The Best Ways to Finance Your Small Business

The past few years have been difficult for small businesses, to be sure. With the economic downturn, sales have been slower and growth has been halted in many industries. Further, the credit crisis of 2007-2008 has made financing a business even harder. Fortunately, the years ahead look promising for small business financing. Below are the leading ways to secure financing for a small business:

Angel Investing & Venture Capital

Angel Investing is the process whereby a wealthy individual provides funding to a company in exchange for equity and sometimes debt as well. There are professional Angel Investors, or the could simply be an acquaintance of the entrepreneur. Venture Capital is largely the same process, but on a larger and more sophisticated scale. Usually, venture capital firms create “funds” from investors that they use to invest in young companies or startups. While Silicon Valley is notorious for getting the lion’s share of venture capital, there are also many VC firms and individual Angel Investors that work in industries other than technology and are based outside of Silicon Valley. For a new and unproven business, it’s virtually impossible to secure bank financing (see below) and venture capital or angel investing are the idea choice for a young startup.

Bank Loans
As mentioned, bank lending was been tough on businesses during the credit crisis, and it’s still very difficult to find easy credit available in the financial markets. However, for businesses in strong financial positions, with plenty of assets, lending is starting to gain momentum once again. The Small Business Administration, see below, can make a major impact in the availability of credit for small businesses.

SBA Loan Programs
The Small Business Administration doesn’t directly make loans, but they guarantee bank loans for qualifying enterprises. This has a number of benefits. The added security to the lender makes the terms and interest rates much more favorable for the business. In 2012 and beyond, SBA Loan Programs should see strong activity.

These are the primary formats of securing financing for a small business, but there are many others (including combinations of the above), and all available options should be considered by the business or entrepreneur before making a final decision on how to finance the business. Typically the best financing choices are as follows: Angel investing (for a brand new idea), venture capital (for a growing startup), SBA loans (for young but thriving businesses) and traditional bank loans (for the mature and growing company).

Small Business Finance – How to Prioritize Your Profits

When you business finally starts producing income (and the initial joy wears off), business owners now have a new financial issue — how should this money be spent? Should you invest profits back into the business, spend the money own your own personal expenses? Or if your business is producing profits, is that the time to pay yourself a salary or save for retirement, or should you wait? Allocating that next dollar of income is challenging, because you and your business have conflicting priorities. On one hand, you want to grow your business as fast as possible. But you also want to enjoy your profits (finally!) and start to up-level your lifestyle.

You also know you “should” be saving for retirement — and you don’t want to miss out on years of saving (especially when you would be building your 401(k) if you still had your corporate job).

I recommend you triage the allocation of your income. As you are able to pay for the first category discussed below, you can move on to considering expenditures in the next category. For example, once you have your minimum expenses covered, you can start investing in business growth and saving for retirement.

“Must” have expenses

  • Minimum Personal Expenses: shelter, utilities, food, gas, loan payments, insurance.
  • Minimum Business Overhead: rent, payroll, licensing, operational costs, insurance, taxes, inventory.

Maintenance & early growth

  • Personal Expenses: clothing, household goods, toys, personal care, discount travel, insurance, gifts, charitable donations.
  • Business Growth: promotion & advertising, networking, staff, outsourcing, new products and services.
  • Retirement Savings.

Lifestyle & Growth

  • Lifestyle Expenses: luxury vacations, 2nd home, luxury automobile, designer clothes, country club membership, extensive charitable causes.
  • Rapid Business Growth: research and development, new technologies, staff, branding, business real estate, additional business ventures.
  • Wealth Building: real estate, equities, alternative investments, college savings funds, additional retirement savings.

But be aware — these choices depend upon you personal priorities and goals. You may not be willing to “give up your coffee” today for a million dollars in 40 years. That’s not right or wrong. It’s a matter of personal values. The important decision is to always be making a conscious choice of what you are taking and what you are giving up in response. The Wealth Spa(TM) Minute Do you know the average monthly overhead of your business? Is that figure a real number or just a guess? Use your bookkeeping software to find your average monthly expenses — to determine how much it costs each month just for your business to stay afloat.

Can a Goat Herder Teach Banks How to Loan to Small Business

Small businesses and entrepreneurs need to be able to get loans from banks to grow and or expand their businesses. Entrepreneurs and small businesses go to banks to get loans to make capital improvements, large purchases, buy a business, and generally expand their business. Basically small business have financing needs that go beyond the immediate cash flow generated by their business.

Imagine driving to the bank in your new Lexus, dressed accordingly, meeting with a bank loan officer and discussing your 5 years old business, your college degree, OK credit score, net worth of $500k and your business generating $50k a year in cash flow and asking to borrow $10,000. Do you think you will get that loan?

Now- For a moment pretend that you are a poor goat herder walking to town to get a loan, you don’t have any money to open a savings account with, you don’t have any normal collateral to secure a loan with, you don’t have a credit record as you have never been formally employed and you’ve never taken out a loan before. Also consider that you might even be unable to complete the necessary paperwork as you are illiterate. You earn about $1/day, and you want a loan of $250 to buy more goats to grow your business. Do you think you will get the loan? – Due to Micro financing the the goat herder may get the loan before the Lexus college graduate.

Many of us Entrepreneurs and Small businessmen/women donate time and or money to various causes or needs. I have been involved with Kiva since 2007. Kiva provides microfinance to Third World Entrepreneurs to help them grow their business. Kiva was founded by 2 former 20 something year olds that were former employees of TIVO and PAYPAL. Microfinance is the supply of loans, savings, and other basic financial services to the poor. As the financial services of microfinance usually involve small amounts of money – small loans, small savings etc. – the term “microfinance” helps to differentiate these services from those which formal banks provide. Why are they small? Someone who doesn’t have a lot of money isn’t likely to want to take out a $5,000 loan, or be able to open a savings account with an opening balance of $1,000. Hence – “micro.”

These are small loans, multiple lenders will “pool” their loans to come up with a lump sum to provide to the Entrepreneur. Again most of the Entrepreneurs I have loaned money to over the last 4 years earn less than $1/day. When an entrepreneur pays off a loan, I reloan those moneys to another. So far I have loaned to 18 different entrepreneurs and repayment of loans have been 100%. Since 2005 Kiva as a group has loaned almost $150,000,000 to almost 400,000 Entrepreneurs and repayment has been 98.27%. Why can this organization have such success in getting loans repaid from those with so little and banks in our “developed nations” loaning to those with abundant resources have problems so significant that these banks need a “bailout” from their government and ultimately taxpayers. Is it the conventional bank that is doing something wrong? Are they loaning to the wrong people on a consistent basis? How much of the blame falls on those that are requesting the loan?.

Currently how many good entrepreneurs and small business are not able to get loans as a result of mistakes made by conventional banks in the past. It seems to me that banks tend to over respond to problems. Obviously if you are a lender and want to have no loans default and you loan no money- you can achieve your goal. As a business broker I see the need for lending to allow buyers to finance the acquisition of buying a business. I also see income statements and balances sheets of reasonable small businesses that are using credit cards to help finance their businesses. It is hard for me to understand how our economy is benefiting by having small business owners take these “whatever is necessary” financing steps when traditional prudent lending to small businesses could truly be our fastest way to our economic recovery. The banks reduce/tighten their lending, the need for small business financing continues, higher interest is being paid through credit card financing, non-conventional means, and when does that higher expense cause employee reductions. Small business could divert money from high interest payments to investments and improvements that actually improve their business and create jobs.

Why can the goat herder get a loan and the Print Shop owner not? Or maybe if I were a banker I could ask why does the goat herder pay off his loans and the Lexus driving College Graduate Default? I understand there is a lot more that goes on between the comparison of a conventional bank and micro finance- but maybe conventional banks could learn something from Micro finance groups such as Kiva.