Financing Your Small Business - The Basics
Whether you’re starting a business or expanding one, sufficient ready capital is essential to allowing your business to succeed.
Before You Finance
Before inquiring about financing, ask yourself the following:
- Do you need more capital or can you manage existing cash flow more effectively?
- How do you define your need? Do you need money to expand or as a cushion against risk?
- How urgent is your need? You can obtain the best terms when you anticipate your needs rather than looking for money under pressure.
- How great are your risks? All businesses carry risks, and the degree of risk will affect cost and available financing alternatives.
- In what state of development is the business? Needs are most critical during transitional stages.
- For what purposes will the capital be used? Any lender will require that capital be requested for very specific needs.
- What is the state of your industry? Depressed, stable or growth conditions require different approaches to money needs and sources.
- Is your business seasonal or cyclical? Seasonal needs for financing generally are short term. Loans advanced for cyclical industries such as construction are designed to support a business through depressed periods.
- How strong is your management team?
- Perhaps most importantly, how does your need for financing mesh with your business plan? If you don't have a business plan, write one. Lenders will want to see your plan for your business before they finance it.
Traditionally, banks and credit unions have been the major source of small business funding, offering demand loans, seasonal lines of credit and single-purpose loans for machinery and equipment. The SBA’s guaranteed loan program encourages banks and credit unions to make long-term loans to small firms by reducing their risk and leveraging the funds they have available. Visit sba.gov/loans-grants for more information on SBA loan programs.
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Dave Lentell is the lead lender relations specialist with the U.S. Small Business Administration's (SBA's) Iowa District Office. He helps coordinate SBA's small business loan programs in the state of Iowa and promotes SBA's programs to the small business community. He has been with SBA since 1993.