How Do I Finance My Business? - English Transcripts
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The trouble with that question is that it is far from straightforward. There are a number of different paths to the answer and I think the way to start really is to talk about a rather typical set of events.
You’ve decided to start your business..you’re excited, so you run down to your local bank and you sit with a loan officer and you share your excitement about your business vision and you tell the banker that you need to borrow “X” amount of money and the banker looks at you very, very carefully and says that “we don’t loan money to new businesses.”
And you go, “oh, I didn’t know that. I thought that’s how businesses started.” The banker says “yes, but you have to have a little track record first. So here’s what I suggest you do…go home, look at your own resources and pull together resources from other places and get started and then come back and see me us in 6 months….once you have a little track record.
And you think to yourself “that’s good advice, so you go home and you start your businesses.
The first thing you do is you take your savings and you quickly run through them because you didn’t have any idea of how fast you’d go through that amount of money.
so you take an equity loan on the house because you have a little equity on it because you’ve owned it for a while and –boy—the next thing you know, you’ve plowed through that. You sit down and talk with Mom and Dad and they’re willing because they share your belief in the business and they give you part of their retirement fund. So now they do that and you turn around and go through the other “F’s” family, friends and fools….because a new business is a very risky start-up and that’s the whole proposition.
1:00 (Finance #2)
and it happens over and over again….and as soon as that credit score drops below about 630 or 640, nobody’s going to loan you money…not even the SBA is going to guarantee your loan.
The US Small Business Adminstration or the SBA is a very important business force in the US economy and the myth is that you go to the SBA and they give you money….they’ll give you a grant to start your business. The reality is – to the best of my knowledge – there isn’t anybody who is gong to give you a grant to start your business and the second reality is the SBA doesn’t really loan anybody any money.
Aside from such big programs as disaster loans and some other such things, but they’re not really one the business development trail that we’re talking about. What the SBA does instead is act in a very important capacity of guaranteeing risk. You work with a bank, you’re risk is unacceptable to the bank under normal lending criteria, but because the SBA is willing to accept a certain higher risk threshold through this guarantee, the bank will allow folks that don’t meet normal lending criteria to receive loans…..the SBA guarantees your bank loan.
0:57 Other Alternatives
There are a lot of financing alternatives that aren’t readily available to most people…one of the things that’s so important is that there are a lot of federal, state and local economic development programs that are focused on job creation or business development that aren’t particularly visible to the folks that are trying to start a business
there are programs from the US Department of Agriculture, the US Department of Housing and Urban Development that are all geared to achieving various kinds of social or economic goals that will support business development….and business folks don’t often know this. My advice is to seek out the state and local based economic development folks and talk to them about some of these programs and about whether you might qualify as a user.
One them is using a commercial mortgage and if you’ve been in business for a while and you own a building that your business occupies you forget about the fact that your building is an asset that you can leverage in terms of your further business development…so you can develop a commercial mortgage in order to better understand that you can download a free guide to commercial mortgages that is listed on the SME Toolkit
Another interesting financing program is –let’s say you’re a small restaurant and your fryolater and freezer bite the dust on the same day. You’re in big trouble….you have to buy new ones. What do you do?
You turn to a program that will provide what is known as a merchant cash advance because you take credit cards in your business…they will loan you money. Actually, they buy your future credit card receipts and you pay back based on the future trail of credit card business so you’re able now to have credit for your business that you otherwise wouldn’t have.
Quality for the lender is secured because they are processing your credit card receipts and they take a small percentage out to repay the loan.
A factor buys your accounts receivables and gives you the money at a discounted rate. They collect the money – you have your cash flow and so if you’re in a business where you have to give account receivable credit then you have the ability to keep your cash flow alive. It’s a very common tool and one that businesses don’t think to use…..each of these are listed in the SME Toolkit.
The answer to that comes from developing a cash flow forecast and the cash flow forecast is a very straightforward process…you have certain expenses that you have to pay…some of them are fixed and they have to be paid whether you have any business or not some of them are variable and they occur only because you’re doing business. And on the other side of both of those –are revenues coming in?
We expect a business when it starts up to have a growth curve when they’re aren’t any sales on day one. And then you gradually build those sales and it gets to the point where you cross a cash flow break even…where the revenues equal the amount of funds that you have to spend.
To get that business started, the amount of the funding you have to spend to get that business started is the amount of financing you need and thereby, my advice is to challenge you every step along the way and ask “Do I really need to spend this money?:
For more information on the topics discussed in this SME Small Business Learning segment, access the following links.
1) Business Credit Costs and Benefits
2) Business Spending Tools
3) Business Reward Programs
4) Small Business Credit Services