Small Business Financing & Startup Costs
OBJECTIVE:
Money makes your business go, and usually banks make loans only to businesses with operating histories. In this session we will give you some alternatives, strategies, and things to think about in your search for financial help. You will learn how to locate, negotiate for, and maintain sources of money to help you start and expand your business.
- First Things First
- How Much Money Do You Need?
- What do you need it for?
- Unsecured Loans
- Loans vs. Investment
- Where to Get the Money
- Types of Funding Sources
- The Art of Getting the Money
- Business Loans
- After You Get the Money
- Suggested Activities
- Top Ten Do’s and Don’ts
- The Business Plan
A banker’s primary concern is your timely repayment of loans. The fuel to make loan payments come from your cash flow. So your management of cash flow is of utmost interest to your banker and you must convince the banker that you are an expert in making cash flow projections that safely include your loan payments. Here is more information on cash flow which is taken from our Business Expansion course.
As pointed out in the first session on picking a business, don’t be discouraged by not having much money to start with. Many businesses can be started with no money at all. You can start small and humbly and grow one order at a time. Here is a sample, partial list of businesses you can start with very little cash: Businesses You Can Start for Little or No Money.
Secured Loans
No Federal Grants For Businesses
The federal government does not offer grants for starting or growing a business. It only provides grants for nonprofit and educational institutions. These organizations focus mainly on medicine, technology development, and other related fields. Find out more about federal grants.
Some state and local programs offer business grants. They usually require you to match the funds. Or, they may expect you to combine the grant with other forms of financing, such as a loan.
The Importance Of Cash Flow To Business Lenders
Cash flow refers to the income and expense ratio of a business. A business can have a positive cash flow, which means its overall revenue is higher than its expenses, or a negative cash flow, which means its expenses are larger than its revenue.
Businesses with positive cash flow tend to be more reliable borrowers that can afford their debt obligations, making them a trustworthy candidate to lenders. However, if a business has negative cash flowor no moneylenders are typically hesitant to provide financing. At the end of the day, lenders want to ensure that borrowers will repay what they borrow without any issues.
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Whats The Difference Between Money Down And Collateral
Just because a loan might not require a down payment, that doesnât mean a borrower is totally off the hook if they default.
In lieu of a down payment, some no money down small business loans require the borrower to put up collateral. If a borrower is unable to meet their loan payments, the lender will seize and liquidate the borrowerâs collateral to make up for those missing payments, or as much of that capital as they possibly can.
Down payments and collateral arenât quite a one-to-one comparison: If your loan requires a down payment, you need to give up that money in order to secure your loan in the first place. But you donât necessarily need to sacrifice your assets on a collateralized loanâand the intent, of course, is that you never will.
Like a down payment, though, collateral mitigates the risk to the lender, and it functions to show the lender that you, too, have a lot to lose if you fail to repay your loan bills.
There are different types of collateral a borrower can choose to put up for a small business loan . Some forms of collateral include:
- Real estate
- Invoices
- Cash
â¦or whatever assets are easily liquidated. In some cases, a lender will impose a blanket lien, which gives them the right to seize any and all of a businessâs assets to recoup their debt. The exact type of collateral required for a small business loan depends upon the lender, the type of loan theyâre offering, and the loan amount.
What Is A Startup Business Loan With No Collateral
Unsecured business loans allow you to borrow money without having to put up assets as security for repaying your loan. In contrast, secured business loans require a guarantee of repayment in the form of high-value collateral. Commercial real estate loans and equipment loans are common examples of secured business loans, where a building or piece of equipment could be repossessed if you fail to repay your loan.
Compared to their secured lender counterparts, no-collateral business lenders face a higher risk of borrowers defaulting on loan repayment. No-collateral lenders evaluate factors like your credit scores, business history and annual revenue to determine your creditworthiness. As a result, unsecured lenders may utilize the following loan agreement clauses to mitigate the risks of lending you money:
- Personal guarantee. You may need to sign a personal guarantee in order to get your loan, even though an unsecured loan doesnt require collateral. The guarantee binds you to an agreement to repay the loan out of your own pocket in the event that your business is unable to do so.
- Blanket UCC lien. As a condition of your unsecured loan, your lender could also require that you agree to a blanket UCC lien on your company assets. If your business cant repay the amount you borrow, the lien allows the creditor to seize those assets in compensation for the remaining debt.
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What Are The Startup Business Loan Eligibility Requirements
Like any other type of loan, a startup business loan has certain requirements that youll need to meet in order to qualify. That said, the requirements may vary depending on your credit health and the lender:
- Good credit score. Conventional lenders like to see borrowers with a credit score of at least 650 before considering granting a loan. Some lender may even check your business credit score.
- A sound business plan. Your lender will want to see that youve put in some effort to come up with an in-depth business plan that outlines what your experience is in the industry, where you plan to take your business once you start it, and how much money you need to cover all relevant expenses.
- No delinquencies or bankruptcies in the recent past. Your credit report will be pulled when you apply for a startup business loan. And in addition to your credit score, your lender will be able to see if youve had any recent delinquencies or bankruptcies. If so, this could hamper your ability to secure a loan.
How To Register Your Business Independently
In order to register your new business with Companies House, you will need to prepare:
- An appropriate company name. This cannot be the same as another company and must end in Limited or LTD. You can check the Companies Companies House register to make sure you arent duplicating names.
- An address for your company. This must be a physical address in the UK and it can be your home address or the address of the person managing your Corporation Tax.
- The name of at least one director. Who will be legally responsible for running the company and preparing all accounts and reports.
- The details of at least one shareholder. As limited companies are limited by shares, they are owned by shareholders. As the director or business owner, youll own 100% of the company if you dont have any other shareholders involved.
- Your Standard Industrial Classification code. A code that describes the nature of your business and the economic activity that youre engaged in.
With all this information to hand, you can easily start a new business online. Once youve registered, you will receive a certificate of incorporation, confirming the businesss legal existence.
NB: After getting the certificate, you will have three months to apply for Corporation Tax before you get fined a penalty.
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Do Start Up Loans Require Personal Guarantees
After making an application, its important to be aware that some lenders will require a personal guarantee as part of their agreement terms. Because there is nothing to secure the money against, a lender might want reassurance that they will have a way of getting their money back, if your small business defaults on repayments.
What is a personal guarantee? A personal guarantee is a signed agreement making the business director personally liable for paying back the money to the lender.
How risky are personal guarantees? You shouldnt be considering a start up loan if you are not confident with your business plans or financial forecasting. Provided you will be able to pay back repayments on time, there is little need to worry about signing a guarantee.
Best Small Business Loans For Startups With Bad Credit
These lenders check credit but will accept scores below 600. Other financing types for startups with bad credit are personal loans, lines of credit, and invoice financing.
- Shannon VissersThe former editor-in-chief of SteelOrbis, Shannon has been researching and writing about small business software and financing since 2015. Her shopping and retail expertise has been cited in numerous publications, including Reader’s Digest, MSN, Yahoo Finance, and GOBankingRates . She has also published articles for LIVESTRONG.COM, eHow, Life’d, and other websites. Shannon attended San Diego State University, graduating in 2005 with a BA in English.
Expert Analyst & Reviewer
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How To Choose Your Best Loan Option
The first step to finding the loan that matches your business needs is identifying how much money youll need to borrow. Business lines of credit offer up to $500,000, while ACH loans and merchant cash advances provide far less. In this way, knowing how much you need can help eliminate options in a hurry.
The source of funding you choose is often determined by the amount of money you need and your business model, explainsForbes. Each business trajectory is different, and your capital needs will largely be determined by your startup costs, infrastructure needs, and operational overhead.
Likewise, youll need to decide how quickly the money should arrive. ACH loans and merchant cash advances can fund in just a couple of days, but business lines of credit can take up to 2 weeks.
Next, youll want to crunch the numbers and see which loan gives you the best bang for your buck. There are plenty of easy-to-use loan calculators available, so dont worry if math isnt your strong suit.
A common issue that small business owners face is lenders using inconsistent metrics and factoring. When disclosures vary from lender to lender, its hard to line up comparables and make an informed decision.
Currently, you will find versions of SMART Box customized for business lines of credit and merchant cash advances. Because ACH loans share so much in common with merchant cash advances, you can draw some similarities from the process as well.
Why Get An Unsecured Business Loan From Clarify
Easy funding process, high approval rates, competitive APRs, no collateral need. Its that simple.
Every business needs working capital for growth and bridging gaps in cashflow. We are a true lending partner that treats you like family, with your best interest at heart. Here are just a few ways Clarify is changing the lending industry:
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Can You Buy A Business With No Money Down
Buying a business with no money down is one of the hardest ways to acquire a business. However, it is possible to buy a business with no money down under the right circumstances. In this article, we examine:
Keep in mind that entrepreneurs who want to buy a business with no money down tend to be viewed with caution by business brokers. This is because a number of these entrepreneurs have unrealistic expectations. These expectations come from having little actual knowledge.
To be taken seriously, you must be prepared. Have realistic expectations and be knowledgeable. Do your due diligence. Show owners, brokers, and potential investors that you have done your homework.
How To Start A Business With No Money
Have you ever dreamed of owning a business? I cant blame you. The advantages, after all, are crystal clear. Mainly, you get to be your own boss, set your own hours, and make a living off of a passion.
Because of this, its not surprising that about three in five Americans have an idea for starting a business, and about a third have had more than one idea.
Despite this, it remains a dream to many due to funding constraints. In fact, according to Zapier, 63% of Americans havent followed through with starting a business due to a lack of funding.
To be fair, thats a valid concern. After all, it costs money to start a business. And, if youre already on a limited budget, this could further complicate matters.
There is some good news though. A business can be started, or even expanded, for free if you think strategically and utilize available resources.
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How To Get A Business Loan With Bad Credit
Whether youre new to building credit, or youve made some mistakes in the past, it can be frustrating to apply for business credit with a poor credit profile. Bad credit doesnt have to keep you from getting funding, however. While it may take longer to get approval, there are some products available that weight your credit profile differently than others are are willing to work with borrowers who dont have a perfect profile . They include merchant credit accounts, business cash advances, secured business credit cards, and some microloans.
You can also work to establish your ability to repay a business loan by other means. These include:
The best way to get a loan with bad credit is to start taking steps now to improve your credit. While this will take time, its the most effective way to get approval for the kind of credit that will be both affordable and most profitable for your business. Although there are options to get funding with bad credit, establishing yourself and your business as a good credit risk will create more options and improve the odds of a successful application.
Can I Get A Startup Business Loan With Bad Credit
All the companies reviewed above specialize in lending to borrowers with bad credit. In some cases, the lenders dont even look at your bad credit score, but rather rely on different metrics, such as your debt-to-income ratio, the amount of money you have leftover after paying your bills each month, and the reliability of your income.
The extent of your access to a small business loan or personal loan may be conditioned, in part, upon your bad credit score. It would be naïve to think that a better score wouldnt improve your approval chances.
But the companies in this review work hard to justify a decision to approve your unsecured loan request, especially since it is not a secured business loan. They decide how much they can lend you, what interest rate and fees to charge, how long youll have to repay the loan, and other loan features.
You can help your chances of loan approval by cleaning up your credit history before applying. If you want to do the work yourself, start by reviewing your three credit reports . You can get free copies of each bureaus credit report from AnnualCreditReport.com, the sole source of free credit reports authorized by federal law.
With reports in hand, comb through each one for transactions and accounts you dont recognize. You can challenge these by entering disputes on the credit bureau websites. If your challenge is upheld, the negative item will be removed, and your credit score should increase.
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Is 100% Seller Financing Realistic
A lot of buyers focus their efforts on trying to get 100% owner financing. It makes sense. At face value, it seems like an attractive option for buyers.
However, offering 100% financing to a buyer is not attractive to the seller. Far from it. They dont want to be a bank. The seller wants to get paid as quickly as possible ideally in cash .
So, why would an owner offer 100% financing? Lets examine some potential reasons.
1. Business has problems
One reason an owner may want to offer 100% financing is if the business has problems. Basically, they want to unload it as quickly as possible to whoever wants to buy it. Offering aggressive financing is one way to attract buyers.
2. Business is not worth it
Another reason an owner may offer 100% financing is that the business may not be worth it for the owner. Maybe the business has problems as mentioned in the previous point. Perhaps it takes too much work or does not make enough profits. Or maybe the business doesnt have a future.
Again, offering aggressive seller financing is one way to unload the business.
3. Owner cannot find a buyer with a deposit
In some cases, the business is good, but the owner cannot find a buyer who can get financing. This happens from time to time. This presents an interesting opportunity for the buyer.
Is SBA financing an option?
What Are The Types Of Start Up Business Financing
This form of finance is imperative for new business owners. There is a whole range of options available, and its important to do your research before making any hasty decisions. These are the main types of start-up business financing:
These suit new businesses that are typically looking to borrow smaller amounts of money without providing collateral. Because they are unsecured, the lender will for business assets as collateral if the business fails to repay the loan. They usually have shorter repayment terms, and whilst unsecured start up loans are arguably less risky, they can come with slightly higher interest fees.
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