Funding Your Business
• How much money do I need to get started?
• Are there any business grants available to start a business?
• What are the alternatives in financing a business?
• What do I have to do to get a loan?
• What will a lender need to process my business loan application?
• Can I borrow money from the SBA?
• What is equity and do I need it?
• What is collateral?
• Are there loans for women-owned businesses? For minority-owned businesses?
• Where can I get my credit report?
• When can I get a free copy of my credit report?
• How do I correct errors on my credit report?
• What can I do to repair my credit?
• What is a credit score?
• What's an acceptable score?
• Which parts of a credit history are most important?

How much money do I need to get started?

That depends on the type of business - retail, manufacturing, service, consulting, etc. Accurately determining how much start-up capital you need is crucial to success. You can use the Start-Up Costs Calculator to help you determine how much you need to get started. It is recommended that you also plan on having enough working capital to cover operating expenses for at least a year.

Back To Top

Are there any business grants available to start a business?

The reality is -- there is no such thing as free money from the federal government to start or expand your small business. Although there are government agencies, private organizations, and institutions that provide grants to small businesses, they generally direct their assistance toward specific projects, charities, lending institutions, non-profit organizations, educational institutions, etc. Very little money goes to individuals.

The U.S. Small Business Administration (SBA), an agency dedicated to the growth and success of the nation's small businesses, is no different. What few grant programs the SBA has are directed mainly to non-profits, intermediary lending institutions and programs administered by states and localities for purposes such as economic revitalization and technology research.

Back To Top

What are the alternatives in financing a business?

There are a number of alternatives for funding your start up or growing business, some of them may not be practical for you until the company gets further along in its growth.

Here is a list of the types of options available for start up funding:

• Self financing from the founder's cash assets
  
• Investment from family and friends
  
• Commercial loan from a bank or other lender
  
• SBA loan from a bank or other lender
  
• Lease financing, in order to acquire equipment such as computers and office equipment
  
• Venture capital financing (from venture capital funds) or angel/private investors
  
• Financing from strategic partners
  
• Financing from potential customers

What do I have to do to get a loan?

Attaining a loan depends on many factors including length of time in business, financial condition, credit history, collateral and amount requested.

Your bank is in business to make money. Consequently, when a bank lends money it wants to ensure that it will be paid back. The bank must consider the 5 "C's" of Credit each time it makes a loan.

Capacity to repay is the most critical of the five factors. The prospective lender will want to know exactly how you intend to repay the loan. The lender will consider the cash flow from the business, the timing of the repayment, and the probability of successful repayment of the loan. Payment history on existing credit relationships - personal and commercial - is considered an indicator of future payment performance. Prospective lenders also will want to know about your contingent sources of repayment.

Capital is the money you personally have invested in the business and is an indication of how much you will lose should the business fail. Prospective lenders and investors will expect you to contribute your own assets and to undertake personal financial risk to establish the business before asking them to commit any funding. If you have a significant personal investment in the business you are more likely to do everything in your power to make the business successful.

Collateral or guarantees are additional forms of security you can provide the lender. If the business cannot repay its loan, the bank wants to know there is a second source of repayment. Assets such as equipment, buildings, accounts receivable, and in some cases, inventory, are considered possible sources of repayment if they are sold by the bank for cash. Both business and personal assets can be sources of collateral for a loan. A guarantee, on the other hand, is just that - someone else signs a guarantee document promising to repay the loan if you can't. Some lenders may require such a guarantee in addition to collateral as security for a loan.

Conditions focus on the intended purpose of the loan. Will the money be used for working capital, additional equipment, or inventory? The lender will also consider the local economic climate and conditions both within your industry and in other industries that could affect your business.

Character is the personal impression you make on the potential lender or investor. The lender decides subjectively whether or not you are sufficiently trustworthy to repay the loan or generate a return on funds invested in your company. Your educational background and experience in business and in your industry will be reviewed. The quality of your references and the background and experience of your employees will also be considered.

Back To Top

What will a lender need to process my business loan application?

When you apply for the loan, you must provide historical and/or projected financial statements as part of a solid business plan.

Be prepared with the answers for these questions:

• How much do you need to borrow?
  
• How will you use the loan?
  
• How will you repay the loan?
  
• What will you use as collateral?

The specific document requirements vary with each lending institution. To start the process the bank will provide you with their application and list of documents that you must submit with the completed application. The process of applying and gaining approval for business financing can be an overwhelming process. In fact, lengthy applications and tough approval processes often deter many businesses from even applying.

Back To Top

Can I borrow money from the SBA?

The SBA offers numerous loan programs to assist small businesses. It is important to note, however, that the SBA is primarily a guarantor of loans made by private and other institutions.

SBA sets the guidelines for the loans while SBA's partners make the loans to small businesses. SBA backs those loans with a guaranty that will eliminate some of the risk to the lending partners. The Agency's loan guaranty requirements and practices can change however as the government alters its fiscal policy and priorities to meet current economic conditions. Therefore, past policy cannot always be relied upon when seeking assistance in today's market.

The loan guaranty which SBA provides transfers the risk of borrower non-payment, up to the amount of the guaranty, from the lender to SBA. Therefore, when a business applies for an SBA Loan, they are actually applying for a commercial loan, structured according to SBA requirements, which receives an SBA guaranty.

Back To Top

What is equity and do I need it?

Equity is an accounting term used to describe the net investment of the owners in a business. As a general rule, financing resources will expect the business owners to have a minimum of 20-30% of the total funds required to start a new business or to acquire business assets such as buildings or equipment.

Back To Top

What is collateral?

Collateral is something of value, such as real estate or equipment that you use to secure a loan. If you do not repay the loan, the lender can legally take and sell the collateral to cover what you owe. Collateral will also include any business assets including real estate, machinery and equipment, accounts receivable being acquired with the borrowed funds.

Interestingly, the state of Texas is unique in its application of homestead protection. Although this protection is very substantial, it presents serious limits on the ability of a homeowner to mortgage his/her homestead. The protections of the homestead laws prevent any creditor (except for the mortgage holder, a taxing authority, or the holder of a note created for a home improvement loan) from forcing the sale of the homestead to satisfy nonpayment of a debt. As a result, in the state of Texas, your home cannot be recognized as collateral for a business loan.

Back To Top

Are there loans for women-owned businesses? For minority-owned businesses?

The federal government does not offer any guaranteed loans specifically for women or minorities. However, the SBA's Office of Women's Business Ownership, works in promoting the growth of women-owned businesses through programs that address business training and technical assistance, and provide access to credit and capital, federal contracts, and international trade opportunities.

Back To Top

Where can I get my credit report?

To obtain your credit report, you can write to these three main reporting agencies:
 
1. Equifax: 1-800-685-1111
P.O. Box 740241 , Atlanta, GA 30374-0241
www.equifax.com

2. Experian (formerly TRW): 1-800-311-4769
P.O. Box 2002 , Allen, TX 75013
www.experian.com

3. TransUnion: 1-800-888-4213
P.O. Box 1000 , Chester, PA 19022
www.transunion.com

Back To Top

When can I get a free copy of my credit report?

You are entitled to a free copy of your credit report once every twelve months from a central website created by the three nationwide consumer credit report companies, Equifax, Experian and TransUnion. To review your credit report visit www.annualcreditreport.com.

Back To Top

How do I correct errors on my credit report?

Credit reports are gathered from many sources, so it is very easy for a mistake to be entered onto your report- such as an outstanding payment that has been settled. To fix a mistake, first send a letter to the store or the company that provided the credit bureau with the incorrect information. Also send a copy of this letter to the credit bureau,

Back To Top

What can I do to repair my credit?

1. Figure out where you stand and devise a plan - determine your net worth and begin to pay at least your minimum payment for each bill on time.
2. Negotiate with creditors - see if it is possible to negotiate a payment plan that is more realistic.
3. Add pertinent information to your credit file - this can include information on loans that have been paid on schedule, salary increases at your job, settlement of disputed bills etc.

Back To Top

What is a credit score?

The credit score basically tells a lender about the risk of lending money to you. If your credit report shows that you are inexperienced with credit, have been late with your payments, have borrowed the maximum amount, have mostly credit card accounts, and have many inquiries on your report, then your credit score will be much lower. These are risk factors.

If your credit report shows that you are never late, have been borrowing money and paying it back for a long time, that you are not borrowing the maximum amount possible, that there is a good mix of different types of credit accounts both secured and unsecured, minimal attempts to secure new debt, then your credit score will be excellent indicating that you are a good risk to a lender.

Back To Top

What's an acceptable score?

Credit scores (usually) range from 340 to 850. The higher your score, the less risk a lender believes you will be. As your score climbs, the interest rate you are offered will probably decline. Most banks prefer a score of 620 or higher for a conventional or SBA loan.

Back To Top

Which parts of a credit history are most important?

Banks and lenders look at a series of criteria to determine your credit score and to see if you qualify for a loan.
1. Your Payment History - the more bills paid on time, the higher your score.
2. Amounts You Owe - this includes the lines of credit and credit cards currently held, number of loans outstanding, length of time they have been open and amount owed on each.
3. Length of Your Credit History - the longer you have successfully managed your credit, the better.
4. New Credit - Lenders will also look to see how much credit you have requested and received in the past.
5. Types of Credit Used - credit cards may count against you while a mortgage may be favorable as it shows a serious commitment to meeting financial obligations.

Back To Top