Whether you are a start-up and seeking funding to launch your business or you are an existing business looking for growth capital, finding a source of money can be challenging. I will try to share some information and tips that will help you maneuver the maze.
Debt financing – Five “C’s” of Credit
It begins with you (and your business) being a good credit risk and have the ability to service the debt. Most traditional financial institutions look at you in terms of the Five “C’s” of Credit.
Your ability to repay the loan. Cash flow in the business, payment history on existing credit relationships, contingency resources of repayment.
Money you have personally invested and what you risk if the venture fails. If you have significant personal investment in the business, you are more likely to do everything in your power to succeed.
Additional forms of security you can provide if the business cannot repay the loan. Business and personal assets can be sources, or a guarantee from someone else who promises to pay if you don’t.
The intended purpose of the loan, what the money will be used for, working capital, equipment, inventory. Will economic conditions in your industry affect your business?
The general impression you make on the potential lender, education, experience, credit scores (both personal and business), references.
Sources of financing/money
There are a variety of sources, in addition to traditional major banks.
Usually very local, imbedded in the community, like to build long term relationships with their clients, and local decision making.
Generally lend up to $150,000, willing to take more of a risk than traditional institutions, and may charge higher interest rates.
Non-for-profit institutions formed to supply credit to its members, lower interest rates, higher savings rates, free or low-cost services. Not all credit unions provide business loans.
Local Economic Development Organizations:
Many have community development block grants (CDBG) available, generally tied to job creation guarantees, and employment of low-income people at a specific salary range. Usually 1, 2or 3 year term, with the loan “forgiven” if the jobs are created.
State Economic Development Organizations/Department of Commerce:
Many have funds available for small business creation and growth, generally tied to business retention or job creation. Some are grants, some are matching fund loans, some are tax incentives, and some are basic loans.
Why business loans get rejected
A 2013 Pepperdine University study identified these as the top reasons banks rejected a business loan application:
- Poor earnings or cash flow (29%)
- Insufficient collateral (23%)
- Bad debt load (13%)
- Size of company (6%)
- Customer concentrations (6%)
- Insufficient credit (5%)
- Personal background and personal financial statement
- Business plan
- Personal and business credit reports
- Income tax returns for last three years (personal and business)
- Financial statements for last three years (Income Statement, Cash Flow Statement, Balance Sheet)
- Documentation of collateral
- Legal documents (licenses, registrations, contracts, franchise agreements, commercial leases, Articles of Incorporation)
Your local Small Business Development Centers (SBDCs) are available to help. To find yours click here.
To learn more about the Milwaukee Small Business Development Center and its additional resources click here.