There are two main types of financing for a business, debt or equity financing. Debt financing tends to be the type of financing that you receive from a traditional bank loan and equity financing tends to be financing that you receive from venture capital for your business from outside investors. The benefit of debt financing is that it is finite and you will pay off the debt over time up to a zero-sum balance with no additional obligation to the lender. The downside of debt financing is that traditional lenders will take a good look at your business, including how long it has been around, operating income, expenses, and will require hard assets as collateral for the loan. Also, lenders will likely want you (and any other director in the organization) to personally guarantee loan repayments. Another disadvantage of debt financing is that your organization will be burdened by some other type of regular payment (usually a monthly payment) depending on the terms and conditions of the financing and this can absorb critical cash flow, especially with small businesses. .
The benefit of equity or venture capital financing is that you will receive money in exchange for capital in your business in the form of stocks or some other form of equity as a percentage of gross / net sales or income. A primary benefit of this type of financing is that there is generally no monthly payment requirement for investors. Instead, you are giving up property interests, most of the time, permanently.
Traditional lenders, banks, for example, will view your business very differently from venture capitalists. Bankers want a zero or near zero risk position when providing financing and will depend almost entirely on the operating economics of the business with little regard for “potential future growth.” They want to see strong cash flow backed by hard assets before closing a deal – ingredients that most small businesses lack or wouldn’t be looking for financing, right? Venture capitalists, on the other hand, tend to consider the management team and potential future business growth more than actual operating numbers, especially for small businesses with high potential but few sales and little to no operating history. Although these two types of lenders vary in their approach to analyzing a business for financing, you can be sure that careful scrutiny of your business will take place …
In addition to actual operating economics and proforma analysis, both types of lenders will closely examine two documents in particular: 1. Your business plan. 2. Your bank or loan application package. These two documents, if put together correctly, can make the difference between success and failure when it comes to any type of lender.
There are many free SBA-related materials that tell you how to create first-class business plans, but they tend to be written for perfect businesses and not the average non-perfect citizen. If you are looking for some type of financing for your business, I suggest you visit our site and check out our business e-books. We have several that cover a variety of topics and there are two specifically that will be a real treasure for you. One is called Power Planning (a powerful report on writing a wide variety of business plans) and Raising Money for Your Business (it teaches you how to put together professional loan application packages). They are priced at $ 5 each and can be worth millions in the hands of the right person. I am not trying to exaggerate the product, I am simply giving you a heads up.
The secrets to obtaining financing from any type of lender is a closely guarded secret by financial and commercial brokers for several reasons. Chief among them is that it forces people like you to do business with them and they earn commissions. The SBA materials, while good, do not have the street knowledge to do the job in most cases. The proof is in the pudding: what has the SBA done for you? The SBA is just another government-backed bureaucratic nightmare for most. We also have some links for venture capital firms in our trade links area located on our site on the Smart Link Zone page; Everything is free.
Think a bit … Your future may depend on it.
For your success! Copyright © 2006 James W. Hart, IV All rights reserved