Where is the money for the new business going to come from? Raising funds requires preparation, without which, finding sources of capital can often be rather difficult.
Sources of Capital
A variety of sources of capital are available to persons looking to start their own business, although some options will be more attractive than others. The following is a list of some of the more common sources of initial capital. Your CPA can help you to determine which funding sources will be best for your business.
- Personal savings - The most common form of capital used to start small businesses
- Family and friends - Represent a second source of potentially no- or low-interest loans
- Banks and credit unions - Offer loans at fair rates, but only if they feel the loan will be repaid
- Small Business Assoc. - Requirements are similar to a bank loan
- Leasing companies - Good resource, particularly where fixed assets will be needed
- Venture capital firms - Viable source of initial capital, but at a steep price
- Private offering - Viable source of initial capital, but difficult for a small business to obtain
Obtaining a Bank Loan
A bank will only lend money to a business expected to succeed and repay the loan. This means two things to the business seeking a bank loan. First, the business must be well prepared with a professional loan proposal to show the bank. Second, the owners of the start-up business should be ready to personally guarantee the loan. The following is a summary of information essential to a loan proposal:
General statements
- The purpose for and specific ways in which the funds will be used
- The amount of money to be borrowed
- How and when the money will be repaid
- What will happen if something goes wrong (personal guarantee of the loan)
- Business name, address and names and social security numbers of owners.
Management
A profile of the principal officers/owners of the company outlining their experience, education and other pertinent background information.
Market
Include information that, at a minimum, defines the company’s product and target market, existing competition, and customer base.
Financial Data
- Detailed projected balance sheet and income statement for the coming years
- Personal financial statements of the owners prepared by a CPA
- A list of items that could be pledged as collateral against the loan
