Obtaining outside business financing is often critical for the success of a closely held business.   Even if the business is profitable from the very beginning, there are times when the cash coming into the business is slower than its need to make expenditures. 

Sources of financing in small business include a company’s vendors or suppliers via accounts payable (i.e., delayed payment of bills) credit cards, leasing companies, family and friends, banks, private investors, venture capitalists and investment bankers.    

Most often, any small business loan must be secured by accounts receivable, equipment, real estate or other assets and/or guaranteed by the owner of the business.  If this can be avoided, that is ideal but, in reality, unsecured small business loans are the exception, not the rule.  In other words, the business owner will almost always be at risk on the loan, especially if the loan is for small business working capital (cash).  

I’m often asked about “small business loans,” which are actually loans from a bank that are backed by the Small Business Administration (SBA) of the federal government.  Although the re-payment terms are generally good, these loans are not easy to obtain because they require a lot of paperwork and tend to be more expensive (more fees) than other types of loans.  As a result, they often take a good while to process.  Typically, they are fully secured by the assets of the business owner.

So, when the business owner asks me, “How do I obtain a small business loan?”, we typically review both the assets and liabilities of the business and the assets and liabilities of the business owner.  In some cases, this requires creating and/or cleaning up the accounting and financial reporting for the company. 

To obtain a loan from a bank and from many other sources, it is critical that the business owner have a good credit rating.  It is also important to the business itself to have a good credit rating, which is typically obtained from Dun & Bradstreet.  

The term “fund raising” typically applies to raising money in the venture capital community.  Generally, the best way to arrange a meeting with a venture capitalist is through someone who knows you.  Venture capitalists tend to be very specific about which types of companies they are interested in investing in including the stage of growth, industry and company size.  Therefore, it is very important to do your homework in advance so you understand what types of companies in particular venture capitalist is interested in investing in; otherwise you will be wasting each other’s time.

Venture capitalists will expect you to either submit a quality executive summary about your business in advance of the meeting or to bring one to the first meeting.  If they are interested in looking closer at your company, they will typically request a full business plan.  Business plans for funding include a detailed description of the company’s business model, cash flow projections, capital budgeting, executive bios, etc.  They will want your management team – and especially the CEO – to have had significant and relevant successes in the past.  In other words, they want your successes in the past to be a strong predictor of your success in your current venture.