When you start-up your business you need to ask yourself in the business viable and can you make money at it? Most important do you have enough cash to start your business. It's crucial to understand the financial feasibility of a business. The key to cash flow is making sure that you have cash coming in than going out. If you know that your idea and product is viable then you know it is time to start-up your business. Starting a business costs more and takes longer than you think. You can make a trial run on your business to see if it is viable. (SCORE)
Step 1: Financing a New Venture
The 3 types of funding sources for entrepreneurs are the following:
- Personal contact loans that refer to loans that you borrow from family, friends, and business associates. These people provide the needed support usually interest free to the entrepreneur and enjoy the benefits of a new venture. Angel investors are in this category with a no non-sense equity and few contract agreements. Venture capitalists investor in your business if you're experienced have more money if you need to grow and if you want to share and plan to grow fast and go public.
- Government loans are called SBA loans, government backed loans that are in every state in the United States of America. The business owner can attend seminars and workshops in obtaining and applying for loan information. These work as guarantors with a network of local lenders to help promote small business to grow and succeed. The seven loan program helps the applicant to apply for a loan from a lending institution. The applicant is required to have a current business status, collateral, and credit history. Microloans are smaller loans no more than $35,000 and is obtained from local non-profit institutions. Grants are an excellent choice if you're in the technology field through the Small Business Innovation Research (SBIR) program.
- Bank and finance loans are commercial and are not guaranteed by the U.S. Government. IT can be difficult to obtain a loan through a bank since they differ in criteria when lending money. Depending on the amount and purpose of the loan, the primary and secondary sources of re-payment, and so on, means that the entrepreneurs after being rejected several times through different banks before being approved by one. There are three types of financing which can fund entrepreneur start-ups. Term loans are used to buy equipment, building, acquire another company, or expand operations. Business owner have an option to choose fixed or adjusted rate. Another loan is Revolving lines of credit is granted to a business to repay to the bank in the course of one year. Intermediate term debt is a short-term loan about 60 months or less and secured by collateral. (Sloan)
- The Pros and Cons for each type of loan
- The Pros of Personal loans can be obtained in a very short period of time because your business is shared with your relations based on a personal level. Business owners have the benefit and freedom of not having to pay back this type of loan in a required monthly payment or pay back interest.
- The Cons of a Personal loan is that you will have to give up more of your ownership of your company. The more partners in the business the more you will have to divide up all the profits. Relatives feel they have the right to offer suggestions which may put a strain on business strategies and also the relationship. Like any loan owners should pay back as soon as possible owed to relations to avoid further conflicts.
- The Pros of Governments that offer SBA loans provide a good way and promote a better interaction with local lenders. The loans increase the chances of getting a bank loan.
- The Cons of Government SBA loans is that the guidelines are very strict. The lending partners could reject the applicants based on income, type of business, experience, assets, and so on.
- The Pros of Bank Non-Bank Financial loans is that it can provide the borrower sufficient amounts of money and lines of credit. When backed by assets they can be obtained quickly. In the case of non-bank financial institutions, they look beyond financial history and assets and will lend to companies that have been turned down by banks.
- The Cons of Bank and Non-Bank Financial loans is there is a chance for rejection with banks, if a business owner has poor credit and little income. Non-bank financial lenders ask for a business plan, personal financial statements, cash flow, and 25% capital. (Go4Funding)
- A lender looks for in a borrower, you, the business owner, if you can pay back the load and how quickly. Can you put up the collateral and put up how much to ensure your ability to re-pay.
What lenders like to see is your character in personal credit history. They do examine credit scores. These are routinely done where loans are involved. Good character means you pay bills on time and not delinquent. There are no blemishes on your credit report. All banks do a credit report check. They look at your cash flow also known as capacity. They like to see a debt coverage ratio where every $ 1.50 you make to every $ 1.00.
Keep your income statement handy to review the revenue less cost of sales to get your gross profit and deduct expenses. (If you have a loan payment of $ 32, 998 X 1.50 = $ 49, 497). There must be an overhead when running a business. If you not bringing into the business than what you started with you'll run into trouble.
The lenders like to see capital that you, the business owner, brings in this is your assets. Banks will not finance 100%, like a down payment on a home. It can go 20% for a business loan or sometimes a little higher. There are certain conditions in a loan request if other factors may exist. How you as a business owner exhibit their expertise. Industries have higher risks. Lenders like to see collateral. This is a breakdown of business assets that is brought into a business. It can be personal property, equipment, real estate, and inventory. Banks will not give dollar for dollar. There are two types of guarantees which are unsecured (personal assets declared) and collateralized (stocks, bonds, second loans). (SCORE)
Step 2: Making the Financing Personal
- Since it takes a considerable amount of capital to start-up a business affording your own business can take years of hard work through determination, passion, and perseverance. It's best to create a mindset, if you want to be successful. The amount of money for such a venture has to do with the goals and needs of the entrepreneur. When bootstrapping on your own without outside sources will make it difficult for an first time entrepreneur. If there's a lack of funding in a business chances are that the company would have to close or even go bankrupt. There are going to positive and negative sides to any business along with your pros and cons. (Butler)
It's best to make sure that your business plan will work before going deeper into it or investing too much into a new business. Once you have summarized about what your business will be and what you're going to do with that business and products and services that you will offer. When you set out to build a marketing plan, know who your target clients are, how you will finance your business, and what your goals will be and keep it going shouldn't be a problem. When you are educated in the pros and cons of business then you will be able to make the right decisions.
The Steps Needed to Plan for Future Entrepreneurial Endeavors:
- Business Plan
- Assets, Liabilities, Capital, Collateral
- Financial Plan
- Marketing and Advertising Plan
- Target Market
- The following are answers to questions to the state of West Virginia small business "Success Stories." These are some of the most recent SBA loan recipients with successful businesses.
- Some of the trends that are seen are those in the technology, textile, food services, human resources, and automotive industries. The popular trends focus on the baby boomer generation. In the age of the internet social shopping has become a trend as well. Other growing trends are repairs and renovations, travel and tourism, healthcare, retail, green business, and physical fitness. (Wang) These jobs are to increased in the next few years in the future. Some of these business can borrow from $150,000 to up to $500,000.
- There are different types of business that are receiving these loans. These range from child care services and food services to technology and textile businesses.
- The three local West Virginia companies that have become successful and are still moving are:
- Azimuth, Inc. is owned by Craig Hartzell and specializes in engineering, fabrication, and engineering services in support of the U.S. Department of Defense. Hartzell realized in order to be successful he had to created a company that would win contracts, providing exceptional support, and build up a solid reputation. He was competing with contracts larger well established companies so e need more experience and influence. To overcome this he entered the Department of Defense Mentor Program. They led him to his first contract. Azimuth has evolved into a reputable defense contractor of over 100 employees. (USSBAWVD)
- ProLogic, Inc. is owned by Jay Reddy who is also the company's CEO. The company provides innovative information technology solutions. The company specializes in 3-D visualization, knowledge management, information technology support services, and independent verification and validation services. It started as a one-man operation and has grown to 75 employees. ProLogic relies heavily on contracts with the Federal Government. Most of the business is primary contractor to NASA, Air Force, Army, and others. Investing in good, knowledgeable people in the IT market is the success of his business. Good work gets more work. Diversification is another key to successful business. Reddy is also looking into other areas of the 8(a) mentor program that he feels will benefit other companies from its success.
- Home Industry is owned by Mike Harris and his wife Pam, who purchased the original bakery business in 1984. They put together a business plan and loan package to secure financing. They started out with problems didn't have assets and no collateral to guarantee security. Their parents helped them and offered their homes as security. They pushed forward and approached Union National Bank now Bank One who suggested the U.S. SBA guaranty loan which allowed them to purchase the store. When Meadowbrook Mall opened in the neighboring town, Mike and Pam knew they had to make changes. They took their product on the road making deliveries to the local businesses. This opened up additional opportunities as several stores began requesting their pepperoni rolls. The business also survived a downsizing economy. But in 1994 their landlord terminate their lease so they turned to SBA again for help. They moved their operation not far from their original location just around the corner and down the street. Today they have 55 employees and five delivery vans. Home Industry Bakery pepperoni rolls are found on the shelves of Pantry Stores, Go-Marts, Sheetz, and Wal-Mart. Their delivery route goes as far west as Marietta, Ohio and far north as Uniontown, Pennsylvania. It took two years for Wal-Mart to sell their products. Persistence pays off, believe in yourself and your product. The Harris' believes their biggest asset are their employees. Pam the marketing expert says their success comes from the customer. The key is to pay attention to the customers, the customer is always right.
- Based on my research, it may be a possibility that I can get a SBA-backed loan in the future. There is a graphics industry business owner who had successful plans and goals. The name of the business, Raven Wing Graphics, applied for financing to get the needed equipment in computer and software. (ABSN) It's not hard for a person into the graphics industry and very little equipment is needed to run it which is mainly computer, printer, scanner, camera, few art supplies, and software. Depending on your niche and your target area will determine whether you will need additional equipment to operate a graphics business. If I were to ask SBA for a loan it would be a small loan and would have it re-paid in about two years. I have most of the equipment I need. The small loan would be for replacement for computer hardware and upgrades to graphics software.
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