How to Get Money For Your Business
Summary
TLDRCharles 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
💡 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.
👥 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.
💳 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.
🏦 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.
Mindmap
Keywords
💡Personal Savings
💡Family and Friends Funding
💡Credit Cards
💡Commercial Loan
💡SBA Loan
💡Investors
💡Grants
💡Five Cs of Credit
💡Business Plan
💡Collateral
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
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