Business financing isn’t an easy task, but you can make it so if you follow the basic principles of small business financing. Asking for business loans or generating a pool of investments in order to give your business venture a jump start requires that you act wisely and take calculated steps.
It’s less risky to select a niche segment and start your business at a relatively smaller level. Nevertheless, it doesn’t mean that you can do well even when you are least informed about the basics. A successful small business owner possesses concrete information about his industry.
When it’s time to seek investors and financers, you ought to make sure that your revenue forecasts and ROI figures are as accurate as possible. Forecast your capital needs precisely so that negotiation with creditors is more targeted and to-the-point.
Small Business Financing Tips
The following are a few tips that you should follow when on your small business financing mission.
Be Honest and Realistic
In an attempt to appeal to the investors, several lenders rely on flashy figures and forecasts that often end up in disaster and bad credit rating. You don’t have to do the same just for the sake of getting the loan that you wanted. Present your business’ projected growth as it is likely to be.
Realize that your bank or any other creditor is giving you financial resources against certain terms and conditions and they can’t rely on your verbal promises alone. Provide solid backing for the revenue estimates that you tell them your business will achieve.
You must have proper forecast reports and projected revenue graphs according to certain factors so that the creditor may verify the facts. They’ll be more than happy to wait for a few years for your business to generate profits higher than the investment.
Get It Legally Written and Recorded
Regardless of the financing alternative you avail, make sure that you abide by the legal formalities. Whether it’s your bank that acts as the financer, a private investor that buys the business’ shares, or a friend/family who’s interested in investing in your venture, you should prepare proper contracts.
Legal contracts always keep the concerned parties at a safe side. You know everything is recorded under the law and thus the other party cannot cheat or fraud. A contract also contains all the terms and conditions that the concerned parties are supposed to abide by.
Maintain Creditors’ and Contracts’ Details
Keep a record of all of your creditors and financers so that you can seek them in future as well, if needed. Keep a record of their contact details, terms and conditions the two of you agreed on and whether they were interested in future dealings.
The details help the small business owners reach out to their potential investors readily and save time and energy resources. Instead of looking through a long list of banks and credit companies that may or may not grant the loan, it’s better to seek the most promising ones in the first attempt.
Small Business Financing Options
There are a number of financing options that you can consider in this regard.
Self-Financing for Capital Investment
You can use your bank savings and/or retirement plans as investments for your business. The major benefit of self-financing is that you don’t have to pay interest or meet any other obligation that other forms of investments lay upon you.
However, it might not be a viable option for many small business owners as they risk investing their life savings in their business venture. What if the return on investment isn’t as favorable as it was expected, or if the business doesn’t realize net profits?
Angel Investors to Divide the Risk Factor
Unlike a traditional business investor who only provides financial resources against certain terms and conditions, an angel investor invests and is a part of the business simultaneously. They like to be well informed and get involved in major business decisions.
For instance, you need to provide sufficient business information, marketing plans, research forecasts, etc. to your angel investors. In addition, any business decision that can potentially affect their investment is their concern and they can eventually influence the final decision.
Borrowing from Financial Institutions
Banks and credit companies are the primary sources of investment generation for several small business owners. However, this particular creditor-debtor arrangement involves details that the borrower must know.
You are supposed to convince your banker that your business venture is worth investing in. You’ll be needed to provide concrete financial statements that validate your claims regarding ROI and revenue forecasts. In some cases, collaterals are also required to get the bank loans.
Grants Only for Not-for-Profit Organizations
If you do not run a profit-oriented organization, you can easily qualify for a government grant. A grant is a special kind of an investment alternative under which the borrower isn’t obliged to repay the loan, but to utilize the financial resources as agreed upon in the contract.
Government entities encourage not-for-profit organizations to work for education, research, and health and safety. In such cases, government grants are meant to support the social cause of the organization under strict monitoring in order to make sure that the resources are justly utilized.
Financing through Credit Cards
Another option with reference to small business financing is the use of credit cards for special business purposes. When business owners fear making cash advances on their personal credit card, they ask the bank to issue another in the name of the business.
The bank then activates the business line on the card through which the business owner can make cash advances to meet the day-to-day business expenditures. For instance, they can charge inventory purchase, cost of supplies, and even employee payroll on the card.
However, the major drawback in this particular financing option is that the rate of interest is relatively higher than what is charged on a bank loan. Though a credit card guarantees immediate financing, it’s relatively more risky in terms of bankruptcy.