Raising
capital is the most basic of all business activities, but it
may not be easy; in fact, it is often a complex and frustrating
process. However, if you have studied and planned effectively,
raising money for your business will go as smoothly as possible.
Finding the Money You Need
There are several sources to consider when looking for financing.
It is important to explore all of your options before making
a decision.
Personal savings: The primary source of
capital for most new businesses comes from savings and other
personal resources. While credit cards are often used to finance
business needs, there are usually better options available,
even for very small loans.
Friends and relatives: Many entrepreneurs
look to private sources such as friends and family when starting
out in a business venture. Often, money is loaned interest-free
or at a low interest rate, which can be beneficial when getting
started.
Banks and credit unions: The most common
sources of funding, banks and credit unions, will provide
a loan if you can show that your business proposal is sound.
Angel Investors and Venture capital firms:
These individuals and firms help expanding companies grow
in exchange for equity or partial ownership.
It is often said that small businesses face difficulty borrowing
money, but this is not necessarily true. Banks make money
by lending money. However, the inexperience of many small
business owners in financial matters often prompts banks to
deny loan requests. Requesting a loan when you are not properly
prepared suggests to your lender that you are a high risk.
To successfullly obtain a loan, you must be prepared and
organized. You must know exactly how much money you need,
why you need it, and how you will pay it back. You must be
able to convince your lender that you are a good credit risk.
Types of Business Loans
Terms of loans vary from lender to lender, but there are two
basic types: short-term and long-term.
Generally, a short-term loan has a maturity of up to one year.
These include working capital loans, accounts receivable
loans and lines of credit.
Long-term loans have maturities greater than one year but
usually less than seven years. Real estate and equipment loans
may have maturities of up to 25 years. Long-term loans are
used for major business expenses such as purchasing real estate
and facilities, construction, durable equipment, furniture
and fixtures, vehicles, etc.
