Site Content


Before Seeking Financial Assistance Ask These 10 Questions:

  1. Do you need more capital or can you manage  existing cash flow more effectively?  
  2. How do you define your need? Do you need money to  expand or as a cushion against risk?
  3. How urgent is your need? You can obtain the best terms when you anticipate  your needs rather than looking for money under pressure.  
  4. How great are your risks? All businesses carry risks,  and the degree of risk will affect cost and available financing  alternatives.  
  5. In what state of development is the business?  Needs are most critical during transitional stages.  
  6. For what purposes will the capital be used? Most lenders  will require that capital be requested for very specific needs.  
  7. What is the state of your industry? Depressed,  stable, or growth conditions require different approaches to money needs and  sources. Businesses that prosper while others are in decline will often receive  better funding terms.
  8. Is your business seasonal or cyclical? Seasonal needs  for financing generally are short term. Loans advanced for cyclical industries  such as construction are designed to support a business through depressed  periods.  
  9. How strong is your management team? Management is the  most important element assessed by money sources.  
  10. Perhaps most importantly, how does your need for  financing mesh with your business plan? If you don't have a business plan, make  writing one your first priority. Most capital sources will want to see your  business plan for the start-up and growth of your business. 

Not All Money Is the Same

There are two types of financing: equity and debt financing. When looking for  money, you must consider your company's debt-to-equity ratio - the relation  between dollars you've borrowed and dollars you've invested in your business.  The more money owners have invested in their business, the easier it is to  attract financing.

If your firm has a high ratio of equity to debt, you should probably seek debt  financing. However, if your company has a high proportion of debt to equity,  experts advise that you should increase your ownership capital (equity  investment) for additional funds. That way you won't be over-leveraged to the  point of jeopardizing your company's survival. 

Equity Financing

Most small or growth-stage businesses use limited equity financing. As with debt financing, additional equity often comes from non-professional investors such as friends, relatives, employees, customers, or industry colleagues. However the   most common source of professional equity funding comes from venture   capitalists. These are institutional risk takers and may be groups of wealthy   individuals, government-assisted sources, or major financial institutions. Most   specialize in one or a few closely related industries. The high-tech industry of   California's Silicon Valley is a well-known example of capitalist   investing.

Venture capitalists are often seen as deep-pocketed financial   gurus looking for start-ups in which to invest their money, but they most often   prefer three-to-five-year old companies with the potential to become major   regional or national concerns and return higher-than-average profits to their   shareholders. Venture capitalists may scrutinize thousands of potential   investments annually, but only invest in a handful. The possibility of a public   stock offering is critical to venture capitalists. Quality management, a   competitive or innovative advantage, and industry growth are also major   concerns.

Different venture capitalists have different approaches to   management of the business in which they invest. They generally prefer to   influence a business passively, but will react when a business does not perform   as expected and may insist on changes in management or strategy. Relinquishing   some of the decision-making and some of the potential for profits are the main   disadvantages of equity financing.

Debt Financing

There are many sources for debt financing: banks, savings and loans, commercial finance companies, and the U.S. Small Business Administration (SBA) are the  most common. State and local governments have developed many programs in recent years to encourage the growth of small businesses in recognition of their  positive effects on the economy. Family members, friends, and former associates  are all potential sources, especially when capital requirements are smaller.

Traditionally, banks have been the major source of small business funding.  Their principal role has been as a short-term lender offering demand loans,  seasonal lines of credit, and single-purpose loans for machinery and equipment.  Banks generally have been reluctant to offer long-term loans to small firms.  The SBA guaranteed lending program encourages banks and non-bank lenders to  make long-term loans to small firms by reducing their risk and leveraging the  funds they have available. The SBA's programs have been an integral part of the  success stories of thousands of firms nationally.

In addition to equity considerations, lenders commonly require the borrower's personal guarantees in case of default. This ensures that the borrower has a  sufficient personal interest at stake to give paramount attention to the  business. For most borrowers this is a burden, but also a necessity.