Fact Sheet: How To Raise Money For a Small Business

One key to a 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 and have planned effectively, raising money for your business will not be a painful experience. This information summary focuses on ways a small business can raise money and explains how to prepare a loan proposal. Finding the Money You Need There are several sources to consider when looking for financing. It is important to explore all of your options before making a decision. * Personal savings: 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. * Friends and relatives: Many entrepreneurs look to private sources such as friends and family when starting out in a business venture. Often, money is loaned interest free or at a low interest rate, which can be beneficial when getting started. * Banks and credit unions: The most common source of funding, banks and credit unions, will provide a loan if you can show that your business proposal is sound. * Venture capital firms: These firms help expanding companies grow in exchange for equity or partial ownership. Borrowing Money It is often said that small business people have a difficult time borrowing money. This is not necessarily true. 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. 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 Short-Term Loans Terms of loans may vary from lender to lender, but there are two basic types of loans: short-term and long-term. Generally, a short-term loan has a maturity of up one year. These include working-capital loans, accounts-receivable loans and lines of credit. Long-term loans have maturities greater than one year but usually less than seven years. Real estate and equipment loans may have maturities of up to 25 years. Long-term loans are used for major business expenses such as purchasing real estate and facilities, construction, durable equipment, furniture and fixtures, vehicles, etc. How to Write a Loan Proposal Approval of your loan request depends on how well you present yourself, your business and your financial needs to a lender. Remember, lenders want to make loans, but they must make loans they know will be repaid. The best way to improve your chances of obtaining a loan is to prepare a written proposal. A good loan proposal will contain the following key elements: General Information * Business name, names of principals, social security number for each principal, and the business address. * Purpose of the loan - exactly what the loan will be used for and why it is needed. * Amount required - the exact amount you need to achieve your purpose. Business Description * History and nature of the business - details of what kind of business it is, its age, number of employees and current business assets. * Ownership structure - details on your company's legal structure. Management Profile * Develop a short statement on each principal in your business; provide background, education, experience, skills and accomplishments. Market Information * Clearly define your company's products as well as your markets. * Identify your competition and explain how your business competes in the marketplace. * Profile your customers and explain how your business can satisfy their needs. Financial Information * Financial statements - balance sheets and income statements for the past three years. If you are just starting out, provide a projected balance sheet and income statemet. * Personal financial statements on yourself and other principal owners of the business. * Collateral you would be willing to pledge as security for the loan. How Your Loan Request Will Be Reviewed When reviewing a loan request, the bank official is primarily concerned about repayment. To help determine this ability, many loan officers will order a copy of your business credit report from a credit-reporting agency. Therefore, you should work with these agencies to help them present an accurate picture of your business. Using the credit report and the information you have provided, the lending officer will consider the following issues: * Have you invested savings or personal equity in your business totaling at least 25 percent to 50 percent of the loan you are requesting? (Remember, a lender or investor will not finance 100 percent of your business.) * Do you have a sound record of credit-worthiness as indicated by your credit report, work history and letters of recommenda- tion? This is very important. * Do you have sufficient experience and training to operate a successful business? * Have you prepared a loan proposal and business plan that demonstrate your understanding of and commitment to the success of the business? * Does the business have sufficient cash flow to make the monthly payments on the amount of the loan request? SBA Financial Programs The SBA offers a variety of financing options for small businesses. The SBA's assistance usually is in the form of loan guaranties - the SBA guarantees loans made by banks and other private lenders to small business clients. Generally, the SBA can guarantee up to $750,000 or 75 percent of the total loan value, whichever is less. The average size of an SBA-guaranteed loan is $175,000, and the average maturity is about eight years. Whether you are looking for a long-term loan for machinery and equipment, a general working capital loan, a revolving line of credit, or a microloan, the SBA has a financing program to fit your needs. For More Information Information is power. Make it your business to know what is available, where to get it and, most importantly, how to use it. Sources of information include: U.S. Small Business Administration * SBA District Offices * Small Business Development Centers (SBDCs) * Service Corps of Retired Executives (SCORE) * SBA OnLine (electronic bulletin board) * Business Information Centers (BICs) The SBA has offices located throughout the United States. For the one nearest you, look under "U.S. Government" in your telephone directory, or call the SBA Answer Desk at (800) 8-ASK-SBA. To send a fax to the SBA, dial (202) 205-7064. For the hearing impaired, the TDD number is (704) 344-6640. To access the agency's electronic public information services, you may call the following: SBA OnLine: electronic bulletin board - modem and computer required (800) 697-4636 (limited access) (900) 463-4636 (full access) (202) 401-9600 (D.C. metro area) Internet: using uniform resource locators (URLs) SBA Home Page: http://www.sba.gov SBA gopher: gopher://gopher.sba.gov File transfer protocol: ftp://ftp.sba.gov Telnet: telnet://sbaonline.sba.gov U.S. Business Advisor: http://www.business.gov You also may request a free copy of The Resource Directory for Small Business Management, a listing of for-sale publications and videotapes, from your local SBA office or the SBA Answer Desk. Other Sources * State economic development agencies * Chambers of commerce * Local colleges and universities * Libraries * Manufacturers and suppliers of small business products and services * Small business or industry trade associations Did you know the SBA ... * Has a portfolio guaranteeing over $27 billion in loans to 185,000 small businesses that otherwise would not have had such access to capital? * Guaranteed over 60,000 loans totaling $9.9 billion to America's small businesses in fiscal year 1995? * Last year extended management and technical assistance to nearly 1 million small businesses through its 950 Small Business Development Centers and 13,000 Service Corps of Retired Executives volunteers? * Provided more than 45,000 loans totaling $1.2 billion to disaster victims for residential, personal property, as well as business losses in fiscal year 1995? * Has 7,000 private sector lenders as partners providing their capital to small business? * Has increased its venture capital program with more private capital in the past two years than in the previous 15 years combined? * Provides loan guarantees and technical assistance to small business exporters through U.S. Export Assistance Centers in 15 cities? * Can respond to written small business questions through the U.S. Business Advisor on the Internet (http://www.business.gov)? Did you know that America's 22 million Small Businesses ... * Employ more than 50 percent of the private workforce, * Generate more than half of the nation's Gross Domestic Product, and * Are the principal source of new jobs? All of the SBA's programs and services are provided to the public on a nondiscriminatory basis. FS0055 (8/96)