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4 Factors to Consider When Deciding About Financing

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4 Factors to Consider When Deciding About Financing

By bridgetwpollack, Guest Blogger
Published: February 21, 2013 Updated: February 21, 2013

If you are looking to make any major improvements in your business, whether it is a second location, new equipment, or an additional product line, you most likely need business financing. But getting financing for your business can be intimidating. Despite this economic downturn, banks are still lending. However, the way banks are lending to small businesses has changed pretty significantly and they are more cautious about where the money is going, especially when considering a loan to new businesses with no track record. As a result, you may need to consider a number of options to get the money you need, whether you are looking to launch a business or need additional financing for an existing enterprise. However, before you look into alternative financing, talk to a SCORE mentor about the various factors that influence which financing option will suit your needs:

Business Impact

According to the U.S. Small Business Administration, factors financing institutions take into consideration include determining the specific uses for which you need the money, whether your business is seasonal or cyclical, and whether you plan to expand. Work with your SCORE mentor to create a written business plan that will help you clarify your financing needs.

Types of Financing

Common types of financing include bank loans, SBA loans, crowdfunding, receiving funds from a venture capitalist (in which you take on investors in exchange for providing them with an ownership stake), or borrowing from friends and family members. If your small business is engaged in scientific research and development (R&D), you may qualify for federal grants under the Small Business Innovation Research (SBIR) and the Small Business Technology Transfer (STTR) programs. You may need to solicit funds from all of these sources to obtain the amount of money you need. You could also tap into personal savings or even take out a second mortgage on your home.

Pros and Cons

Each type of financing offers certain benefits and pitfalls. For example, grant money, venture capital funds and your own money do not have to be repaid, so you won't incur additional debt. If you borrow from family and friends, you may receive a low interest rate as well as flexibility in payment terms. If you borrow from a bank, you may have more stability, avoid using your own money, as well as avoiding the potential tough situation of approaching people you know to ask for money.

If you borrow from friends and family, you need to consider what would happen to your relationship if your business fails and you cannot repay them. If you default on a bank loan, you could lose your business and need to file bankruptcy. If you work with venture capitalists, you may need to relinquish some control of your operation.

Potential

Whatever method of financing you decide to pursue, your ability to sell your business concept for starting or growing successfully will increase the potential of obtaining financing when asking for money. Factors that will help you sell your idea include a solid business plan, the ability to demonstrate the need for your business in the marketplace, and any successful business experience you had in the past. Talk to your SCORE mentor today to get started with your financing planning needs.

About the Author:

Bridget Weston Pollack

Guest Blogger

Bridget Weston Pollack is the Vice President of Marketing and Communications at the SCORE Association. She is responsible for all branding, marketing, PR, and communication efforts. She focuses on implementing marketing plans and strategies to facilitate the growth of SCORE’s mentoring and trainings services. She collaborates with SCORE volunteers and develops SCORE’s online marketing strategy.

Comments:

The important issue is to have enough capital and stability, the business risk is necessary, but would be very risky investment in the wrong place. Share your community spirit is more personal. Thank you
all of us might really need to take into consideration a number of alternatives to acquire the cash you may need, whether we are searching to produce a organization as well as need to have more capital to have an current organization. choosing with regards to loans can be essential within business. this content is excellent and contains tons of great information.
Nice tips - but, when considering a small business loan, never just think about how to land one and which loan to pursue. Your first thought should be about what you can do with the money. A business loan is just an asset to the business - thus, that asset has to return value - a lot of value. You would not buy a new piece of equipment for your business that costs $100,000 but only bring half that amount in value back to the business - you would be better off spending your money on something that actually adds value to a business. Business loans are the same way. Far too many companies seek loans - say for $100,000 - but, when all is said and done, that loan only brought into the company less than half that amount - it was a waste of money. What you can do with your business loan is what matters. Not only should you be able to increase the value of the business by the amount of the loan and any and all interest and fees but you should also be able to realize a return from it - whatever your return threshold is - 10%, 12%, 15% etc. Example: You take a $100,000 for 36 months. In the end, that loan will cost your business - with interest and fees - some $116,200. Thus, the value you get from employing that loan money in your company should at least be that amount. But, to use it like a true asset, it should also return additional returns in profits - if your hurdle rate (the amount of return that you want from all your assets including your overall business is 15%) then that loan should bring into your company some $168,200 to cover the principal, interest and your return - anything less and you should not have taken the loan as you could have just put that money in the stock market or other investment that would have returned that amount or more. If you know the loan proceeds (how you deploy them) can do that, then you can start thinking about those other issues. If you can’t earn a commendable return from the loan - then you should not take it in the first place and find another way – a less costly way – to grow your business that will give you those returns.
Can a Bail Bond business receive any funding from SBA? (This post was edited to remove a link. Please review our Community Best Practices for more information about how best to participate in our online discussions. Thank you.)

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