Business and Investment sidenote

In today’s world, traditional bank loans are not the only medium of financing a small business loan. It is imperative to consider all the options available before you make your choice.

What are the overlooked options?

Currently, many unconventional sources of finance are coming up as well, e.g. contract financing, which is one of the widest preferred options. Indeed, it is also known as purchase order financing. Following this option, a lender finances the purchase order rather than the manufacturer.

Consequently, the lender gets the agreed portion of profit when the process is finished. This is known as purchase order financing.

What would be the other option?

One more type of finance options is to think of grants for small businesses. But, one negative aspect of this option is the fact that grants are not considered that reliable. However, venture capital is one of the small business financing options that is best defined by many applicants.

This is especially true since the firms, which fund the proposals presented, are from the small enterprises. The only limitation with these small business loans is that they just finance a very few ventures.

Do you have any other options?

You can avail finance for your small business by selling your debts and stocks in the mass market. But again, one thing you should know is that it is not a common method of getting any help because of its difficult procedures.

A large number of small businesses are now funded with the help of debt finance through financial institutions like banks. In this context, banks provide small business owners a line of credit or loan with a repayment term and schedule, as well as, a rate of interest.

How can a financial institution make an educated decision?

A financial institution will look at the cash flow of the business, the liquidity of assets, and the collateral available. In this case, one needs to have a good business plan that can be presented to the financial firm in order to let them know your situation.

Have you ever thought about the option of debt funding?

Another option of small business loans can be debt funding. There are many companies that are financed by institutional or private investors in direct exchange for some equity ownership stake.

Borrowers from any class can opt for equity options. Despite having a bad credit rating that may include bankruptcy, default, arrear, CCJ or IVA, one can apply for this option without any problem. Obviously, you will need to put in some efforts for making these financial deals cost effective.

What is the best choice that I can recommend you?

Applying for investment finance options on the Internet is a great choice. You will not only save on the effort and time spent, but you can also have a look at various business options available.

In this context, it is recommended to compare a plenty of finance choices and choose the best solution for the small business system you have. Doing this, you will minimize the risk to waste your money.

To get the best of a financial deal, you will need to put in some time in research. This will help you find out the right financial option for you. In this article, the message was to list different small business finance options and the best choice is your decision.

Your mummy always warned, “Don’t put all of your eggs in one basket ” and those words of advice can be applied when > financing a business. There are numerous techniques that will help consumers in financing a business. Customers must recognize their available resources eg the seller, banks, and financiers.As a kid, we are inspired to “think big ” and told that nothing can stop us, but ourselves.

As entrepreneurial adults, this notion of dreaming giant is typically part of your daily routine, it is inescapable that at some specific point you can come smashing down from those heights into fact. The awareness that financing your special enterprise can immediately moisten even the most impassioned enterprising individual can get you down. To put it bluntly, “do not let it”.

Having a fact check on the problem of securing financing for a business may be the primary step towards making your dream a reality. There are countless kinds of financing available, some more unusual or obscure. If you take the effort and time to analyze all avenues for funding you’ll be rewarded.

There are 2 main sorts of financing : debt financing and equity financing. It is vital to you and the successfulness of your business that you become familiar with the kinds of financing to select, seek, and ultimately, get the right form for your wishes.Debt financing involves getting a loan that’ll be paid back over a certain allocated time with a set rate of interest tacked on.

The time of such financing can be short term or long term. In most situations, short term financing would include repayment inside one year, while long term financing would comprise repayment in a period of time that surpasses one year. An merit of this sort of financing is the undeniable fact that the lender won’t gain possession in your business.

You remain in control and your sole requirement to them is to make regular and opportune payments.

In the case of little start ups, an individual guarantee is commonly wanted to help the closing of the financing deal. Financing of equity, unlike debt financing, will involve giving the financing entity a share in the business .  Some entrepreneurs hate the concept of losing any amount of control. On an encouraging note, this sort of financing doesn’t sustain debt. This type of liberty from debt can give a larger sense of security in beginning an exciting new business.

Additionally, some entrepreneurs find excellent value in their equity financing partners, and see their presence as an asset. The kind of financing you may select is based principally on the wants of your business and the sort of collateral, or available assets you have to give. A good amount of debt financing can end up in bad credit and a shortage of funds in the future due to an incapacity to apply for more financing.An enterprise that becomes overextended, offers nothing collateral, and is drenched in debt isn’t an intriguing option for many backers.

As formerly discussed, there are more more unusual techniques of getting funds that may definitely turn out to be useful to your business. Some options can be discovered in your own circle of buddies and family. One advantage of this sort of financing is getting the cash and a silent partner who will very probably not meddle with your business.

It may also eliminate some of the red tape involved with more standard kinds of financing. This doesn’t imply you can simply utilize an oral agreement or “shake on it ” to signal and bind the exchange. This is still a strategic business move and you need to treat it as such meaning correct paperwork, clear terms, and mutual understanding of those terms.

Small business owners can choose from two basic types of financing- debt and equity.  There are advantages and disadvantages of each type that may be used for different purposes. 

Before you seek start-up capital, organize your records as follows;

Gather you’re financial business records including tax returns Speak with business partners or family members about the sometimes uncomfortable     option of giving up partial control of the business to potential investors Request copies of your personal and any business credit reports  

Entrepreneurs who seek financing face a fundamental choice: Should they borrow funds or take in new investment capital? Since debt and equity are accounted for differently, each has a different impact on earnings, cash flow, and taxes. Each also has a different effect on leverage, dilution, and a host of other metrics by which businesses are measured. The planned use of funds will also affect the choice of financing, with one option more appropriate for certain uses than the other. 

Debt can be a loan, line of credit, bond, or even an IOU — any promise to repay borrowed amounts over a certain time with a specified interest rate and other terms. Debt is accounted for as a liability of the company, and interest payments are deductible business expenses. In the event of bankruptcy or insolvency, debt holders take priority over equity holders. 

For a small business, debt financing has both advantages and disadvantages. On the plus side, debt can be relatively simple to secure through a bank or other financial institution and is available with a broad range of terms, allowing you to customize the debt to meet your specific needs. And since most debt entails regularly scheduled payments of interest and often principal as well, debt is easy to plan around. Perhaps most important, debt, unlike equity, will not dilute your ownership interest in your company. 

On the minus side, however, financing with debt can be more expensive, and you will have to meet scheduled interest and principal payments regardless of your cash flow. Although loan terms can be negotiated to build in flexibility, ultimately the money must be paid back. 

Debt is most often used to fund a specific project or initiative that has an identifiable implementation time frame. It’s also used as a cash flow backup in the form of a revolving line of credit. To attract lenders, you will need to have a good personal and business credit history, sufficient cash flow to repay the loan, and/or sufficient collateral to offer as a second source of loan repayment. 

Equity differs from debt in that it represents a permanent ownership stake in the company. When you finance with equity, you are giving up a portion of your ownership interest in — and control of — the company in exchange for cash. Equity investors may demand dividends or a portion of annual profits. But most investors in small businesses seek long-term capital gains on their investment, meaning that at some point these investors may look to opt out. This can mean the eventual sale of the business or the need to bring in replacement investors in the future. 

The most common sources of equity financing for start-up entrepreneurs are personal savings or contributions from family, friends, and business associates. Many successful entrepreneurs find start-up money, grants and loans using all inclusive support centers such as Ethos Mentor, Business Finance.com or the Small Business Association (SBA).    

Venture or seed capital companies can also be sources of new capital, although they generally deal in larger financings. If your business is incorporated, anyone contributing equity capital would receive shares in the business. If it is a sole proprietorship or a partnership, they would receive an ownership share of the business. 

While equity financing can be used for many different purposes, it is usually used for long-term general funding and not tied to specific projects or time frames. The major disadvantage to equity financing is the dilution of your ownership interest and the possible loss of control. Moreover, equity investors in smaller businesses generally look for high returns over time to compensate for the risk. 

In practice, most businesses use a combination of debt and equity financing. The concern is getting the right balance. If you have too much debt, you may overextend your ability to service the debt and can be vulnerable to business downturns and changes in interest rates. On the other hand, too much equity dilutes your ownership interest and can expose you to outside control.  For more information visit www.EthosMentor.com

This arrangement allows the business owner to raise capital while retaining the use of the assets that are needed in the business. A sale-leaseback can offer the creation of significant source of funds that can be used for a variety of purposes. This includes paying off a specific lender, as working capital, to buy-back capital stock, buying out a partner, or upgrading assets, etc.

In sale-leaseback financing, is accomplished by conveying the title of the asset, at an agreed upon value, to a financial institution in exchange for a lump-sum payment. The business owner then makes lease payments to the finance company in exchange for the cash insertion.

Benefits. Many companies can benefit from this type of transaction. If you don’t qualify for traditional bank financing or want to preserve your existing bank credit line, sale lease-backs can be used to finance growth, restructure troubled financials, provide tax benefits and enhance balance sheets.

This is an approach to raise cash. All business owners know that cash is king. From a tax perspective, sale lease-back offers the possibility to structure the transaction as a taxable sale, which can be offset by net operating losses that, may otherwise expire if unused. It may also offer unique economic or tax benefits for companies that have been unable to utilize net operating loss carry forwards for federal income tax purposes.

Since lease payments are not considered preference items, companies that are in an Alternative Minimum Tax (AMT) situation may benefit as well. This article should not be considered tax advice. Business owners should always seek professional tax advice from their CPA or Tax Attorney before making tax decisions based on a sale lease-back transaction.

Business Qualifiers: If you have been in business for at least 18 months, have a personal FICO Score of 620+, own the equipment outright, no open tax liens, no open bankruptcies and have financial statements that indicate that you can service the lease payments, you are a viable candidate for sale-leaseback financing.

Each finance company has its own minimum transaction size and funding parameters, so it is best to compare terms from each. Note: Restaurant owners typically will have to be in business 2 years, with a personal FICO score of 650+ before the financial institution will consider a sale lease-back transaction.

Eligible Equipment: Most durable equipment is eligible for sale-leaseback financing. Some examples: All types of IT equipment, computers, laptops, servers, network switches, routers, telephone systems, copiers, faxes, machinery, dry-cleaning equipment, telecommunications equipment, cubicle stations, auto repair equipment, diagnostic equipment, construction equipment, health club equipment, and all manner of medical equipment… just to give you an idea.

Gaming and beauty salon equipment typically are not eligible for sale-leaseback transactions. Some finance companies specialize in certain types of equipment. Others will consider a wide variety of equipment.

Application Process: It is surprising simple compared to other forms of financing. Contact the financing company for their 1 to 2 page application. Provide a list of the equipment that you wish considered. (Depending on the age of the equipment, there may not be a requirement for an appraisal of the residual value). Fax the application to the finance company. Expect a response in 24-48 hours. If you approve their proposal, you can have funds in-hand in 10-14 days.

It should be noted that you are selling a company asset to a finance company and then leasing it back. As such, the application/approval process is more straightforward than the typical debt-financing transaction and therefore a much faster funding process.

In summary: If you are in need of a cash infusion for your company, own equipment outright and are willing to sell equipment to a specialty finance company, but retain it for use in your business, then sale lease-back financing is a financing tool that is available to the business owner.

In general, debt financing involves raising money for business purposes in exchange for promised principal and interest payments. There are multiple types of debt financing available to commercial real estate and other business owners from a variety of lenders, including banks, pension funds, insurance companies, and other financial institutions. Each type of debt has its own function, terms, risk, cost and maturity. The job of the financing experts at Remington is to work with both sides of a commercial transaction to creatively mix and match these options with the interests of all the parties in ways that will secure the best possible rates and terms consistent with client needs and market conditions.

In the typical capital structure for commercial real estate, senior debt usually accounts for 50-70% of the capital stack. By definition, senior debt is just that. It is senior to equity and all other forms of mezzanine (junior, subordinated) debt. As such, senior debt stands first in line before all other creditors for interest and principal payments and, in the event of liquidation, the repayment of debt. Most senior debt on commercial real estate is amortized over 15 to 40 years, with interest rates, either fixed or floating. Rates tend to be based on the quality of the collateral involved and the propertys historic cash flow, with higher rates tied to the degree of risk involved.

Many commercial real estate loans mature in three to ten years, resulting in a balloon payment at the end of the term. Remington professionals are equally adept, however, at securing financing across the capital stack for virtually any business purpose, with or without the involvement of real estate, including loans for expansion, working capital, operating capital, investment capital, etc.

By and large, asset-based business loans have lower interest rates than unsecured loans and may be tied to the particular asset being purchased or other assets of the borrower.

Fixed Rate Loans: Fixed rate loans offer borrowers an unchanging rate of interest, with predictable payments for the life of the loan. Because of strong relationships with public and private sources of capital, many opportunities exist for the financing experts at Remington to negotiate with lenders on transaction terms for such loans, particularly interest rates, as well as maturity and prepayment penalties. All of which assures Remington clients of the best possible and lowest-cost financing package available.

Floating Rate Loans: Floating rate loans are typically tied to the London Interbank Offered Rate (LIBOR) plus some point spread over the base rate. Attractive to borrowers with a two-to-four year financing requirement, floating rate loans are adjusted periodically, have minimum or no prepayment penalties, and cost less than fix rate loans because of the risk of rising interest rates. This type of loan has been particularly popular of late because of the historically low interest rates experienced in recent years. Remington professionals are highly experienced in securing such short-term financing or employing it as an integral part of a longer-term overall financing strategy.

Construction Loans: Commercial construction loans typically are short-term loans used to finance the cost of building new warehouses, industrial buildings, retail centers, apartment complexes or other properties destined to be sold or rented to others or operated by the owners. These loans tend to be varied, depending on the project, construction time, and borrowers experience. They are meant to be paid off when construction is completed and a certificate of occupancy issued. Borrowers usually require another mortgage to pay off the construction loan when it comes due. Thus the overall process may entail two loan applications with their associated fees and closings a potentially complex and time-consuming process that the experienced financing professionals at Remington can coordinate, facilitate and expedite. For more information on construction loans click here.

Bridge Loans: The bridge loan is a form of financing that bridges the gap between funds needed now and when longer-term financing becomes available. It can be a key component in an owners long-term financing strategy, particularly for those faced with a here-and-now opportunity or other situation, such as improving or selling a property.

Real estate owners often come to Remington to help secure a bridge loan to purchase a second property before the sale of the first property closes, with proceeds from the sale used to pay off the bridge loan. This illustrates the important exit strategy borrowers must have before an investor makes a bridge loan. In the foregoing example, the investor would need to see a signed sales agreement spelling out where, when, and how the bridge loan will be repaid.

Bridge financing almost always needs to be arranged and closed quickly. Such loans tend to be for 6 to 12 months with a possible 12-month extension. They are usually structured as simple interest only loans with no pre-payment penalty and all principal due in full at maturity. Risk to the investor is minimal since the loans are underwritten based on existing equity in the property and a defined exit strategy.

Because of the owners need for timeliness, banks and other institutional lenders are not usually effective when it comes to bridge loans. That is why the Capital Markets Group at Remington provides access to investors capable of making on-the-spot decisions. Included among these investors are hedge funds, private equity groups, mortgage pools and other sources of private capital. For information on hard money loans, another type of short-term loan, click here.

Hard Money Loans: There is another type of short-term loan that is similar to the bridge loan in some ways but substantially different in others. It is called the hard money loan. Hard money loans and bridge loans are similar in that both types can be quick to close. Both may be needed for a short period of time. And both undergo limited or less severe underwriting processes. But, while the bridge loan investor requires a definite exit strategy, the hard money source may not. Moreover, bridge loans frequently have a loan to value ratio of 70-95%, whereas hard money loans will not exceed 50% LTV.

Hard money loans also are generally more expensive. Unlike bridge loans, which focus on exit strategy, hard money investors emphasize collateral, making certain enough collateral exists to collect the debt in the event of default. Because the two types of loans have similarities, borrowers frequently misjudge which is best for them. More than three-fourths of those who say they want a bridge loan qualify only for a hard money loan because, for example, the borrower has less-than-average credit, a modest financial statement, too little experience in commercial real estate, or no defined exit strategy. The financing experts at Remington can quickly sort out any such confusion and quickly align the client with the appropriate type of financing and related investor.

If there were only two reasons for a business to fail they would be poor financing and poor management or planning. You can’t over-emphasize the importance of financing your business. Financing the business is not a one time activity as some might think. It is necessary whenever the need arises such as when expanding, modernizing etc. At this stage you need to understand the importance of exercising extreme caution and plan the utilization of capital. A wrong decision here can haunt your for the life of your business.

Are You Sure You Want To Raise External Funds?

For start-ups, it’s understandable that you need to raise capital through loans. But what about expansions and upgrades? Make sure that external financing is an absolute must before you apply. It is critical that you organize your finances at transitional stages but only after you make sure that you can’t do it yourself, either permanently or for some time. Equally important are the criteria of risk, the cost of not financing and how well it contributes to specific and overall goals of the company.

FINANCING TYPES

Equity Financing: Equity financing involves selling off of your shares (mostly partially) in return for cash and giving away that portion of ownership and rights to profits. Equity financing can be sought from private investors or venture capitalists. This brings about proper capitalization opening access to debt financing. Equity finance doesn’t need to be returned like loans unless your partner wants to withdraw.

Debt Financing: Debt financing is loan financing against some kind of guarantee of repayment. The guarantee can be collateral, a personal guarantee or a promise. Lenders restrict the use of debt finance to inventory, equipment or real estate. You need to properly structure the debt and the rule of thumb for doing so is giving long term debt for fixed asset loans and short term for working capital. The reason is that fixed assets generate cash flow over their lifetimes and have the benefit of lower interest rates as opposed to working capital loans.

Sources of Finance:

You can choose finance sources depending on your circumstances and the amount required.

1. Family and Friends: Small and short-term working capital requirements can be financed quickly through your own resources or through family and friends. The benefit here is the absence of the interest component (mostly.) This method of raising finances is handy even in early stages of business. You should be mindful, though, that disputes over money are the main reason that close relationships turn sour.

2. US Small Business Administration: This is the most prominent source for debt financing. The SBA doesn’t lend money directly but organizes and guarantees loans through various lenders and sources under its umbrella. Local governments, banks, private lenders, etc. disburse loans immediately to businesses approved by the SBA. SBA loans are available for various business purposes and at the lowest interest rates available.

3. Venture capital: Raising venture capital is organizing financing through selling shares whose value equals the finance you require. Essentially this means selling a portion of the ownership and control rights. It is essential that a proper valuation of your business’s worth is made before the deal is done.

Financing a business shouldn’t be hard provided you have established your credentials as a good manager, have collateral/assets, a convincing cash flow statement, genuine need, a proven track record, good credit history and a robust plan. This should not just save your business from collapsing but also allows it to grow and succeed.

Debt is an amount owed to a person or organization for funds borrowed. Surprisingly, millions of people the world today have debt problems that they cannot support, for many different reasons. Many of us may feel like it is impossible to live without debt because of the way certain purchase experiences are structured in our society.

Debt financing is financing a company by selling the bonds, notes or mortgages held by the business. Basically it is borrowing money to keep your business running. Long term debt financing is typically associated with larger assets such as buildings, equipment, land, and large machinery. The schedule for repayment for long-term debt financing spans more than a year. Short term debt financing is mostly associated with operations of the business such as inventory purchasing, payroll, and supplies. The repayment of short term debt financing happens in less than a year. With debt financing, your business does not have give up future profits or ownership in the company like with equity financing.

Debt financing is more commonly known as selling bonds or debentures. Debentures are tools used by large companies to raise capital for their projects and operations. This is known as a debt offering since the company literally goes into debt to the investors until the price of the debenture is paid back, plus interest, or until it is converted into stock. The company must record this debt in their balance sheet. If bankruptcy occurs, the debenture holders are considered creditors and must be paid back by the companies remaining assets. Debentures are a way for companies to raise capital without having to use their assets or give up ownership in their company. This leaves their assets free to do other things to generate capital for the business.

One of the most important decisions facing managers in need of capital to fund their business operations is debt versus equity financing.  Debt and equity are the two predominant sources of capital available to businesses, and each offers both benefits and drawbacks.  The way that money is raised can have a tremendous impact on the success of a business.

Debt financing involves taking out loans that must be paid back over time, generally with interest.  Businesses can borrow money over the short term (under one year) or long term (more than one year).  Principal sources of debt financing are banks and government agencies, such as the Small Business Administration (SBA).  Debt financing offers businesses a tax advantage—the interest paid on loans is typically deductible.  It also limits businesses’ future repayment obligations for the loans, since the lender does not receive a share of ownership in the businesses.

However, there are some drawbacks.  New businesses sometimes experience difficulty making regular loan payments when they have irregular cash flow.  Debt financing can therefore leave these businesses susceptible to economic downturns or rising interest rates.  Businesses that carry too much debt are more likely to be perceived as risky, and therefore less attractive to investors and less able to raise additional capital in the future.

Equity financing, by contrast, involves obtaining money from investors in exchange for an ownership share in the business.  These funds may come from family members and friends of the business owner, wealthy investors, or venture capital furms.  The principal benefit of equity financing is that the business is not obligated to repay the funds.  Instead, the investors hope to realize a positive return on their investment in the form of future profits.  The association with high-profile investors may also enhance a new business’ credibility.

The chief disadvantage to equity financing is that the investors become partial owners of the business and therefore gain some control over business decisions.  As ownership interests are weakened, managers face the possibility that they could lose autonomy in operating the business.  Also, businesses that rely excessively on equity financing are likely not making the most productive use of their capital.

Debt and equity financing are both important ways for businesses to obtain capital for their operations.  Determining which to use or emphasize depends on the goals of the business and the extent of control managers would like to maintain.  Experts recommend that businesses use both kinds of financing in a commercially appropriate ratio.  This ratio, the debt-to-equity ratio, is a critical factor used by analysis to determine whether managers are running a business in a sound manner.  While debt-to-equity ratios vary widely by industry and company, a reasonable ratio should generally fall between 1:1 and 1:2.

According to some experts, businesses should rely more on equity financing during the early stages of their development, since such companies may experience difficulty repaying debt until they achieve a consistent cash flow.  On the other hand, many start-ups may have trouble attracting sufficient venture capital until they demonstrate strong profit potential.

In short, all businesses require sufficient investment capital in order to succeed.  The most sensible strategy is to obtain capital from a variety if sources, using both debt and equity financing, and hire professional accountants and attorneys to facilitate financial decisions and transactions.

Preparing for the Perfect Score

By Christopher Y, Guest Contributor

Before your business takes the dive into debt financing, make sure you have prepared for the associated risks with borrowing, so when you do take the leap, you don’t belly flop. Preparation is vital. How can you get a perfect 10 so you can finance your business? Let’s take a step back and look at how banks evaluate risk and how they view businesses.

Depending on what stage your business is in will have a huge impact on the way a bank looks at your business:

Stage 1: Are you a start up (have you been in business two years or less)? Stage 2: Are you an established growing business (have you been in business for more than two years and still growing; i.e. are your sales still expanding, not yet stabilized)? Stage 3: Or, are you a mature business with a stable sales cycle (have your sales reached a plateau and are no longer growing rapidly)?

Knowing where your business is in its growth cycle will better help you prepare for the bank lending process.

Debt Financing for a Start-up (Stage 1)

A start-up business is going to have the most difficult time obtaining bank funding.  Think about it; ideas are worthless without execution.  If we could all capitalize on our ideas, then everyone would be in business for themselves.

Evaluating Risk
Banks approach each deal based on the amount of risk they are undertaking and start-ups are as risky as they come.  This is why it is vital for a business to be completely prepared for the bank underwriting process. You need to be prepared to answer any and every question that a bank might ask, be your best advocate, and able to sell your business as a good risk.

So, what can you expect?  While every deal that a bank looks at is unique and presents its own risks and challenges, there are some common things that most banks will look for.

Be prepared to provide:

A business plan that gives a thorough explanation of your business and its strategy A project cost worksheet (what are you going to use the money for?) Management resumes (how much experience do you have in this field?) Two years of personal tax returns and all schedules for every owner of the business (typically defined as a person who owns 20% or more of the business) Personal financial statements for each owner Two or three years of projections showing the business’s expected cash flow (broken down monthly) A business debt schedule (does the business have any other debt? I.E. personal notes, other start up financing, etc) Collateral (what do you have in terms of assets that the bank can take as collateral?) It should also be pointed out that most banks have minimum credit score requirements for all parties guaranteeing debt (a 700 or greater credit score for start ups and 650 or greater for established businesses)

Though useful upfront information will get you into the front door, don’t be surprised if a bank requests additional information. Start at a bank where you have an existing relationship and have a candid conversation with a loan officer.  Ask them what their credit, collateral, and equity requirements are for their business loans; be sure to explain your business in detail, as this can have a bearing on the requirements.

Banks look at things from many different angles to evaluate your risk.  You may be working with one bank employee, but there are probably several parties involved in underwriting your deal; each person will approach your deal from a different perspective.

Start-up Resource Guide

Though debt financing is challenging, we hope you haven’t abandoned your business. While approaching a bank for start-up financing might seem like an impossible, daunting process, it doesn’t have to be.  There is free help out there. Two great resources available to everyone are the SBDC and SCORE.  Both are government sponsored programs funded by tax payer dollars.

The SBDC (Small Business Development Center) is a government-funded program that seeks to provide assistance to current and prospective small business owners.

Some Useful Services for Startups:

Viewing and interpreting your credit Writing a business plan Making projections Developing a management plan And many other useful, free services

If they can’t help you, more likely than not, they will know someone who can.

SCORE (Service Corps of Retired Executives) is a nonprofit association that exists for the purpose of educating small businesses owners and promoting the growth of US based small businesses.  SCORE offers services similar to the SBDC.

While it can be difficult for some to obtain bank financing, it is not impossible; you also do not have to go at it alone.  Whether you decide to approach the task alone, utilize a free service, or pay a consultant or a broker to help you, you need to understand that preparation is vital.

What can be “collateralized” in my small business when I need business debt financing?

The short answer is: Anything with any value can be usued as collateral when you need start up business financing or business debt financing.

Collateral is “an asset pledged to a lender until a loan is repaid,” according to the Denver Business Journal. The Denver Business Journal goes on to define an asset as “anything that has commercial or exchange value that’s owned by a business, institution or individual.” In other words, anything owned by your business that has any intrinsic value on the marketplace, taking in to account the value that would be lost if the assets had to be sold off quickly, can be used as collateral on a loan toward your business.

When looking at what you may be able to use on collateral, it’s important to consider how much money you’re looking to have loaned to you and to look at the value of the assets you have available to use as collateral. It’s also important to consider the risks involved. If you fail to pay off a lender, the items used as collateral can and most likely will be seized and liquidated very quickly, giving you little chance to intervene.

For example, say your business owns a database computer for which it paid $5,000. A bank may determine that the computer may only draw $2,000 if it had to be liquidated quickly, given the relatively quick obsolescence of computers – there’s always something newer and better. Thus, the bank would accept your $5,000 computer as collateral on a $2,000 loan. In essence, you would be putting $5,000 on the line so that you can obtain $2,000 for use somewhere else in the business.

Another element to keep in mind is that collateral isn’t limited to simply physical property. Accounts receivable, purchase orders and other debts owed to you by other people and business can be used as collateral. Insurance policies, collectables, furnishings and virtually anything with an identifiable cash value can be used as collateral, though accepted collateral will vary from bank to bank.