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![]() Pub.37-How to Find Financing for Your Business (text) United States Postal Service How to Find Financing For Your Business
One of the most difficult tasks faced by the management team of small businesses today is finding adequate financing for current operations in order to support new and ongoing contracts. The sources for financing your business are many, but the type of financing you may choose are limited to two types. They are debt (borrowing money) or equity (investing money). Both types of financing have their limitations and advantages but both require accurate information. The applicant should be prepared to answer the following questions when seeking either debt or equity financing: DEBIT FINANCING BORROWING MONEY * What assurances can be offered to the lender as to the company's ability to meet its debt-service obligations (how will it be repaid)? * What additional financial risks and/or failure will be placed on the corporation as a result of these debt-service obligations? * What are the direct (principal and interest) and indirect (other loan restrictions) costs of this additional money? Financing Documents Checklist * Copy of company's Articles of Incorporation EQUITY FINANCING INVESTMENT MONEY * What will equity holders suffer or lose as a result of getting additional equity capital? * What are the relative risks involved in the use of the capital to be raised? How will prospective investors assess this risk in determining their expected rates of return? * What are the projected profits to be generated by the use of the capital to be raised? How and when will these profits be divided and distributed among the holders of the company's equity securities? * What tax advantages are lost as a result of the choice of debt ( borrowing money) over equity (investing money)? The management team must prepare and submit to the bank or financing company minimally the following eight (8) essential elements that describe your business: I. BUSINESS DESCRIPTION * Describe the business, its products, and customers II. MARKET ANALYSIS * Repeat customers and significant large customers III. MARKETING STRATEGY * Define target markets by product line niche and by major customer IV. OPERATIONS * Location facilities n Terms of any leases or mortgages on real property * Status of standard cost or job cost systems * Provide a detailed organizational chart by department and region FINANCIAL RESOURCES LISTED ON BACK PAGE VI. SCHEDULED MAJOR EVENTS * Provide a timetable of major events expected within the next 3 to 5 years VII. FINANCIAL INFORMATION * Income statements * Provide sales detail (with copies of contracts from customer) by:
* Prepare five year financial projections n Describe all assumptions underlying the projections and discuss risk of unforeseen events n Prepare historical monthly financial statements for the past two years * Prepare projected monthly financial statements for the next two years * Prepare a detailed break-even analysis VIII. FINANCING OBJECTIVES * The need for financing, size & type required
* S B A, (202) 205-6510 or fax (202) 205-6959 for the Directory of Operating Small Business Investment Companies. www.sbaonline.sba.gov * AT& T Small Business Lending Corporation, (800) 221-7252 for reference to an office near your business. www.att.com/capital/bfnet * Business Consortium Fund, (212) 243-7360 * National Association of Investment Companies, (202) 289-4336 * S B A for list of Small Business Development Centers in your local area. * Alternative Financial Services, Inc., (703) 370-1599 or 1(800) 480-1599. For information about contract and purchase order financing, fax to (703) 751- 1707. This company finances federal, state, city, and high grade commercial contracts and purchase orders for small businesses. http://www.dirs. com/finance/ALT * Often overlooked for referral sources to financing are: relatives, friends, CPA's, law firms, local or state chamber of commerce, local economic development authorities, and elected federal and state official's offices. Attendance at seminars, workshops, conventions, and professional membership events are very productive because banks and financial institutions are always present advertising their services. SOURCES OF FINANCING * Private Individual Investors-The private placement generally offers reduced costs because of its exemption from many of the extensive registration and reporting requirements imposed by federal and state securities laws. The private placement alternative usually also offers the ability to structure a more complex and confidential transaction, since the offerees will typically be a smaller number of sophisticated investors. * Institutional Venture Capital-The term "venture capital" refers generally to the early stage financing of young, emerging growth companies at a relatively high risk. The professional venture capitalists are usually a group of highly trained general partners who manage a pool of venture funds for investment in growing companies on behalf of a group of passive limited partners or a federally licensed Small Business Investment Company (S B I C). * Commercial Finance Companies-Many companies who seek debt financing but are rejected by banks turn to commercial finance companies, factoring companies, and accounts receivable financing companies for credit. These companies usually offer debt financing at considerably higher rates than an institutional lender, but are often willing to provide lower rates if the company takes advantage of other services offered for fees, such as payroll and accounts receivable management. In part, due to fewer federal and state regulations, commercial finance companies generally have more flexible lending policies than traditional commercial banks. * Leasing Companies-Small businesses with a need to acquire specific assets to finance their development should consider leasing as one alternative to debt financing. Leasing typically takes on one of three forms:
* State and Local Government Programs Many state and local governments provide direct or indirect financing to small and growing companies in an effort to foster economic development. The amount and terms of the financing will usually be regulated by the statues authorizing the creation of the state or local development agency. * Trade Credit/Consortiums (Vendors and Customers)-Suppliers have a vested interest in the long term growth and development of their customer base and may be willing to extend favorable trade credit terms or even direct financing to help a customer's growth. The same principles apply to the customers of a growing company who rely upon the company as a key supplier of needed resources. A new trend is emerging in customer related financing, known as a consortium. * Credit Card Financing-Another new and emerging source of contract financing is the credit card facility which is being used by the federal government, particularly the General Services Administration for its purchase order business. SUMMARY
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