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The prospect of financing a new business can make the most fearless entrepreneur shudder – and with good reason. Lack of capital is one of the primary reasons start-up companies fail. While no one can guarantee success, a little advance planning goes a long way toward economic stability.
The trick lies in knowing how much money you will need to cover expenses until you become profitable, and where to find additional financing should you need it.
A Preliminary Budget
Many experts recommend new businesses have enough cash on hand to cover all expenses for a minimum of three months. To arrive at a preliminary budget, list the following obligations along with the estimated cost for each:
Take the total of these estimated costs and multiply by the number of months you estimate you will need to become profitable. Then, multiply that number by 1.25, which will allow an extra 25 percent of capital to fall back on when unexpected expenses pop up.
Financial Backing: Programs that Help
While cash shortfalls may be a primary reason for business failure, many entrepreneurs are not aware that financial resources do exist.
Large banks historically have been the most common source of traditional commercial loans and lines of credit. But there are other options, too. Organizations such as the U.S. Small Business Administration, as well as state and local economic-development agencies and various nonprofit organizations, offer low-interest loans to small business owners who do not qualify for standard credit arrangements.
The SBA’s signature lending program is the General 7(a) Loan. This initiative enables qualified small companies to secure financing when ineligible for assistance through normal lending channels. Funding can go toward working capital, equipment, machinery, furnishings, land, structures and more. Delivered through commercial lending institutions, both start-up and existing small firms are eligible. Still, certain criteria do apply. According to SBA guidelines, to qualify a company must:
Other loan programs under the 7(a) umbrella include:
The CDC/504 Loan Program, also SBA-backed, affords long-term, fixed-rate financing to acquire real estate, machinery or equipment for business expansion or upgrade. Generally, a 504 project includes a loan acquired from a private-sector lender with a senior lien; a loan through a CDC with a junior lien covering up to 40 percent of the total cost; and the borrower’s contribution of a minimum 10 percent equity. Certified development companies – nonprofit operations targeting community and regional growth – administer these programs.
Microloan, a 7(m) Loan Program, provides small, short-term loans to small businesses and some nonprofit childcare centers. The maximum loan amount is $50,000, with the average running about $13,000. Monies can go to the purchase of inventory, supplies, furniture, fixtures and other goods, but may not apply toward existing debts or real estate purchases. The SBA makes loans to an intermediary (nonprofits with background in lending/technical assistance), which then delivers the loan to the applicants.
For more information about SBA loans and other funding options, visit the SBA website.
While banks and other lenders provide specific application forms, virtually all ask for similar documentation, so prepare your paperwork in advance. Needed files may include: