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Finding Capital

EDITOR'S COMMENTS:

Some sound advice about business funding from Matt Bacak. One very important point is to have a good business plan. Most lenders won't even talk to you until they see a plan.

Starting a business requires funding in the form of start-up capital and initial operating costs. Although personal savings and loans may be adequate to start a small business along with a great idea, some businesses require a lot more capital that can be borne by savings alone. Of course, with greater capital required comes a higher risk level as more sales and revenue would need to be generated by the business in order to support the repayment amount as well as to produce a healthy return on investment percentage.

The second option to obtaining capital would be from people that you know, such as friends, family and relatives. Equity financing could be obtained from there sources, or just as a low-cost loan payable over a certain period of time. This will be a great benefit to you as you wont have to adhere to conditions and the higher interest rates imposed by financing intuitions or other stakeholders.

The most common source of financing would be from lenders such as banks and credit unions. These organizations are in the business of providing financing and will impose a particular interest rate on your loan. Apart from that, they may impose restrictions on conditions on repayments and even on limitations on the usage of funds provided to you. This type of loans are normally known as debt financing, as obtaining capital from these sources increases the debt of your company.

Equity financing can be obtained by other shareholders or venture capitalists. Capital obtained from venture capitalists are regarded as an investment into the company and not as a loan. As venture capitalists are very selective in the projects that they fund, as they want to ensure that their investments pay off multiple-fold. Therefore, venture capitalist funded projects are subjected to scrutiny from venture capitalists in terms of management, decision making and accounting procedures.

 The U.S. government has realized that the importance of funding to fuel the growth of small businesses and thus have launched the Small Business Administration organization for this purpose. There are various loans offered based on the nature of the business, the amount of financing required as well as the repayment period. Apart from that, certain types of loans are funded by lending partners of the SBA, with the SBA acting as a guarantor for the loan. This way, a longer loan repayment period can be obtained, with a lower risk on the lender.

There are also many other capital sources that can be obtained by a small business. This would be a loan from a credit card, employee stock ownership, home loan refinancing or even purchase order financing. All of these are just glimpses of the various ways in which money can be obtained to start a business, each of them with varying cost levels. Therefore, it is up to the business owner to decide on the type of financing source would be most suited for the business.

Once you have determined your financing source, you will then need to develop a business plan that you will propose to your potential capital source. This requires expertise in producing a viable and impressive business plan, and therefore needs to be as comprehensive as possible in provided business information, forecasts and budgets.

The first section of the business plan would be on the background of the company. Here, details of the name of the business, the physical location, the amount required for the startup and information on the business owners are provided. Then, the next section will be a holistic explanation on the nature of the business, its uniqueness, the long-term potential as well as the sustainability of the business. A listing of key success factors as well as the strength of the business idea would be ideal to be used to support the business plan.

After that, a listing of the management team of the company, their background and credentials as well as their stake in the company is drafted. Information on the industry and market of the business will follow, where the maturity and opportunities available within the industry is highlighted. Finally, critical financial information, incorporating forecasts and budgeting are listed. This would be an area of utmost importance to anyone evaluating your plan, and thus needs to be done with accuracy to create a positive impression.

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