This course discusses ways a small business can raise money and explains how to prepare a loan proposal.
The objectives of this course are to: Help you learn about ways a small business can raise money; Identify the purpose of a loan proposal; Describe the components of a successful loan proposal; and Identify how a lender reviews your request for credit.
Welcome to SBA's electronic training course outlining the ways small businesses can raise money. This course is designed to provide you with lots of important information and, at its conclusion, lets you test what you have learned It also provides numerous electronic resources and offers an interactive opportunity to have your questions answered electronically by a SCORE business counselor.
Introduction One key to successful business start-up and expansion is your ability to obtain and secure appropriate financing. Raising capital is the most basic of all business activities. But as many new entrepreneurs quickly discover, raising capital may not be easy. In fact it can be a complex and frustrating process. However, if you are informed, well-prepared, and have planned effectively, raising money for your business will not be a painful experience.
Finding Capital There are several sources to consider when looking for financing. Explore all your options before making a decision. Sources for financing a new business include: Personal savings Friends and relatives Banks and credit unions Venture capital firms
It is often said that small businesses have difficulty borrowing money. This is not necessarily true.
Sources for Financing The primary source of capital for most new businesses comes from savings and other forms of personal resources. While credit cards are often used to finance business needs, there may be better options available, even for very small loans. Many entrepreneurs look to private resources such as friends and family when starting a business. Often, money is loaned interest-free or at a very low interest rate which can be beneficial when getting started. Banks and credit unions are the most common source of financing if you can show that your business is sound. Venture capital firms provide money needed for expansion in exchange for equity or part ownership.
Borrowing Money Banks make money by lending money. However, the inexperience of many small business owners in financial matters often prompts banks to deny loan requests. Requesting a loan when you are not properly prepared sends a signal to your lender. That message is ''High Risk!'' To be successful in obtaining a loan, you must be prepared and organized when making your request. You must know exactly how much money you need, why you need it, and how you will pay it back. You must be able to convince your lender that you are a good credit risk.
Types of Business Loans Loan terms will vary from lender to lender, but there are two basic types of loans: short-term and long-term. Short-term loans are generally repaid in less than one year. Types of short-term loans include: Long-term loans have maturities longer than one year, but usually less than seven years. Real estate and equipment loans may have maturities up to 25 years. Long-term loans are used for major business expenses such as purchases of: Writing a Loan Proposal Approval of your loan request depends upon how well you present yourself, your business, and your financial needs to the lender. To improve your chances of obtaining a loan, prepare a written proposal. A good loan proposal contains the following key elements: General information Business description Management profile Market information Financial information
You may also wish to explore the SBA's electronic course, "The Business Plan," for further information.
The General Information section of your loan proposal should include: Business name, name and social security number of each principal owner, and business address Purpose of the loan: describe exactly what the loan will be used for and why it is needed Amount required: state the exact amount required to achieve your purpose
The Business Description section of the loan proposal will include: History and nature of the business: describe the kind of business, how long it has existed, number of employees, and current business assets Ownership structure: discuss the company's legal structure
The loan proposal's Management Profile section will include: A short statement about each principal owner in the business Background, education, experience, skills, and the accomplishments of management and principals
In the Market Information section of your loan proposal you should: Clearly define your company's products and market Identify your competition and explain how your business competes Profile your customers and explain how your business satisfies their needs
The loan proposal's Financial Information section should include: Balance sheets and income statements for the past three years (If you are just starting out provide a projected balance sheet and income statement.) Personal financial statement on yourself and all principal owners of the business Collateral you would be willing to pledge as security for the loan
Loan Request Review When reviewing a loan request, the loan officer's primary concern is whether or not the loan will be repaid. Many loan officers will order your business credit report from a business credit reporting agency. For this reason, it is important for you to work with the credit reporting agencies to help them present an accurate picture of your business. Using your business credit report and the other information you have provided, the loan officer will consider the following issues: Have you invested savings or personal equity in your business totaling at least 25% to 50%? Do you have a sound record of credit worthiness as indicated by your credit report, work history, and letters of recommendation?
The loan officer will also consider the following: Do you have sufficient experience and training to operate a business successfully? Have you prepared a loan proposal and business plan that demonstrate your understanding of the business and your commitment to its success? Does the business have sufficient cash flow to make monthly interest and principal payments on the loan?
SBA Financial Programs The SBA offers a variety of financing options for small businesses. The SBA's assistance is usually in the form of loan guaranties - it guarantees loans made by banks and other private lenders to small business clients. Generally the SBA can guarantee up to $750,000 or 75% of the total loan value, whichever is less. The agency's most popular lending initiative is the LowDoc program. The program is for loan requests of $100,000 or less and features a one-page SBA application. From long-term loans for the purchase of machinery and equipment to short-term loans for general working capital, revolving lines of credit, and microloans, the SBA has a variety of financing programs to fit your needs. A complete description of the SBA's loan programs is in our SBA Business Borrower's Guide. Check Your Understanding Now that you have learned about the many ways small businesses raise money, let's check your understanding. You will be presented with a series of multiple choice questions. Good luck!
Which of the following are sources of financing for a small business? A. Personal savings B. Friends and relatives C. Borrowing from banks and credit unions D. All of the above
When presenting your request for financing to a lending officer, your chances for success will increase if you: A. Profile your company's products and services B. Show up for your appointment on time C. Present yourself, your business, and yourfinancial needs to the lender in a well-prepared loan proposal D. Develop a financial statement for yourself and the other principals
The main purpose of a loan proposal is to: A. Help you file for incorporation of your business B. Clearly define your company's products and market C. Present biographical information on all of the principals of your business D. Provide a lender with details about the financial needs of your business
When reviewing your request for credit, the loan officer will consider which of the following? A. How long you have been in business B. Whether you have prepared a loan proposal and business plan that demonstrate your understanding of the business and your commitment to its success C. The types of product or service you plan to provide D. Your business location
When reviewing a loan request, the loan officer's primary concern is: A. Whether and how the loan will be repaid B. What the loan will be used for C. How long the money will be required D. How many individuals will sign for the loan
Congratulations! You have now completed the course on raising money for a small business. As you learned, there are many sources available for financing your new business. Remember, to be successful in obtaining a loan, you must be prepared and organized when making your request. Once you have completed your loan proposal, review it with a friend or business associate.
Answer Key 1 D. All are sources of financing for a small business. In addition, venture capital firms provide money needed for expansion in exchange for equity or part ownership. 2 C. A good loan proposal contains the following important sections: General Information; Business Description; Management Profile; Market Information. 3 D. The loan proposal provides detailed information about how much money you need, why you need it, and how you will pay it back. 4 B. Whether you have prepared a loan proposal and business plan that demonstrate your understanding of the business and your commitment to its success. 5 A. The lender is concerned about being repaid.
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