Session 4: Financing the business
As pointed out in the first session on picking a business, don't be discouraged by not having much money to start with. Many businesses can be started with no money at all. You can start small and humbly and grow one order at a time. Here is a sample, partial list of businesses you can start with very little cash: Businesses Requiring Little or No Money to Start.
Our first reminder is that personal savings should be considered the primary source of funds for starting a business. If you haven't started already, start now to begin accumulating cash through personal savings.
Also, don't overlook the Small Business Administration (SBA) loan guarantee programs available for start-up businesses. With a SBA guarantee program in hand, your bank will be happy to talk with you! Refer to the Resources section to get more information.
Finally, start your search for financing with a good credit rating. Most all sources of financing or credit have come to rely on a four-letter word to score your credit worthiness: FICO. FICO is a numeric method, using just three digits, to predict the likelihood of your paying your credit as agreed. FICO scores range from 365 (not good) to a high of 850 (great). The score evaluates your credit payment history, number of open accounts, overall credit balances and public records such as judgments and liens.
Generally, a FICO score above 680 will produce a positive response while a score below this will cause a lender to be cautious. A good way to obtain your own score is to enter "FICO" into a search engine. Several sources will charge a modest fee to calculate your score. will provide you with several report formats and notify you of credit inquiries that could affect your score. Before seeking financing or credit, it is a good idea to know where your FICO score stands.
Or, how much can you reasonably expect to get? Refer back to your business plan. If it still doesn't answer the question, let's go step-by-step. In Session 11, Accounting and Cash Flow, you will learn how to predict future cash needs by using a cash flow control form.
The cash flow control form will spell out all of your sources of income and expenses. For example, some expense items might include:
Buying supplies and inventory while waiting to get paid
Paying payroll and rent
Buying equipment and fixtures
Getting a computer
Buying the business
Prioritize those areas where your options are limited to paying in cash, and review your alternatives where there may be another way. For example, it is not necessary to pay all cash for a delivery truck when you can rent or lease one. Next, review what might serve as collateral for your loans.
Unsecured Loans
Some credit is granted on an unsecured basis, such as credit cards, but most small business loans are secured by the assets of your business, your personal assets, or both. Unsecured means that there is no collateral granted for the loan. Examples of unsecured are
Credit cards
Unsecured lines of credit (like you get in the mail)
Friends or relatives
Secured Loans
Rod Banks
Executive Vice President, City National Bank
Raising start-up money is one of the great hurdles in starting a business. Would you have any recommendations or some basic Do's and Don'ts as to how people should go about this great challenge?
Secured loans mean that there are assets pledged to secure the payment in the event you are not able to pay. Examples of this are
Computer lease
Home mortgage
Car loan or lease
Small Business Administration loan
Collateral
Common types of collateral are equity in your home, accounts receivable, inventory of the business and equipment. Lenders go through an evaluation of the collateral to determine how much they can lend. Some key variables as to what kind of loan terms you can get are
Number of years in business - This is your track record and is very important. Banks usually require three years while others are less stringent.
Size of your company and the amount needed - Financing institutions vary in the way they service the public. For example, you would probably not get a car loan and a large corporate loan at the same place. Do your research. Ask around. Get to the
Other Quick Tips
Needless to say, being well dressed and neat in appearance at bank meetings will reflect positively.
Most lenders (including the SBA) will want to see your business plan.
Keep your lenders informed on the status of your business: the good and the bad.
If you are unable to make a loan payment on time, call your lender in advance, advise him or her of the problem and request the extension you need. Explain the sources of repayment.
Virtually all lenders will do a personal savings and corporate credit check through a company called TRW or by other means. Be prepared to discuss any prior credit issues/problems. The best access to a lender is through a referral. Lending is a people business. Have your CPA, attorney, or friend introduce you to a lender.
The first thing that will spook lenders or investors is the fear you are "puff" rather than "substance." Avoid giving the impression of being an over optimistic, "pie-in-the-sky" operator.
As a start-up, do not plan to spend money on expensive entertaining. Your lenders will be more interested in knowing how their money is being used to grow your business.
Do not depend on a bank to loan you money to start a business. Most small businesses are funded by personal savings.
Make a shrewd appraisal to minimize your risks and to limit losses to a predetermined limit.
Your suppliers and vendors can be sources of financing. For example, if you need an illuminated sign for your store front, the company you contract with to make the sign may provide financing so you can make monthly payments rather than pay cash. Examples of financing from your suppliers include
Longer payment terms
Advertising and marketing assistance
Furnishing or financing of equipment, signs or inventory.
Advertising and promotional programs
Bartering, which is to trade by exchange one commodity for another, can provide a source of financing. For example, your advertisements in the local newspaper might be paid for by the bagels you make