Steps to Business Financing
- Identify your financial needs
- Know what lenders look for and assess your situation.
- Find assistance in helping you get ready to apply
- Understand about debt financing basics
- Identify most appropriate sources
- Check requirements and begin compiling documents
- Submit your application
Identify your financial needs
Commercial lending can be used for initial expenses, financing ongoing operations, or major investments in equipment.
The most common - and generally the easiest - reason to get a business loan is for expanding your business, either by opening new locations, entering new territories, or otherwise increasing the scope of your current operations. Lenders see that your business is succeeding and are willing to loan you money to do "more of the same."
Other reasons for a bank loan are to:
- improve facilities and conduct renovations
- invest in major equipment
- boost working capital
- build up inventory
Unfortunately, the time when you need money the most is when it's hardest to get a loan: during the startup phase. You simply won't get a new business loan by walking into a bank with an idea and enthusiasm - and the same goes for buying an existing business. You need to demonstrate an understanding of the industry, business acumen, and commitment.
You need to be clear on how much you need. Thoroughly research costs and understand how the flow of cash in your business will influence your ability to repay a loan.
Know what lenders look for and assess your situation
Know what banks look for and prepare for it:
- Character and credit history of the borrower
- Loan documentation: financial statements, tax returns, and a business plan
- Cash flow history and projections for the business
- Collateral that is available to secure the loan
Get a credit report on yourself and your business. The smaller the business, the more closely the experience, know-how and overall character of the owner(s) will be evaluated. You are often judged on your personal credit - especially if your business does not have a long operating history.
- You need to build a credit history to give banks an idea of how responsible you are – they will assume that you operate your business in the same manner that you manage your personal finances.
- You need to monitor what banks see when they pull your credit report.
- Check your credit report well in advance of seeking a loan because it can take up to four weeks for errors to be corrected.
- Take advantage of the U.S. government’s free credit report program: www.annualcreditreport.com.
- Continually monitor your credit to check for errors or omissions. Use www.myfico.com if you want to pay for this service.
- Know your credit score. Scores range from 300 to 850, and the higher the score, the lower risk you pose to lenders — and the lower interest rate you'll be able to secure.
- You can obtain a free Business Information Report on your own business from Dun & Bradstreet, http://smallbusiness.dnb.com/. If D&B does not yet have any information on you, they will allow you to voluntarily obtain a listing by providing them with some basic information about your business.
- Every commercial lending application you submit will be listed on your credit record - if you're turned down by one lender, the next will see that you were declined already. Make sure to do everything you can to get it right the first time.
Find assistance in helping you get ready to apply
JEDC Business Consulting Service (BCS)
Juneau Economic Development Council
612 W. Willoughby, Ste. A
Juneau, AK 99801
Phone: (907) 523-2300
Fax: (907) 463-3929
Web Site: http://www.jedc.org/bcs.shtml
JEDC’s Business Consulting Service is available to small businesses throughout the Southeast panhandle. JEDC's Business Consultants work with your existing or expanding business through a process of confidential counseling and coaching. Once your business's specific need or problem has been identified, a consultant will work one-on-one with you to solve it. Consulting services are available to focus on business problems, while coaching services focus on the business owner. Counsel might center on revenue growth, cost analysis, market research, business planning, financing, expansion, customer service, marketing and sales, accounting and record keeping, human resources, and/or e-commerce. Coaching can address leadership capabilities, workload management, and/or achieving more satisfaction with business and personal life, as examples.
Upon requesting consulting services, a one-hour initial consultation is free of charge to all businesses. A first phase then offers up to 20 hours of consulting and coaching services at the very low cost of $25 per hour. For businesses wishing to go further, an additional 30 hours are available at a fee of $60 per hour.
Alaska Small Business Development Center (SBDC)
3100 Channel Dr., Suite 306 Juneau, AK 99801-7814 Phone: (907) 463-3789, Fax (907) 463-3430
Web site: http://aksbdc.org/
Serving Alaska for over 23 years, the Alaska Small Business Development Center (SBDC) www.aksbdc.org provides free, confidential, business advising for small businesses throughout Alaska. Whether the business is a startup, already existing, or still just an idea yet to be realized, its five statewide locations are there to help. Each statewide center offers free business counseling, low cost workshops and business libraries.
Other SBDC Programs:
Procurement Technical Assistance Center (PTAC) – Provides one-on-one counseling and conducts training sessions for business concerns interested in pursuing federal, state and local government contracts.
Technology Research and Development Center (TREND) – Assists small businesses in the research and development of new technology in Alaska. TREND provides free one-on-one counseling, workshops and resource materials designed to identify a client’s business assets and resources for taking a technology to market.
Rural Outreach Program for Entrepreneurs (ROPE) -- offers free business counseling and training services in Southeast Alaska. We provide our services through group workshops and one-on-one counseling and training. Call us at 1-800-478-7232 to request a workshop in your area, or fill out our request form.
Service Corps of Retired Executives (SCORE)
U.S. Small Business Administration
410 L Street, Suite 310
Anchorage, AK 99501
Phone: (907) 271-4022
Web site: www.score.org
Assistance may be provided to existing and potential small business persons by retired executives who volunteer their time to assist others in their field of expertise.
Small Business Assistance Center (SBAC)
Office of Economic Development
Department of Commerce, Community, and Economic Development
550 W. 7th Ave., Suite 1770
Anchorage, AK 99501-3510
Phone: (907) 269-8104
Anyone seeking assistance or directions may use this service. The Office of Economic Development also has professional staff members the public may consult with by appointment, phone, or e-mail. This is a free service provided by the Office of Economic Development and is not funded by any program.
The SBAC links people or businesses to the State of Alaska's network of partners like University of Alaska, Anchorage (UAA), the Small Business Development Center (SBDC), the Alaska Regional Development Organizations (ARDORs), the Made In Alaska (MIA) program, the Buy Alaska program or anyone just seeking to buy a business license online. Some examples of information that can be obtained is: * How do I start my business? * Where do I go for financing? * How do I write a business plan? * How do I sell internationally?
Alaska Business Development Center
Alaska Business Development Center, Inc.
840 K Street, Suite 202
Anchorage, AK 99501
The Alaska Business Development Center provides direct hands-on, one on one consulting to Alaska small businesses and commercial fishers.
Understand about debt financing basics.
- Debt Financing Basics
- Long-term versus short-term borrowing.
- Long-term loans are made to purchase, improve, or expand fixed assets such as a company’s facilities and major equipment. You must provide collateral to reduce the lender’s risk.
- Short-term loans provide cash for working capital, inventory needs or for accounts payable. Usually secured by collateral, but may be available unsecured based on the creditworthiness and reputation of the borrower. Short term loans are almost always set up for terms of one year or less, and are repaid in a lump sum at the end of the term, instead of monthly. They're usually for smaller amounts - less than $100,000 - and are best for seasonal inventory buildup or small investments with quick returns.
- Lines of credit are more general business loans that are often set up to insure against cash flow problems. Instead of getting a check for the full amount of the loan, the financial institution will allow you to borrow up to a certain amount per year - you take out the money in increments as you need it. The flexibility comes at a cost, though: if you don't repay the loan balances fairly quickly, they can become more expensive than other types of loans. Avoid using a line of credit for significant business improvements: they're designed for temporary cash shortfalls.
- Commercial banks are the primary source of loans to small companies, but not the only source.
- Commercial finance companies – less regulated and can assume more risk. However, they usually charge higher interest rates than banks. Also, they may have significant pre-payment penalties. Primarily lend for the purchase of inventory, equipment or other revenue producing assets.
- U.S. Small Business Administration (SBA) sponsored programs – these are not direct loans to start or grow a business. The SBA provides a loan guarantee to participating lenders to reduce their risk in extending credit to small businesses. The borrower does not need to contact SBA. The lender determines if the business meets SBA eligibility and credit requirements and suggests which programs best suit the loan. SBA loans are especially advantageous to businesses that have tight cash flow, as the terms of such loans can often be extended far longer than those of a comparable bank loan.
- State and local government programs
- Community revolving loan funds
- Choosing a bank for your small business loan.
- Start with institutions that you already do business with - since you’ll have to share ALL of your personal and business financial information anyway.
- If you have your mortgage with a bank, that’s a good place to start.
- As a general rule, banks will never provide 100% financing. Contribution requirements will vary depending on the stability of the business and the value of the collateral used to secure the loan.
- You are considered a greater risk if you want a start up business loan. Start-up companies typically must contribute at least 25 to 35% of the costs. The primary source of funds for starting a business is equity, not debt:
Identify most appropriate sources
Use the sorting filter on the home page under What Do You Want to Finance
Check requirements and begin compiling documents
Be prepared to have several key documents on hand before you even set foot in a bank. These should include personal financial statements, tax returns, monthly cash flow projections, and a well-prepared business plan. Learn more....
You will need financial statements for your business to show how much it’s worth and how much money you’re making.
Prepare detailed pro-forma statements. These give projections about what your business will be worth going forward.
Be sure you have an updated business plan. Prepare a plan with as much detail as possible – including bios of you and your partners, your track record, your strategies and advantages, and more. Supply a well-organized plan of how you intend to use the loan.
The most important component to a lender is whether the business's ongoing sales and collections represent a sufficient and regular source of cash for repayment on a loan. A business's cash flow will usually include not only the money that goes in and out of the business from its operations (sales less expenses), but also any cash flow from investments or financial activities (e.g., payments and receipts of interest and dividends, long-term contracts, insurance, sales or purchase of machinery and other capital changes, leases, etc.)
You may need to provide collateral. Collateral may be defined as property that secures a loan or other debt, so that the property may be seized by the lender if the borrower fails to make proper payments on the loan.
In order to ensure that the particular collateral provides appropriate security, the lender will want to match the type of collateral with the loan being made. For example, the useful life of the collateral will typically have to exceed, or at least meet, the term of the loan. Consequently, short-term assets such as receivables and inventory will not be acceptable as security for a long-term loan, but they are appropriate for short-term financing such as a line of credit.
Submit Your Application
Submit your application, make an appointment with your lender, follow up to find out if they need more information and/or what the status of your application is.