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How to Get Money for Small Business Startup


4 Jun 2007

The first step to getting money for a small business startup is determining how much capital you need. The working capital of a business is its current assets (cash, inventory, accounts receivable) minus its current liabilities (what you owe loan and payables). Usually, this information is summarized on a balance sheet, and shows the financing required for the short term running of the business. This working capital will vary during the course of the year and you need to allow for the maximum likely working capital requirement. For example, if you sell bathing suits, you know that for half the year you need money for merchandise, while the other half of the year you are selling the merchandise. How do you determine your working capital needs? Let's take the example of a store selling children's clothing.

  1. Determine the average number of weeks the merchandise is in your store, and how long it takes for you to receive payment from your customers
  2. Deduct the number of weeks you are allowed to hold the merchandise until you pay your supplier
  3. Take the total number of weeks (for example 6) and divide by 52 (the weeks of the year), and then multiply the result by your estimated sales for the year.
The answer will give you a figure for the maximum working capital required. In our clothing store case, if you paid your supplier in 4 weeks after receipt of merchandise, held it in your store for 10 weeks, and got paid by customer credit cards in 2 weeks, your would have a figure of .15. If your annual sales are $500,000, your capital needs for merchandise (not including fixed store expense) would be $75,000. This is a high estimate, and if you want to work with the cost of your merchandise (assuming a 100% markup), you would be end of with capital needs of $37,500. Now that you have determined your capital needs, how can you find a small business loan? If you are interested in working with a bank, you should understand that they are traditionally more conservative with their investment dollars. They are more likely to approve of a loan for an established business over a startup or emerging company. Yet, with the help of the Small Business Administration (SBA) you can get loans from banks if you have a strong business plan and well prepared business loan request. You can get the assistance of the SBA and the Small Business Development Centers that have located in all major U.S. cities.Be prepared and professional when looking for a loan. You need to have a small business plan, which includes cash and sales projections as well as your personal financial statements. For an SBA loan you will also have to show how a repayment plan, and personally guarantee the loan. The bank will also want to see that in addition to your time, you are investing some of your own capital in the business.To maximize your chances of receiving approval on a business loan from a bank, it is a good idea to look at your business from the perspective of the lending bank.Some of the key questions a bank will ask, and that should be included in your business plan, include:
  • How will the business operate, and why is it expected to make money
  • How will the money loaned to the business be utilized
  • What is timeframe for the repayment plan
  • What makes you capable of succeeding in the business
  • Who are the key management people in the business
The smaller the business, the more closely the individual standing behind the business will be evaluated. Therefore, since the bank sees your business as an extension of you if you have a solid credit rating it will help you significantly. Are there some quick and simple ways to apply for a small business loan? Though it is more challenging with a new small business start up, there are funding resources that can approve you for a loanor a small business line of credit in a relatively quick time frame. Some of those financing resources include.
  • Asset based loans - for existing running businesses that include leveraging your inventory, account receivable or equipment to get a loan. For a new business venture, it can mean using the equity in your house to help your new business get off the ground.
  • Credit Cardss - if you have a good credit history, you can usually get one of the strong business credit card companies to make a small business line of credit of up to $20,000.
  • Equipment leasing / financing - if you are in need of expensive equipment for you new business or practice, there are many companies that will use the new equipment you are buying as collateral, and help you finance the purchase
  • Unsecured Business loans - these loans are used when you do not have the credit history, or do not want to personally guarantee a new business loan. While it might cost you a little more in interest rate, it gives you the peace4 of mind to know you are not personally signed.
Remember to always keep reviewing what your financing needs are, and keep your lenders informed of your financial position, and your business progress. Such open communication will only strengthen your lending relationships.

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