Business Financing Basics

In the world of finance, sometimes it can be helpful to just spell out some of the basics. All too often even the experienced entrepreneur can make the mistake of missing a small item that can become a big problem. These are just some of the things to keep in mind when considering business financing. Whether you are starting a new business and seeking financing or have an established venture, these points should be considered.

First things First

We all know that money is the life blood of any business, but don’t try going to a bank if you have just opened. Banks want a track record and usually only loan to those businesses with a verifiable operating history. A bank’s primary concern is receiving timely payments. This means that the ability to manage your cash flow is looked at closely and you must convince your banker that you are an expert in maintaining this flow and can make the projection that will safely include this new loan payment. Additionally, your financing chances will be enhanced with a good credit rating and this cannot be understated. Often a less than optimal credit score will be a show stopper. Most all funding sources now rely on that four letter word in determining your credit worthiness: FICO. FICO is a numeric calculation, using three digits, that predict the likelihood that you will make payments as agreed. FICO scores range from 365 (Not good at all) to 850 (Fantastic). The score is proprietary, meaning that the exact method of calculation is not publicly disclosed, but it evaluates your credit payment history, number of current and open accounts, the balances on those accounts and the existence of any public records like judgments or liens. Unpaid taxes will also appear as a negative item on a credit report.

How much money do you need?

A good indicator of this or how much you can expect to raise, comes from your business plan. You have this right? This plan should spell out all sources of income and expenses. Some important items should include:

• Supplies and inventory
• payroll and rents
• equipment and fixtures (including computers, credit card processing machine, etc.)

Organize these items by priority if you must pay for these in cash. As an example it is not necessary to pay cash to buy a delivery vehicle if you can rent or lease one.

Collateral

The most common type of collateral is the equity in one’s primary residence. Lenders will sift through all of your assets to determine what can be used, with any real estate owned at the top of the list.

Post Funding

Having your business funded is really only the first step. You need to be a good customer to your lender so that later when you need additional funds, they will be eager for your business. A good customer will maintain a good relationship by honoring the lending agreement. Make sure you understand the requirement upfront. In a business relationship, lenders will often ask for regular updates in the form of financial statements and you should produce these as requested.

A good loan consultant can often help you navigate the lending process and get you the funding you need. Loan consultants have the experience and contacts to get you the best deal and the best terms that you may not be able to secure on your own. As always, do your research and have all the facts before committing to any financing. In doing so you ensure a long and profitable venture.