Most businesses require start-up funds. Begin by making an inventory of necessary equipment and items needed to start the business. Indicate whether each item is to be purchased or whether it is something one already has. If it will be purchased, will there be an advantage buying it new or buying it used?
If one does not have enough start-up money, he will have to borrow. Getting someone else involved financially is a decision he must carefully consider.
If he decides to borrow money, he needs to develop a written plan to submit to the lender. The steps for planning and developing his business for loan consideration may look something like the following:
- Develop a Business Plan
- Analyze Sources of Capital
- Prepare Loan Proposal
- Present Proposal
Develop A Business Plan: Every business needs a plan, even if the business does not need financing. The better the planning, the higher is his chances of business success. In the financial community, a business plan is an essential tool. The plan should be a typewritten report showing the lender one has planned his business. It is designed to give them confidence in him. If one doesn't need much money, about $10,000 or less, he will not need a complicated plan.
The business plan is in the following order:
Part I Business Organization
A. Business name/address
B. Form of business ownership
Part II Business Purpose and Function
A. Product/service description
B. Initial start-up
C. Reasons for success
D. Background/experience
Part III Marketing Plan
A. Customer profile
B. Geographic description of trading area
C. Economic description of trading area
D. Size of market
E. Competition
F. Pricing strategy
G. Sales plan
H. Advertising plan
Part IV Management Plan
A. Personnel plan
B. Banking plan
Part V Financial Plan
A. Source of funds schedule
B. Cash flow projections
Sources of Capital: Local financial institutions (banks, savings and loan associations, credit unions)--Financial institutions generally are conservative and want to know the ability to repay. They thoroughly examine a loan request and the monetary amount one is willing to put at risk. For start-up expenses, loans generally are limited to 50 percent of the money needed. Loan officers look for borrowers with good credit ratings and sound business plans. Interest rates and repayment plans vary from institution to institution so comparison-shop for the loan that best suits his circumstances.
Life insurance policies: Most life insurance policies (except term insurance) have a cash value amount to borrow against. The owner borrows against the cash value. The interest rate varies by company and the policy. In some cases, the interest can be deferred indefinitely. The policy loan will reduce the dollar value of the policy. In case of death, the loan is repaid first, with the remainder given to the beneficiaries.
Friends and relatives: One may choose to borrow money from friends and relatives to start the business. However, “family borrowing” has severed many friendships and family relations. If he decides to borrow within the friend or relative group, do it on a business basis. He may want to ask an attorney to develop a binding contract. Then repay the loan as agreed, just as though his friend or relative were a traditional lending agency.
Finance companies: Finance companies are concerned about a person's ability to repay a loan and generally are more interested in the quality of the collateral put up for the loan than in a persons history or business projections. Usually, the cost of borrowing from a finance company is several percentage points higher than the cost of borrowing from bank, a savings and loan association, or a credit union.
Credit cards: Although not considered a traditional source of money, bank credit cards are sometimes the only source for a small home-based business. Many small businesses have gotten started by purchasing needed equipment and supplies and by borrowing cash with personal bankcards. Keep in mind that interest rates can be high.
Government sponsored business loan programs: Federal and state business loan programs are available to Mississippi entrepreneurs. Contact the Mississippi Development Authority, Small Business Administration, and local Planning and Development District Offices for specifics about the program available.
Prepare A Loan Proposal: A loan proposal is necessary and often required for business loans. It becomes the "backbone" in the negotiations for money. It should include a brief summary of the business; the service or product one plans to market, and a realistic view of his competition.
A brief personal history, including his skills, prepares the reader for his business ideas. It outlines sources of funds to be invested in his business, including funds requested from the lending agency. The proposal also should outline the repayment plan and list references.
Present The Loan Proposal: The formality of the presentation will depend on the audience for proposal. If one has done his homework, regardless of the situation, there will be no surprises. His well-outlined plan speaks for him, whether it is formally referred to a loan committee or whether it is informally discussed over a cup of coffee.
Regardless of whom he include in the financing of your business, a bank, a friend, or a relative, insist that all details be put in writing. This agreement protects him and the lender and can eliminate future misunderstandings that may cause permanent rifts.
Credit Evaluation
Lenders usually use the five C's of credit when evaluating loan proposals: character, capacity, capital, collateral, and conditions.
Character centers on the loan applicant's integrity, trustworthiness, and attitude toward honoring outstanding credit obligations.
Capacity deals with the individual's or business's repayment ability. This factor is frequently evaluated on the basis of history, income, and credit analysis.
Capital refers to the general financial position of the borrower, with emphasis on tangible net worth. A lender needs to know what is owned (assets) and what is owed (liabilities).
Collateral represent through assets the borrower can pledge as security for the loan.
Conditions refer to how dependent a particular borrower's situation is on general economic trends and special developments. The higher the dependence on these external factors, the higher the associated credit risk is.
