Small Business Financing Options – Know What to Expect.
So you have made the decision to start a small business franchise or home based business… now, how do you pay for it? As any rational individual understands, albeit contrary to what many internet “opportunities” would have you believe, any legitimate business requires capital: either cash or credit. As recently as a few years ago, obtaining funding to cover business start-up and operating costs was as simple as going to your local bank and getting a loan. However, due to the current economic conditions most individuals and small businesses are not able to qualify for large loans due to more stringent lending guidelines – banks just are not lending money like they used to. As a result, many would-be entrepreneurs are finding they must forgo their small business plans, put them on hold or become very creative at finding alternate means of financing. This article will provide a cursory overview of some basic methods business owners have used in order to fund their enterprises.
Depending on the small business plans you have in mind, you will most likely need some type of start-up capital along with your ongoing operating budget. Even small franchise opportunities are beyond the financial means for most individuals without assistance. Too little funding will virtually ensure either the immediate failure of your business, or will lead to you going out of business in a short time due to a lack of required operating income. Unless you are one of the fortunate ones in a position to have all of the needed investment capital liquid, meaning you have immediate access to the money, you will have to borrow money, either from people you know or from outside sources. Even if you are cash rich and have ready access to the required funding, it may still make fiscal sense for you to borrow, if possible. For the sake of this brief article I will separate the funding sources into personal and outside sources. I am writing this under the assumption that you already have or will have an approximate estimation of the nature of your desired business and how much capital you will require to realize your vision. Also, it goes without saying this article is not meant to provide in-depth financial advice. This is solely my opinion and I would strongly encourage you to make any financial or business decisions only after doing thorough due diligence.
In order to finance your business plan you may be able to raise the money personally or borrow money from people you know. This will probably be a more viable option if you do not need a large amount of money. On average, small business franchises usually require $10,000 – $30,000 to start, while you can start some small franchise opportunities and home businesses with as little as $2,000 or even less. Fast food franchises normally start around $100,000 or much more. You will almost certainly – unless you are in an extremely dire financial situation – be required to invest some of your own money in order to obtain additional financing. Individuals will probably be unlikely to invest in your business if you have not shown the same commitment. Even if you don’t have the money readily available in the most obvious places such as a savings or checking account, entrepreneurs frequently use available credit in the form of credit cards, money in retirement accounts including 401K savings or borrow against your 401K or house with a home equity loan or line of credit. If you are planning to approach family, friends or business partners to borrow, or are looking for a loan from outside sources, you should plan on preparing a business plan.
If you are unfamiliar with what goes into creating a business plan, you may find sufficient guidance online or from your local library. Any commercial lending institution (e.g. your local bank) and even family or friends will most likely require a formal written business plan. A business plan essentially details the nature of your business, including a strategy, risk level, expectations of profit, an overview of how you will operate your business and more. An informal plan may suffice if you just need a small loan from a friend, but plan on having a detailed and comprehensive plan if requesting a sizeable loan from a lending institution. Bankers will expect you to fully explain what the money will be used for: why you require the requested amount, when you can reasonably expect to repay the loan, etc. Do your homework ahead of time and be prepared!
You may need to seek professional guidance in this area especially if your plan is unusual or excessively complex, but otherwise you may be able to get by with a pre-formatted business plan template or even follow an existing business plan from another company. If you are looking to start a small business franchise you can likely use borrowing guidelines provided from the company. One of the benefits of franchise-type businesses is they give you a “cookie cutter” type format for what has proven to work for others, especially in regard to investment amounts. Regardless of the nature of your business though, lenders will take into account numerous factors when considering your plan. Request sufficient financing to allow you to operate your business as you have budgeted, but not an excessive amount or your application may be denied.
The author hoped to provide some insight and suggestions as you seek to fund your new business. This will hopefully provide some direction as you continue to do your homework on making your business ownership dreams a reality. From a personal standpoint you should look to use some combination of liquid funds, credit cards, retirement savings or possibly a home equity loan. If you need additional financing, consider approaching family, friends, business partners or commercial lending institutions. Regardless of where you plan to obtain the funding, plan to prepare a thorough business plan. As mentioned above, if you are starting a you may be given investing guidelines to follow. No matter what type of business, however, prepare to provide potential lenders with a clear and complete picture of your business strategy, risk and repayment timeframe.