Your business has been up and running for a year or 2, and you have a list of placements where you would like to make capital investments. Or you are a long time business owner deciding to expand into different markets; you’re even thinking about exports. Or you are a brand new business owner, just getting started.
Whatever your situation, you are probably thinking about how to best finance your business, beyond committing personal funds. (It is good to keep in mind, though, that using personal funds is considered a key indicator of the owner’s seriousness about the business. Risking personal money gives confidence to others investing in the business.)
There are several ways your business can get financial support:
- Banks: Banks are a traditional way to finance a business but have the strictest requirements for providing loans. You may be required to provide an alternate source of income and/or impressive credit score, or be able to provide significant collateral. They may also require that you have a business plan if you are a new business, they will want projected cash flows and other financial documents.
- Investors: Your investors may be people you know, such as friends, relatives, or colleagues. Investment can also come from venture capital—angel investors or venture capital firms that want to invest in your business. Examples include: Commercial finance companies and Venture capital funds.
- Community Development Financial Institutions / Micro Lenders: This is a good option if you are unable to get a traditional loan. This could be a good first step to build credit and get a bigger loan down the line.
- Life insurance companies: We strongly encourage working with an attorney on this approach due to tax implications.
- Crowdfunding: Also known as peer-to-peer lending or investing, is an alternative funding model often via internet platforms. Crowdfunding can also raise awareness of your company or brand.
- Select government funding opportunities
Estimating How Much To Borrow
Once the building and equipment needs have been met, the business owner(s) must have enough money on hand to cover operating expenses for at least a year. These expenses include salaries and money to repay the loan. Work closely with your accountant to estimate cash flow needs.
Types of Business Loans
Short-Term Loans are paid back in less than one year. Types of short-term loans include:
- Working Capital Loan: Should not be used for something like expansion but rather a situation where a business needs cash quickly to cover immediate expenses
- Accounts Receivable Loan: Uses accounts receivable as collateral. The bank would typically lend a fraction of the value of the receivables
- Line of Credit: It’s a preset amount of money that a financial institution like a bank or credit union has agreed to lend you and that you can borrow in increments
Long-Term Loans have maturities greater than one year. These loans are used for major business expansions, purchases of real property, acquisitions, and in some instances start-up costs. Types of long-term loans include:
- Personal Loan
- Commercial Mortgage
- Term Loan: A loan from a bank for a specific amount that has a specified repayment schedule and a fixed or floating interest rate
Organizing Your Loan Information
A good loan proposal will be written and contain the following key elements:
- Provide the business name, address, names of principals and the social security number of each principal
- State the purpose of the loan and provide exactly what the loan will be used for and why it is needed
- Provide the amount required in the exact amount needed to achieve your purpose
- Give the history and nature of the business with details of the business’s age, number of employees and current business assets
- Provide details on the ownership structure (the company’s legal structure)
- Develop a management profile detailing the responsibility of each principal staff member
- Include the individual’s background, education, experience, skills and accomplishments
- Provide a clear definition of the products and markets
- Identify competition and explain how the business competes in the marketplace
- Profile the company’s customers and explain how the business can satisfy their needs
- Provide financial statements including balance sheets and income statements for the past three years (if just starting out, provide a projected balance sheet and income statement)
- Prepare a personal financial statement on yourself and other principal owners of the business
- List all collateral that could be pledged to the bank as security for the loan
Selecting and Developing a Relationship With a Bank
When business owners have trouble with banks the major problem is generally related to communication. It’s important that bankers are informed about the business and it’s equally important that business owners are informed about a bank’s policies and procedures.
Open communication with the bank cannot be overemphasized. A well-informed banker may anticipate needs and be able to react quickly to a request. In a problem loan situation the banker may be more likely to work with the borrower than in a situation where communication has been absent.
Business owners and bankers should meet to discuss what is needed and expected by each party.
Loan Request Review Criteria
A loan officer’s primary concern when reviewing a loan request is whether or not the loan will be repaid. To help answer this question, many loan officers will order a copy of your business credit report. Using the credit report and the information you have provided, the lending officer will consider the following:
- Have the principal(s) invested savings or personal equity in the business totaling at least 25% to 50% of the loan requested? Remember a lender or investor will not finance 100% of the business.
- Does the principal(s) have a sound record of credit worthiness as indicated by your credit report, work history and letters of recommendations? This is very important.
- Does the principal(s) have sufficient experience and training to operate a successful business?
- Has the principal(s) prepared a loan proposal and business plan that demonstrates an understanding of the business and commitment to the success of the business?
- Does the business have sufficient “cash flow” to make the monthly payments on the loan request?
A Note of Caution
Be aware of advertisements or programs from so-called experts that offer “insider information” on financing a business with claims the state government or other public organizations have funds in the form of grants or extremely low-rate loans are available to the following groups:
- Individuals who want to open a business
- Companies in severe financial trouble
- Minority, women, or foreign-born entrepreneurs
The “insider information” is usually no more than common business guidelines and a list of government agencies that can be found in a library, telephone book, or on the Internet.
Once a person begins calling these numbers to request money they quickly find out that the programs often have been misrepresented. Make sure you understand the terms, conditions, and obligations of the loan to advoid predatory lenders.
If you’re interested in information on financing a business through government funds, you can check out our verified, government-created database.
Recent Regulations and Resources
These organizations have workshops, people who can answer questions, mentoring programs, and more. Whether you’re refining a business plan, thinking through potential expansion, or need some questions clarified, these entities will have information and support.
For more, visit the business.nj.gov business support page.