One of the major causes of small business failure is inadequate start-up
financing. Admittedly, it is more difficult for small businesses to obtain
financing than their larger competitors. However, the owner who borrows
too little up-front money may quickly see the business close down because
of lack of capital to keep the operation running.
"The most hazardous period for a new business is the first two years due to insufficient working capital," says Bernard Schnitzer, a counselor
Many over-eager entrepreneurs open their doors without the necessary
funds to keep the business going until the profits begin to roll in. They
have only enough for a couple of months' rent, some fixtures and minimum
Before you open for business, it is critical to plan how much cash you
will need. That amount depends on the type of business you are opening
(sales and manufacturing need more; service businesses need less) and the
type of person you are.
You also should ask yourself what you need the money for; how much you
need; does the amount allow for unexpected developments; how and when you
will repay the money; can you afford the cost of borrowing; and what is the
outlook for business in general and your business in particular? By
carefully planning your financial projections, you can avoid some of the
financial crises that arise from a future shortage of funds.
Hinden/Owen/Engelke, specialists in financing for small businesses,
recommend the following "Ten Commandments of Smart Corporate Financing";
There are a number of sources of financing available to the small
business owner (besides family and friends): private sector financing--
banks, savings and loans and other financial services institutions;
government financing--the U.S. Small Business Administration and local
community groups like the Small Business Investment Companies and the
Minority Enterprise Small Business Investment Companies; and venture
capitalists--wealthy individuals and firms who make their money as
- Stay in contact with several lenders.
- Anticipate financing needs and make arrangements well ahead of opening
- Borrow as much as you can.
- Get all commitments in writing.
- Never assume silence is approval of a loan request.
- Don't make the interest rate the major consideration in evaluating
- Don't surrender or assume that if one lender says "no," they all will.
- Watch for turning points in the operation of your company.
- Tight money doesn't mean no money.
- Don't limit your sources just to banks.
Before you fill out your loan request--no matter who the prospective
lender is--find out what documentation you will need. For example, banks
and the U.S. Small Business Administration require a resume of the
applicant's education and work experience with emphasis on experience
related to the particular business; a personal financial statement
detailing net worth and income tax statements for at least the two previous
years; the aforementioned business plan; and credit references.
Finally, borrow carefully. "Having financing is critical at the growth phases," says one small business owner; "But be careful not to overextend yourself."
Reprinted from the United States Small Business Administration
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