovation Research (SBIR) and the Small Business Technology Transfer (STTR) programs. You may need to solicit funds from all of these sources to obtain the amount of money you need. You could also tap into personal savings or even take out a second mortgage on your home.
Pros and Cons
Each type of financing offers certain benefits and pitfalls. For example, grant money, venture capital funds and your own money do not have to be repaid, so you won’t incur additional debt. If you borrow from family and friends, you may receive a low interest rate as well as flexibility in payment terms. If you borrow from a bank, you may have more stability, avoid using your own money, as well as avoiding the potential tough situation of approaching people you know to ask for money.
If you borrow from friends and family, you need to consider what would happen to your relationship if your business fails and you cannot repay them. If you default on a bank loan, you could lose your business and need to file bankruptcy. If you work with venture capitalists, you may need to relinquish some control of your operation.
Whatever method of financing you decide to pursue, your ability to sell your business concept for starting or growing successfully will increase the potential of obtaining financing when asking for money. Factors that will help you sell your idea include a solid business plan, the ability to demonstrate the need for your business in the marketplace, and any successful business experience you had in the past. Talk to your SCORE mentor today to get started with your financing planning needs.
Via: The Industry Word