Capital Opportunities for Small Businesses - sbtdc

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Debt Sources Equity Sources Personal $100k+ Angels $100k- $500k+ SBIC $1m+ $250k- $2m $10m+ Venture Capital $100K $250K \\ $500K $250k- SCOR $1m+ $500k- Private Investment $10m+ IPO $10m+ C A P I T A L O P P O R T U N I T I E S F O R SMA L L B U S I N E S S E S $2.5m+ $15k+ Credit Cards $35k (loan amount) Microloans $50k+ Loan Programs $100k+ Trade Credit $100k+ Line of Credit $150k (loan amount) SBA Low Doc $50k $100k \\ $250k \\ $1 million \\ $2.5 million $100k+ Factors $1m (guarantee amt; loan amt up to $2m) $1m+ Asset-Based Loans $100k+ SBA 7(a) $50k - Bank Loan $1m $1m+ Revenue Bond SBA 504 SBIC $250k - $250k - 20 \\ $10 million \\ $1 million
C A P I T A L O P P O R T U N I T I E S F O R SMA L L B U S I N E S S E S Obtaining a Loan The most important aspect to realize in seeking a loan as a source of capital is that the lending institution derives its return solely based on the borrower’s ability to repay the principal and interest. Since a lender’s expected return on investment is limited to interest payments and service fees, it will be reluctant to accept as high a degree of risk as may be acceptable to an investor who provides financing in exchange for a claim on future earnings of the company. The lender does not gain any additional return if the business does exceedingly well. One must also realize, however, that these institutions principally derive revenue from making loans. A loan applicant, therefore, must take the time to gain an understanding of what the lending institution looks for in a loan candidate and why the business opportunity is a solid proposition for the bank. Before approaching a financial institution, the applicant needs to have the following documents: A business plan Federal tax returns for the previous three years Personal and business financial statements Cash flow statements. A business plan is the first indication of how the business is going to be managed. A business plan is often one of the most important documents and can be seen as a sales tool directed at those people who are considering backing the entrepreneur. If it is thorough and well prepared, this is a predictor that the business will be managed the same way. The business plan should be sufficiently complete to prove the ability of management to understand the critical factors of the business such as product, market demand, competition, cost structure, pricing, and management. Information needed to support a loan request includes: Size of the loan requested or needed Capital already on hand Experience of management What the loan proceeds will be used for How the loan will improve the business Evidence of ability to repay the loan. Factors an applicant must consider in seeking a loan include types of loans offered, rates and fees, collateral requirements, personal guarantee requirements, lending limits, and loan processing time. While the institution will have a policy regarding these elements, its flexibility will depend on the strength of the applicant. From the institution’s point of view, personal credit and payment history are some of the factors indicating the degree of risk involved in making the loan. The more accounts and services an individual has with the institution -- personal and business checking account, savings account, credit card, IRA -- the more valuable they are to the bank. This gives the individual more leverage in negotiating terms and conditions of the loan. It is important for a small firm seeking loan capital to develop a relationship with the lender early in the process. Even before the loan is needed, it is important to take steps to solidify the foundation for a good 21
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Capital Opportunities for Small Businesses - sbtdc

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