Funding

Funding

Part of being an effective leader of your small business is to be able to make sense of the numbers and to know that cash is king!  Understanding how to gain access to business funding is important because your business must be able to understand how to maintain proper funding resources in order for your business to expand and grow.

As an entrepreneur, there is a good probability that at some point along the growth of your business you will need funding.  Having knowledge of the different types of funding available to your business can help you to be better prepared for when the time comes when you need a cash injection or funding of some sort.

As a small business, you can get your business set up with its own business credit profile which can allow your business to build its own credit profile.  Building business credit occurs through the following steps:

• Business credibility – Setting up your business with a phone number, mailing address, fax number, web site, and website directories is the first step to convincing someone to lend your business money.
• Vendor Credit – Some vendors will sell your business merchandise on account with the anticipation of being paid later. Doing business with vendors who report your payment to the business credit bureaus will help you build your business credit.
• Business merchant cards – Purchasing goods for your business on merchant cards, such as Staples and Office Depot, will allow your business to build its credit rating.
• Business Credit Cards – Eventually, getting business credit cards is a great way to add liquidity to your company.

Apart from the credit building types of credit discussed previously, there are many types of funding available to small businesses.  Many of these options require the same general types of documents as part of the funding package.  It is a good chance that you will need to provide the following:

• Bank statements – both business and personal
• Tax return – both business and personal (up to 3 years)
• Personal Financial Statement
• Profit and Loss Statement (up to 3 years)
  • Many banks like to see the financials structures in an EBITDA format. Unlike standard net income calculations that use a simple formula of revenue minus expenses, EBITDA factors in other expenses, like taxes and interest. EBITDA allows analysts to generate useful comparisons between companies, and to project long-term profitability and the ability to pay off future financing.  To calculate EBITDA, a business must know its income, expenses, interest, taxes, depreciation (the loss in value of operational assets, such as equipment) and amortization (expenses for intangible assets such as patents, that are spread out over a number of years). With those numbers in hand, the formula is:  EBITDA = Revenue – Expenses (excluding tax, interest, depreciation and amortization).  Or, more simply, it equals net income plus interest, taxes, depreciation and amortization.
• Balance Sheet (up to 3 years)
• Business debt schedule

Some different types of funding available are:

• Bank Term loan – traditional lending from banks can be some of the least expensive money in the marketplace but it is also some of the most conservative financing available. A traditional bank term loan is what most people re used to where there is a fixed rate and a fixed repayment period.  Many banks have different appetites for industries and risk.
  • We recommend that you review your banking relationship to see if perhaps there may be some better banks that can show you more favorability based on your risk and industry.
• SBA Loans – The Small Business Association is a government association that works with banks and other lenders to help reduce the risk of a loan by essentially insuring it, in the event of default. Some of the most common SBA loans are:
  • Basic 7(a) Loan Program – Gives 7(a) loans to eligible borrowers for starting, acquiring and expanding a small business. This type of loan is the most basic and the most used within SBA’s business loan programs. Borrowers must apply through a participating lender institution.
  • Certified Development Company (CDC) 504 Loan Program – Provides growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings.
  • Microloan Program – Offers very small loans to start-up, newly established or growing small business concerns. SBA makes funds available to nonprofit community based lenders which, in turn, make loans to eligible borrowers in amounts up to a maximum of $50,000. Applications are submitted to the local intermediary and all credit decisions are made on the local level.
• Online Lenders – online lenders are a recent phenomenon and benefit from being faster and more flexible than bank lenders. They also may not require as many documents from you in order to get you underwritten.  Often times the costly of money can be more expensive and sometimes the repayment terms can be weekly or daily.
• Angel Investors – This type of money is usually for start-ups and generally the angel will want at least 25 % ownership in your company.
• Venture Capitalists – Venture capital is money that is given to help build new startups that are considered to have both high-growth and high-risk potential.
• Factoring / Invoice Financing – This method of funding allows a business to turn its receivables into cash. A factoring company buys your receivables at a discount thereby providing immediate funding.
• Merchant Cash Advances – Merchant cash Advances, also called MCA’s, often times are based on your cash flow and not your financial statements. These types of loans do not look at your credit score, but rather take your future credit card receivables and use that anticipated cash-flow as collateral to lend you money today.  This type of money is often very costly and requires weekly or daily repayment of the loan.
• Crowdfunding – This method allows a business to pool small amounts of money from a large number of people. There are many websites that you can go to that allow you to set up a crowd funding project.
• Grants – Grants are available for certain businesses. As an example, The SBA offers grants through the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs.