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.