Tips for Deciding on a Financing Source for Your Small Business

Once your small business is established, it may have a broader range of financing options than ever before, including personal or commercial loans, asset-backed financing, vendor loans, and equity investments. Before deciding on a financing source, stop and ask yourself the following questions. The answers will help you determine how much capital you need and the best way to raise it.

Why does your company need to raise capital? Does it need to increase cash flow, raise funds for capital projects or establish permanent financing to ensure its financial future? Your firm could increase cash flow with accounts receivable financing or vendor financing, but this wouldn't be appropriate for capital investments, which should be financed with medium-term or long-term money. If your business doesn't need capital today, but you want to assure that funds are available when it does, a line of credit might make sense.

How immediate is your company's need for capital? Personal loans or equity investments from family or friends are probably the quickest sources of funds, followed by collateralized loans. If the need isn't urgent, you will have the luxury of evaluating a variety of financing sources and perhaps of finding a long-term solution to your company's financing needs.

Do you have the financial information you need to raise capital? Lenders and equity investors in an established small business are going to want to see evidence that their loans will be repaid or their investments will pay off. Therefore, even before your small business needs to raise capital, it is a good idea to put together (and keep updated) detailed historical, current and projected financial information about your business, including income and cash flow statements and balance sheets. Also, be prepared to provide detailed information about loans and any other financings.

What is the current operating environment for your business and how will it grow? Potential lenders and investors also will want to know how the current economic environment is affecting your business, how its industry is doing and what competitive challenges it faces. In addition, you need to be able to set forth clearly and specifically how you intend to grow the business going forward.

What are your company's risks? It is human nature to want to take an optimistic view of the future and not to dwell on those things that can go wrong. However, for a small business seeking financing, there are two very important reasons to think clearly about risks. First, you owe it to investors and lenders to be frank about your business's challenges. Second, you can best control and defend against risks by dealing with them head on. While some risks relate to uncertainties that can't be predicted ahead of time, that doesn't mean that you can't prepare for how to handle them should the worst happen.

Does you firm have a strong, experienced management team? For many lenders and investors, the quality of the management team is one of the most critical factors when deciding whether to support a small business, so make all the key players in the company available to potential lenders or investors and make a strong case for why they are the right team to growth the business successfully.

Sources:

http://www.sba.gov/content/determining-your-financing-needs , Determining Your Financing Needs/SBA.gov

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