How to Get Money For Your Business

Summary

Charles Alexander from the Tennessee Small Business Development Center provides an overview of financing options for businesses. He covers common methods like personal savings, loans from family or friends, credit cards, and SBA loans. Alexander emphasizes the challenges of startup financing, the importance of having a clear repayment plan, and the potential pitfalls of credit card debt. He also explains the 'five Cs' lenders consider when approving loans: character, cash flow, collateral, capital, and conditions. Lastly, he cautions against relying on grants or investors for most business types.

Takeaways

• 💰 Personal savings are the most common method to fund a business, especially for startups.
• 👨‍👩‍👦 Family and friends are common sources of funding but can complicate relationships if not handled with clear agreements.
• 💳 Credit cards are risky for businesses, especially startups, as high interest rates can overwhelm cash flow.
• 🏦 Commercial loans require two years of tax returns and experience, making them hard for startups to obtain.
• 👩‍💼 Investors, like venture capitalists, are more likely to fund tech or medical startups, but Main Street businesses may struggle to attract them.
• 💸 SBA loans offer bank loans with the Small Business Administration backing, but often come with additional fees.
• 🎁 Grants are rare and often not suitable for starting or expanding businesses. Be cautious of scams.
• 💼 Lenders consider the '5 Cs' of credit: character, cash flow, collateral, capitalization, and conditions.
• 📊 A business plan is essential but won't guarantee a loan. It should outline funding uses, management, and financial projections.
• 📉 Credit score matters, with 720+ often being the benchmark, but it's just one factor in securing a loan.

Q & A

What is the most common method of financing for both existing and startup businesses?

The most common method of financing for both existing and startup businesses is personal savings and resources.

Why is it difficult for startups to secure a bank loan?

It is difficult for startups to secure a bank loan because they typically need two years of experience in the industry, two years of tax returns, and most banks don't count income from a new business until it's been around for at least two years.

What should be done if seeking financial help from family or friends?

If seeking financial help from family or friends, it is important to create a term sheet, preferably with the help of an attorney, to document the repayment terms to avoid misunderstandings.

Why are credit cards considered a risky option for financing a business?

Credit cards are considered risky because they often come with high interest rates, and businesses that rely on credit cards are typically already cash flow-strapped, which can worsen their financial situation.

What is the main reason banks might offer SBA loans instead of standard commercial loans?

Banks might offer SBA loans because the SBA guarantees a portion of the loan, providing the bank with additional collateral protection in case of a default.

Why are grants typically not a viable option for business funding?

Grants are not a viable option for business funding because they are very rare, especially for starting or expanding a business, and often come with highly specific and obscure eligibility requirements.

What are the Five Cs of Credit that lenders consider when evaluating a loan application?

The Five Cs of Credit are Character (personal experience and credit history), Cash Flow (ability to repay the loan), Collateral (assets pledged for the loan), Capital (how much the business owner is investing), and Conditions (how the loan will be used).

Why is collateral important when applying for a loan?

Collateral is important because it serves as security for the loan. If the borrower defaults, the bank can claim the collateral to recover some or all of the loan amount.

How much capital is typically required from a business owner when applying for a loan, especially for a startup?

A business owner is typically required to invest around 25% of the project cost when applying for a loan, especially for a startup.

Why is having a business plan important when seeking a loan?

A business plan is important because it shows how the loan will be used and provides insight into the business’s marketing, management, financial strategies, and the specific conditions of the loan. It helps lenders understand the business’s potential, although it doesn't guarantee approval.

Outlines

00:00

💡 Introduction to Financing Options for Businesses

Charles Alexander introduces the topic of financing options for businesses, catering both to established businesses and startups. He discusses how personal savings are the most common method for funding a business, especially for startups, as banks generally require two years of tax returns and experience in the industry. He briefly touches on other options like family and friends, warning about potential complications if not properly documented.

05:00

👥 Family and Friends as Investors

Family and friends are a common source of funding but can be challenging due to emotional complications. Charles shares personal stories highlighting the need to document terms to avoid future conflicts. He stresses the importance of setting clear repayment terms and cautions about potential tensions during family gatherings if informal loans go unpaid.

10:03

💳 Using Credit Cards for Business

Using credit cards to fund a business is discussed as a risky option. While accessible, they often lead to increased debt, especially for startups. Charles shares an example of a client who relied heavily on credit cards, leading to financial strain due to high interest rates, even though the business was generating income.

15:05

🏦 Commercial Loans and Investors

Charles discusses commercial loans from banks and mentions that investors, particularly those in the tech or medical fields, can be an option, but they're less likely for Main Street businesses. He emphasizes that investors, like family and friends, often come with strings attached, and may not always stay 'silent' partners.

💸 SBA Loans Explained

An SBA loan, backed by the Small Business Administration, is explained as a commercial loan where the SBA co-signs. While SBA loans may come with extra fees, they provide an advantage because they reduce the risk for banks by covering the collateral shortage if a borrower defaults. This increases the chances of getting a loan approved.

🎯 Misconceptions About Grants

Charles clears up common misconceptions about grants, stating that they are rarely available for starting or expanding a business. He advises against spending too much time searching for grants unless it's for a very niche field and recommends using reliable sources like grants.gov.

📊 The Five C’s of Credit

The 'Five C's of Credit'—Character, Cash Flow, Collateral, Capital, and Conditions—are introduced as the key factors lenders assess when considering a loan application. Charles dives into each component, explaining how experience, cash flow, and personal investment play critical roles in determining loan approval.

🔄 Cash Flow for Startups

For startups, demonstrating cash flow can be challenging since new businesses often lack two years of financial history. Charles recommends keeping a job while starting a business to show other forms of income that can support the loan. He explains how collateral, such as personal property, is typically required to secure loans.

🏡 Collateral and Capital Requirements

Charles discusses the importance of collateral and capital when applying for a loan. Banks often require tangible assets like real estate as collateral and expect borrowers to invest their own capital to show commitment. He provides an example of a bakery owner who expected full financing without personal investment, which is often a red flag for lenders.

📝 The Role of Business Plans

A business plan does not guarantee a loan but is often a requirement to start the conversation. Charles explains that while existing businesses may not need one, startups often do. The plan should detail the use of funds, marketing, management, and financial projections. He emphasizes simplicity and professionalism in business plan presentations.

📈 Financial Projections for Loan Applications

Charles outlines the financial documentation lenders expect, such as tax returns, personal financial statements, balance sheets, and cash flow projections for one to three years. Startups face more complexity, as they need to make assumptions about future revenue. Existing businesses need to ensure their projections align with past performance.

🔍 Credit Score and Final Steps

Charles advises that a strong credit score (around 720 or higher) is necessary for loan consideration, but not a guarantee of approval. He warns against relying solely on credit scores or business plans. He encourages businesses to reach out to the Tennessee Small Business Development Center for further guidance on loans and financial planning.

Keywords

💡Personal Savings

Personal savings refer to the money an individual has set aside for personal use, which can be a major source of funding for starting or growing a business. In the video, the speaker emphasizes that using personal savings is one of the most common ways for business owners, especially startups, to finance their ventures. Since loans can be difficult to obtain for new businesses, personal savings provide a more accessible option.

💡Family and Friends Funding

Family and friends funding refers to borrowing money from close acquaintances to finance a business. The video explains that while this is a common method, it can lead to personal complications if not managed properly. The speaker suggests using a formal term sheet or loan agreement to avoid misunderstandings and potential conflicts, especially with relatives like grandparents.

💡Credit Cards

Credit cards as a financing option involve using personal or business credit cards to cover business expenses. The video warns against relying on credit cards due to the high-interest rates and potential for accumulating debt. An example from the video highlights a business owner who funded her startup using a credit card, which led to financial strain due to high interest charges.

💡Commercial Loan

A commercial loan is a loan provided by a bank to a business to cover operational costs, expansion, or other business needs. In the video, commercial loans are described as a common method for established businesses, but they require two years of tax returns and other financial documents, making them difficult for startups to obtain.

💡SBA Loan

An SBA loan is a loan backed by the U.S. Small Business Administration, providing additional security to the lender. The video explains that SBA loans are often used by businesses that might not qualify for traditional loans due to a lack of collateral or other risks. While SBA loans have additional fees, they make it easier for small businesses to access funding.

💡Investors

Investors provide capital to businesses in exchange for equity or future returns. The video mentions that while many people think of investors as an ideal source of funding (inspired by shows like Shark Tank), investors typically focus on tech or medical businesses. Main Street businesses, like retail or food services, might not attract investor interest, and investors can be demanding and involved in business decisions.

💡Grants

Grants are funds provided by the government or organizations that do not need to be repaid. The video emphasizes that obtaining grants to start or grow a business is extremely rare, with most grants being available only for specific industries or purposes. The speaker advises against spending significant time searching for grants unless they meet very specific criteria.

💡Five Cs of Credit

The Five Cs of Credit refer to criteria that lenders evaluate when considering a loan application: Character, Cash Flow, Collateral, Capital, and Conditions. In the video, the speaker breaks down each element, explaining that these factors are crucial for lenders to assess the risk and viability of a loan. For instance, 'character' refers to the business owner's experience and credit history.

💡Business Plan

A business plan is a formal document outlining a company's goals, strategies, and financial projections. The video discusses how a business plan is necessary to have a serious conversation with lenders, especially for startups. However, it should be practical and not overly elaborate. The business plan helps lenders understand how the loan will be used and how the business intends to repay it.

💡Collateral

Collateral is an asset that a borrower offers to a lender as security for a loan. The video explains that banks often require collateral to secure business loans, and this could include real estate or equipment. Collateral is particularly important for lenders as a safeguard in case the borrower defaults on the loan.

Highlights

Personal savings and resources are the most common method of financing for both startups and existing businesses.

Getting a loan for a startup can be difficult as banks typically require two years of industry experience and tax returns.

Family and friends can be a common but potentially problematic source of funding due to personal relationships and lack of formal agreements.

Term sheets and documented repayment plans are essential when borrowing money from family and friends to avoid future conflicts.

Credit cards are often used when businesses are cash flow strapped, but using credit card debt can cause more harm than good.

Commercial loans from banks require strong financial documentation, including tax returns, and are not always accessible for startups.

Investors, such as venture capitalists or angel investors, are more likely to invest in tech or medical-related businesses rather than typical Main Street businesses.

SBA loans are commercial loans co-signed by the Small Business Administration, offering additional collateral coverage for the bank.

Grants are rare and typically not available for starting or expanding a business, with very few exceptions.

The five C's of credit – character, cash flow, collateral, capitalization, and conditions – are the key factors that lenders evaluate when considering a loan.

Character refers to the borrower's experience in running a business and their credit history, including personal integrity.

Cash flow is critical for loan approval, and lenders typically require two years of tax returns to prove the business can generate enough revenue to repay the loan.

Collateral is any fixed asset like property that the borrower can pledge against the loan in case of default.

Capital is the amount of money the borrower is willing to invest in their own business, often requiring a 25% investment for startups.

A business plan is necessary for startups seeking a loan, but it does not need to be overly complex – it should clearly outline how the money will be used.

Transcripts

Charles Alexander here with the

Tennessee Small Business Development

Center talking to you today about how to

get more money for your business now

this is whether you are an existing

business that has been around 20 years

and you're looking to grow or sustain uh

this is also for folks that want to get

started speaking of which let's get

going so what are some of the financing

options that you have available to you

number one the most common method

whether you're existing or starting is

your personal savings and or resources

that means you've been squirreling

dollars away you planned ahead and now

we are ready to make a decision this is

especially true for startups the per the

reason for startups is that getting a

loan for a startup is it's a little

difficult you have to have two years of

experience in the industry two years of

tax returns and most banks all banks

really don't count the resource the

income from the new business until it's

been around for a couple of years so

most common most favorite uh

savings one of my one of my least

favorite uh but also very common whether

you're existing or starting is from

family Andor friends look I get it a lot

of the people that you're you're friends

with have seen your success or they've

seen your plans and they want to pitch

in and help out they are scared of let's

say the stock market they don't invest

in real estate but they they think

they're the you know the silent partner

that you need first of all they're not

always so silent and in most cases

they're they like to chip in with their

comments later but if Joe who has been

sitting in the cubicle next to you hears

about your startup or your buddy uh Amy

that you know you hang out with and you

know she she's heard you talk about the

business that you've had and she wants

to invest it's a thing what you want to

do at that point is get a term sheet

together uh preferably one from an

attorney uh or even if you're doing a

loan have them have it documented of

what the repayment is going to be

especially true if this is for family uh

and most of the time it's I don't know

my experience 17 plus years it's not

from Mom and Dad it's from like Grandma

or Grandpa and if mimal decides to give

you 10 grand and tells you to pay tells

you to pay her back whenever what she

really means is starting next week with

a 4% interest rate which she thinks is

very generous she just didn't verbalize

that and then you're going to wait and

you're going to kind of forget you're

going to pay her as you go and then when

Thanksgiving rolls around it's going to

be awkward because the cousins are going

to be in the kitchen talking bad about

you because you you've taken mimo's

pension look family friends not my

favorite it can make things sticky but

if you do that get it

documented credit cards it's a little

below the rung as far as I'm concerned

uh then uh family and friends credit

cards I'm not going to give you a Dave

ramsy or Susie Orman speech however most

of the time when people are starting to

use credit cards for an existing

business is because they are cash flow

strapped and they can't go to the bank

now in those cases it also means that

times are tough and they're lean adding

credit card debt to that situation I

don't know that I've ever seen it help

I've seen it harm several times over

worse yet for startups I've had people

who are in a full-time job and they're

paycheck to paycheck and there's nothing

wrong with that a lot of people are

however if you want to launch a

full-time business that costs you know

five figures plus if you put it all on

the Visa card and it has whatever a

three-month deferment 0% interest it

does kick in at some point and when it

kicks in woe me for example I had a

client years ago who launched an online

beauty store and this was pre- Amazon

Etsy she had to build it all out on her

own and every month it was awesome

because that business was making money

making money making money great uh

unfortunately it was on the uh Bank of

America Visa card I remember at the time

uh excuse me Bank of America Andor Visa

those are just examples not real

life they uh the interest on those were

Skyhigh and she was having to pay as

much or more in the interest to keep the

thing going to keep it paid uh than she

was making in the business and that's a

bad

situation commercial loan from A bank in

a few minutes we'll go into details on

what that looks like to get a loan from

A bank investors this kind of goes back

to the family and friends point and I

know a lot of us have watched Shark Tank

love it all over the years and we feel

like there's a local Shark Tank waiting

for us you've heard all about the

Venture capitals the angel groups uh

state of Tennessee has this investment

that anytime investors are involved most

likely from my experience feel free to

prove me wrong it is usually for things

that are Tech related medical related uh

from people who have done this type of

business before who have started a

business sold the business for a big

chunk of change and that's where an

investor likes to come in and play in

the case of many Main Street type

businesses the ones that you know a lot

of the clients come to me for whether

it's an online

business service based business a retail

store Food Service investors aren't as

like

and I'll also reiterate it's like family

and friends the silent investors are not

always so silent and they can be

expensive and they can be there's a lot

of things I can go along with I'm not

discouraging you from doing that I'm

just letting you know kind of what I

have

seen an SBA loan an SBA loan is is

basically a commercial loan from A bank

with the SBA that is co-signing so to

speak along the way commercial loan from

a Bank as I mentioned previously they

want to see a couple years of tax

returns and we'll get into the five Seas

of credit all of those things still kind

of play true for an SBA loan SBA Loans

are not

necessarily you know better interest

rate or better terms in fact more times

than not they come with a couple of

extra fees attached to them so why would

we do an SBA loan well a bank if they go

the SBA route usually means they are

looking for some additional collateral

coverage so to speak so if I default of

my loan and the bank collects as much as

they can for me collateral wise but it

doesn't cover the full amount of the

loan still owed the SBA will kick in a

big portion of that so that is that is

why Banks tend to use SBA Loans then

becomes an advantage to us because if

the SBA Loans didn't exist we might not

get the loan to begin

with and then grants look doing this a

long time and this is a question I

answer every single single week it means

I've answered this question hundreds of

times I have not ever met anyone who's

gotten a grant

to first of all not to start a business

for sure and at any point I don't know

that I've ever really met anybody that

got a grant to expand a business uh and

I know there's some really obscure

things if you want to look for some if

you want a safe place to look go to

grants.gov now look once you get off of

there you you're kind of in the wild

west and there you can Google grants and

you'll come across all types of

officiall looking websites and free

money here but I once you start drilling

down drilling down you're either a

getting into something really obscure

where you got to be a peanut farmer in

wyom and creating a new energy resource

and then you've got to meet all these

Milestones or you're getting hold of

something Shady during the pandemic we

had forgivable loans we had advances you

didn't have to pay back but that was

also a pandemic so unless we have

another one around the corner and I hope

we don't I I wouldn't personally spend a

lot of time looking for

GRS so what does a lender consider when

you ask for a

loan make it really simple there are

these things called the five sees of

credit character cash flow collateral

capitalization capital in the conditions

first let's start with character

character is your personal experience

with running a business

have you and by running a business the

skills it takes to run a business you

know whether that's been uh marketing

before or managing other people reading

financial statements it could also mean

uh they also want to see that you've get

two years of uh industry experience I

see this quite a bit let's say with a

food industry people love the idea of

opening the next hot Burger join or fro

yo place and they're they're getting

into it with no experience they want to

see that you you not not a key employee

the person signing the loan document has

a couple of years of experience at doing

this where I see exceptions to the rule

if if you are purchasing a franchise and

that franchise is on the approved SBA

list and you're getting an SBA Alan then

maybe we can get out of that uh other

things of character your credit which

we'll talk about in a minute just a good

old gut feeling about you next cash

flow cash flow is the amount of money

you have coming in that can pay back the

loan that you are getting so if this is

an existing business they want to see

two years of a tax returns not two years

of an Excel spreadsheet or QuickBooks

profit and loss statement although well

if it's midyear and you have it reviewed

by a CPA certified by a CPA they may

accept that but why do they want tax

returns well the tax returns are what we

show what we're willing you know it's

the most honest level of our financial

statement so to speak so if you have

enough cash left over at the end of each

year to make a monthly loan payment in a

lot of cases that goes a long way to

helping you get that loan not completely

but that that makes a big difference so

what do you do if you're a startup I've

already told

you they don't count the cash inflow

from a business until it's been open for

two years well this may mean you don't

want to quit your job just yet so you've

got your income maybe a spouse income

income from other Investments that show

your ability to repay a loan if you quit

your job and then try to go get a loan

it becomes difficult because there's no

cash coming in and yes I know that's

almost a catch 22 but it's also big

reason why we look at Alternative forms

of funding or even doing this on the

side until you can get things rolling

collateral and capital are kind of tied

together here

collateral is what you will pledge to

hold the note so to speak this is what

the bank lending institution Credit

Union whatever would collect if if God

forbid we were unable to repay the loan

uh and that you know most of the time is

a fixed asset that appreciates property

your home uh and I don't even mean

rental property I mean usually your

personal residence now if you're if you

have if you're an existing business and

you have land you have a building you

have equipment you have something that

the bank might want well they might

consider that they do not like

depreciating assets computer equipment

cars or just random things I've seen

people want to throw in their whole

whole whole life insurance policy or

time share they don't want that they

don't want your inventory they want

something that if God forbid things went

South they could they could collect with

and I'll see a lot of SBA Loans that say

no collateral required which may be the

case but the bank wants collateral

because if you default on the loan they

don't want to go back to the SBA

empty-handed Capital how much cash are

you willing to infuse and this is an

existing business in a lot of cases

you've already invested a ton of capital

that you can prove if this is a startup

they want you to be upwards of 25%

investment now why do they make me

invest money if I'm borrowing money

doesn't that kill the point think about

when you purchase a home they usually

want you to have a 20% down payment

right you have to invest money and show

skin in the game could tell you the

number of times I have sat down and had

conversations with people that want to

borrow big money and I make the mistake

of not asking them how much Capital they

want to invest had a guy that wanted to

open a bakery here in town talk for an

hour going to specialize in sugar

cookies hey man how much Capital are you

investing I'm not putting any money in

this this is

risky which I get and he's right but if

you don't do it nobody else will uh and

then conditions how will you spend the

cash and that is so important I have so

many especially existing businesses that

they want to borrow their way out of

debt that never Works uh but they want

to you know get cash and not explain

what they need it for and this happens

to startups to worked with somebody that

wanted to open a

hotel uh franchise should have been a

slam dunk but had capital or collateral

uh and they had everything laid out

except working capital you know I need

cash set aside to pay the bills until I

have enough occupancy to pay the bills

and they wouldn't put it on the cash

flow and the bank wouldn't lend it to

them so until we fix that then then they

then they wouldn't loan the money until

then now so you have to make sure you

got enough everything listed out so what

else will a l Bank look for let me State

this really clearly a business plan does

not get you a loan business plan in many

cases is required to have a conversation

about a loan especially for a startup

existing businesses I'll be quite blunt

they a lot of times that's not

necessarily a requirement you have a

business plan and your business plan

does not have to be 50 pages charts

graphs all the demographics and now that

we have ai that will write it for you

lenders can spot that puppy a mile away

the business plan should just simply be

written and we've got templates all day

long from A Small Business Development

Center so contact one of us to get one

and we'll even work with you try to help

you walk walk your way through it but it

it needs to be semi-professional looking

but it doesn't have to

be it doesn't have to look like you're

turning it in for a grade at a college

so a business plan that shows how you're

going to use the money marketing

management financial and then a sources

and useless as we just discussed

conditions how much the entire project

cost how much you putting in um how much

you going to borrow and how the funds

will be

used a balance sheet now when I say

existing businesses Only They will also

ask you and I talk about that you know

here next a personal financial statement

no matter what that is your personal

assets your person personal liabilities

and an existing business will need to

have a balance sheet two to three years

of tax returns cash flow projections for

one to three years if this is an

existing business again we have

templates to well and we'll help you put

those together uh but it's not that

complicated you have tax returns it's

simply projecting forward what the loan

will do for your business and then

showing the loan on the expenses as well

if it's a cash flow projection for a

startup obviously it's more complicated

because it doesn't exist yet so you're

using some assumptions and building out

I feel like I can sell X number of

Widgets or this service based off this

marketing I'm going to do in the demand

of the market uh and then a year-to-date

p&l if this is an existing business only

and again they'll they might want that

certified by uh a

CPA and you know if it if applicable

leases purchase sales agreements

partnership agreements a loan

application that will never be fun to

fill out and just anything else you feel

like in help the lender so credit score

what does my credit score need to be

think I don't it ballpark please don't

quote me on this but it's got to be like

a 720 something and up uh go to

myfico.com you can get your report I

think they still make you pay for the

score uh they will see how lenders view

it top four reasons that's not hire who

to contact if you think it's not

accurate and there's more than ever

there's a jillion in one a number I made

up uh credit you know places to go get

your credit score for free I Think

Credit Karma checks two out of three

major credit bureaus now um and look

find out what your score is and and here

I'll also throw in a disclaimer people

get super excited say oh my credit score

is 800 up so I'm a slam dunk that's just

a it's like the business plan that's

just to have the

conversation uh a credit score does not

necessarily get you a loan a bad credit

score can disqualify you great business

plan can't get you the loan a no a no

business plan or a not a good business

plan can disqualify

you so what are your next steps pretty

simple stuff if you're an existing

business and you're ready to still have

the conversation after all of this

please reach out under the tsbdc site

hit uh Consulting find a sbdc near you

if you're a startup we have startup

workshops if you haven't already take

one take one uh otherwise uh reach out

to us as well once you do that and we

will be happy to get you going have a

great day