How do I get money to run my business?
Any business requires some money to run the day-to-day operations. Growth will often also require additional funds. Here is some information on how funding can be obtained and what type of funding is available.
Your Local Bank
Your bank is a great source for both information on business financing as well as a place to gain funding. It is vital to form a relationship with your bank as early in your business as possible. The more the bank knows about your business, the more they are able to help both when you need it and before you realize you do.
Bank branches are a great place to meet your local team and get information. They can help you review options and look at ways to build credibility with the bank. They also know many other businesses in the area and can help you solve other types of business challenges as well.
Banks have several options to help you finance your business. The key to working with the bank is to remember they have two questions: What will you do with the money and How will you pay it back? Different banks will have different levels of tolerance for risk so you need to look at your situation from their standpoint.
What You Will Do With the Money?
Business owners are excited about their business and ideas. But a banker has to work within a set of rules and regulations so rather than go in to sell your business or idea, look at it from the standpoint of the banker. What, exactly, will you do with the money? If you are planning to pay general expenses with it and it will be used over time, you want a line of credit. If you have a specific purchase like a piece of equipment or fixed expense, that will most likely be a loan. If you are looking to buy a building, that will typically be a mortgage. Being able to articulate your needs is important in obtaining the funding you need.
How Will You Pay It Back?
The bank also needs to know how you will pay the money back and what guarantee do they have to get the money back. The guarantee is called, “collateral” and different banks have different expectations when it comes to collateral. The key is to remember the bank wants you to pay the money back out of your business – they want you to be successful! Be sure you understand what you have to use as collateral as well as be realistic with yourself on how you can pay the money back.
The bank will also want to understand what you have put into the business. For instance, if you want to start a business, you need to be able to put some money into the business as well as gain financing. It is important for the bank to see you are committed to the business and believe it can be successful and that is shown through your own money.
It is also important to understand that the bank is not interested in liquidating collateral. It is costly and time-consuming and generally means they took a poor risk. Instead, they want to be confident you can pay the loan back from your own reserves or the cash from the business. Good collateral does not guarantee a bank wants to make you a loan.
When you are ready to approach a bank or other funding source for financing, it is important to put time into preparation. Most banks will require much of the same types of information. They include:
• Business Plan – a strong business plan gives the bank the overall picture of the organization as well as the projections of growth in the next 3 to 5 years.
• 3 years of profit demonstrated through tax returns or CPA-prepared financial statement. If the business doesn’t have 3 years of profit, bring your personal financial information (most institutions will give you a form to complete).
• Any information on personal assets that may be used as collateral (i.e. property, financial accounts, etc.)
Types of Funding Available
Line of Credit – Lines of credit are typically short term and are intended to be flexible. Usually the bank will look at accounts receivable and inventory as collateral on a line of credit.
Loans – Loans are usually long term and use equipment or buildings as collateral.
SBA Loan – An SBA loan is one backed by the Small Business Administration. They have different requirements than typical loans in that they are designed to foster small business growth.