In all cases, the prospect of a profitable investment as shown by a sound business plan is a key step to seeking financing.
Financing for your business may be obtained from private investors, lenders and other financial institutions. In Colorado, most new businesses are initially financed by personal investments from the owner, family, friends and personal business contacts. While it is not impossible, it is often more difficult for new businesses to obtain outside financing. The vast majority of outside financing for small businesses comes from commercial banks, savings and loan institutions. Commercial finance companies, leasing companies, insurance companies, and private or public stock offerings are other financing vehicles that may suit a particular small company’s needs. The next three sections review the different financing sources and some of the advantages, disadvantages and limitations of each resource.
As you seek financing for your business, there are questions you should ask: For what do I need financing? How much do I need? How much may I borrow? For which programs does my business qualify? What information do I need to provide the lender/investor? Do I have to pay interest? If so, will the interest rate vary over the term or will it be a fixed rate? Will I be required to “share” ownership in my business? How long will it take to acquire the money? What are the repayment terms?
No matter which type of loan or financing option you choose, the lender will judge your ability to repay the loan and evaluate your collateral. He/ she will ask for information to determine how you manage your business, how likely you are to default on the loan, the size of the loan compared to how much you have (your debt to tangible net worth ratio) and your company’s ability to liquidate its current assets. In all cases, the potential for a profitable investment as reflected in a sound business plan is a key step to obtaining the financing you need. Assistance in how to prepare a business plan is available through a number of government offices and private management and financial consultants. See the Sources of Assistance chapter of this guide.
Financing needs may generally be categorized into three major classifications: short-term, intermediate and long-term financing, as well as equity financing.
Short term financing methods include credit lines, loans, contract financing and factoring.
Term loans can be used to finance your permanent working capital, purchase of new equipment, construction of buildings, business expansion, refinance existing debt and business acquisitions.
This type of financing allows investors to buy into the ownership of your business.