Small Business Financing Alternatives: How Best to Prepare

Raising money for your business may be one of the toughest tasks that you will face as a business owner.

Once you have decided to start your business, you will need to investigate the possible financing alternatives. It will be important for you to do your homework in order to understand the different ways of Financing your business, the key terms and conditions for each Financing alternative and which Financing method best suits your business at the present time.

It is not easy to raise money.  Proper preparation will help you understand and negotiate more effectively the terms of your Financing.  You also need to learn the Financing lingo so that you speak the same language as your Investors, which will give you confidence and credibility as you attempt to raise money.

What:

As a starting point, you will need to research the information, requirements and documents that will be necessary to secure the desired Financing.  In almost all cases, you will need Financial Statements that cover the past results and future projections of your business.  Different funders will have different requirements regarding the level of information and time periods covered by the Financial Statements.

In addition, you should prepare an Executive Summary of your business, as well as a Business Plan with more complete and detailed information.  You should know how much money your business will need, how it will be spent and the intended results, how the money will be repaid and the company’s longer-term operating goals and exit plan.

Why:

Funding your business, either with internal cash flow or outside capital, will be critical to the success of your business.  As you start the Financing process, you will have many questions and important issues to consider, including:

• What small business Financing alternatives are available for your company (e.g., personal savings, credit cards, Friends and Family, banks and credit unions, Angel Investors, Venture Capital, etc.)?
• Why do small business entrepreneurs use Equity Financing? (Want to learn more about Equity Financing? Check out this post!)
• Should you take out Loan for your small business?
• How do you apply for a business Loan?
• What paperwork and documents should you pull together in order to request business Financing or to seek a business Loan?
• What is the best legal structure to use to raise money given the current state of your business?

As John Wooden once said: “Failing to prepare is preparing to fail.”

You will improve your likelihood of obtaining Financing if you are prepared and organized.  Timing is important and you should not seek business Financing (and waste time and other valuable resources) if there significant financial issues or credit risks of if your company is not yet ready to take on the desired Financing.

How:

In order to prepare for Financing, you should start by doing your own background research to pull together your questions and identify some of the issues unique to your particular business.  Eventually, you may determine that you need to request the assistance of a consultant, banker, attorney or other advisors who have experience navigating the type of Financing that you are considering.

Other resources, such as the Small Business Administration, SCORE, local chambers of commerce, etc., provide valuable information and guidance regarding the Financing alternatives and how to proceed.

Friends, family members and business contacts also may provide valuable input and assistance during this process.

When:

In the best case, you would start reviewing the possible Financing alternatives even before you start the business.  As you might imagine, many small business Entrepreneurs start their companies with incomplete planning as to how and where they will find the necessary Financing.  And, even the Entrepreneurs who have planned their Financing strategies in more detail often do not accomplish their objectives given many business and other factors outside their control.

In most cases, the funding process will take three to six months to complete.  There is no guaranty, however, that a business will secure funding and the funding process often takes much longer than expected.  Once you have identified the potential source of Financing, you should start planning and organizing at least 30 to 60 days in advance of the proposed funding event, so that you are not scrambling to pull together documents and other information for the loan officer or other professionals conducting the Due Diligence investigation of your company.  In many cases for small companies, 30 days will be sufficient to organize and present the necessary funding documents and information.  You may need more time, however, if your company records are in bad shape or you need to prepare additional information requested as a condition to the closing of the Financing.  For more complex Financings, the negotiation and documentation process can extend the timing even further.

Practical Tips & Next Steps

Below are some practical tips and action items that you should consider to prepare for your financing:

1. Executive Summary and Business Plan – prepare, revise and revise again until it is balanced and professional.
2. Presentation – rehearse your financing pitch and seek honest feedback so that you have a polished presentation that addresses your experience, the financial condition of your company and the key business issues and opportunities; anticipate the tough questions and be ready to address them.
3. Credit history and Credit Score – review your credit rating as it could impact your ability to obtain a business loan or other debt financing, especially from banks.
4. Bring in the Pros – involve an accountant and business attorney to help address the tax, accounting, deal structure and contractual matters.  You also may need to involve a financial or other advisor depending on the nature of the Financing transaction and your available resources to assemble a more complete team.

Related Content

Ready to learn more about raising money for your business? Here’s a great place to start:

• How to Raise Money Through the Bank of Friends & Family
• Raising Money with Convertible Debt: The Basics
• 6 Investor Questions that You Need to Answer to Raise Money