You don’t have to stop dreaming up a business plan or if you want to expand an existing one. Small businesses have many financing options. Let’s look at some of the financing options that small-business entrepreneurs have access to. Although there are many financing sources available, including banks, government sources and angel investors, it is important to consider what all lenders want when they lend money or invest in a company.
Lenders will want to see the business history and track record of management and performance when you apply for money for an existing business. Lenders want to know if you can repay the loan. They will also look at your cash flow to determine if it is enough to pay your obligations and allow you to take on additional debt. Also, your credit history will be scrutinized. Good credit history is a prerequisite for getting a loan. It is important to tell the lender if you have ever had financial problems and how you have resolved them.
By putting up collateral, you can increase your chances of getting a loan. In the event of default, this reduces the risk to the bank. Lenders will be more confident in your proposition if you can prove that you have invested your personal money in your business.
Alternative Business Financing Options When Banks Say ‘No’
Poorly presented proposals, inadequate collateral, low cash flow and lack of managerial experience are all reasons why small business loans are often turned down. These are the key points that investors and lenders are most interested in. Now let’s take a look at the major sources of small-business financing.
1. Traditional lenders: Small businesses can get loans from banks, credit unions and finance companies. Many of these institutions have small-business departments and are skilled in small-business loans. It is a good idea to begin with the bank that handles both your personal and business banking. It is important to get to know your bank’s manager and staff. Don’t waste time at the ATM. Although it won’t guarantee you a loan, being friendly with bank staff will make it easier to present your loan application.
2. The Small Business Administration (SBA), Government Sources: These programs work with traditional lenders because they are loan guarantee programs. This reduces the risk for lenders in the event of default. Here are some of the most popular SBA programs:
a. 7(a) Loan-Guarantee Program: This program assists businesses without sufficient collateral. It provides repayment guarantees that range from 75% to 85 % depending on the amount of the loan.
b. SBA LowDoc Loan Program: These loans only require one application. The approval time for these loans is quick (within 36 hours of receiving the applications). These loans can only be used to fund start-up businesses and are limited to amounts of $15,000
c. SBAExpress loan program: This loan program covers loans up to $250,000. These loans are guaranteed by the SBA at 50%. The interest rates for this program might be higher than those in other SBA programs.
d. Microloans are loans up to $35,000 that are provided by community-based non-profit organizations.
3. Venture Capitalists are firms that seek investment opportunities in high-profitable companies. Venture Capitalists usually require you to surrender some ownership to the investors when you accept money. It is important to research the VC firm thoroughly and ensure that they have good references if you decide to go in this direction.
4. Angel Investors are individuals who invest in businesses that offer good opportunities. These funds are not necessarily available to high-tech companies. Venture capitalists can invest less than angels and they have investments ranging from $100,000 to $1 million.
There are many angel investors in the U.S., Canada, and at least 170 angel networks or investment groups spread across both countries. Search the Internet for angel associations in the area you are interested to find them. You can also contact your local chamber of commerce, the SCORE office and other non-competitive business to inquire. This brief survey shows that small businesses can get funding. Make sure you carefully prepare your proposal and reach out to the people or institutions that are most likely to be able to help you.
Get a credit card from someone else to finance your restaurant business
You won’t need me telling you how difficult it can be to make a living in the restaurant industry. Although you’re building up your reputation, money can be tight. One bad night could mean a loss of the week. Cash flow is a matter of course. It’s just that you wish more cash was coming in than out. What about the slow periods? What should you do if the slow periods last longer than expected? How can you raise the funds to help your restaurant get over the hump? Okay, this is a negative image, but even the most successful restaurant can have financial problems, especially if it wants to grow quickly. It is still a question of how to finance your restaurant.
Although a loan might seem obvious to help you raise funds for your restaurant, it is important to consider the lender’s perspective. According to Deloitte & Touche LLP’s 2004 Restaurant Industry Operations Report, the average pre-tax profit margin is between 4-7%. According to the lender, even a profitable restaurant can pose a risk. The higher the risk, the greater the interest payments. This is true even if you are approved for any loan. High interest rates can cause problems for low-margin businesses like the restaurant trade.
Although lenders will be more open to you owning your property, they may also consider you more favorable. Lenders will be looking at the potential resale price of your property when funding your business with real estate as collateral. Because there are fewer potential buyers, the purpose of the property may reduce its resale price. Many lenders have very high minimum loan amounts that may not suit your specific circumstances. It is important to speak to a specialist lender who is familiar with the restaurant industry if you decide to take out a loan.
ACCOUNTS RECEIVED FACTORING
Factoring allows a company to increase its cash flow through the sale of its receivables at a discount. The business does not have to wait for the outstanding invoices to clear before it can receive the cash needed to move forward. Account receivable factoring can be a great way to quickly access cash for many service-based companies. Restaurants are not likely to have this type of business. They do however have a lot of credit card transactions. These can be leveraged to allow budding restaurateurs to – literally! – finance their restaurants using credit cards from other people.
FACTORING CREDIT CARD
Restaurants can simply sell future credit card transactions to receive an advance of that money, usually up to $120,000. You can use the money for anything, from expanding your business to purchasing new equipment. It is not a loan and there is no guarantee. This is a loan that you can use to pay off future credit card payments. The company buying takes a small percentage of future credit cards transactions until the advance is repaid.
This option is great for restaurants that need cash quickly. There are some restrictions regarding who can apply. To qualify, a restaurant must be open for at least one year, have received more than $5,000 in Visa/Mastercard transactions per month, and have a lease that has not expired after one year. This is the best way to grow your restaurant if it has been around for over a year.
COMPANIES RESTAURANT FINANCING
This type of financing is available from a variety of companies. These are the main things to look out for when choosing a company that offers this type of financing:
- Application Fee- Avoid companies that charge an application fee. There is very little paperwork involved in this process so an application fee does not seem necessary.
- Closing cost – Companies that charge ‘closing fees’ should be avoided. There are many companies competing for your business.
Credit card factoring can be a great way to get the money you need to expand your restaurant, whether it is a new or established business. Fund your restaurant with someone else’s credit cards.
Invoice discounting: A tool to finance your business
Is it possible for clients to take up to 60 days before they pay their invoices. This is a common problem and can cause significant stress for business owners. A profitable business does not automatically mean you have reliable cash flow. Contrary to popular belief, a business can have high profits but a low cash flow. This is how it can be. Simple. You get paid by clients in 60 days. However, you still need to pay your employees each week, rent, or suppliers. While the numbers might work long-term, you will be left with very little cash in the short-term. This happens unless you have enough money in your bank to cover the deficits.
What do you do if your business is new or growing? A business loan is possible. Unlikely. It is difficult to obtain business loans. Invoice discounting is a better alternative. Factoring companies offer invoice discounting, which is a type of financing that isn’t offered by banks.
Invoice discounting is, as the name suggests, selling invoices for cash immediately at a very small discount. Its value proposition can be described as simple. To get paid immediately, are you willing to take a discount of between 1.5% and 6% on your invoices? Many business owners offer a 2% discount for businesses that pay within 10 working days. Invoice discounting is a similar offer. Invoice discounting, or invoice factoring, is not right for all businesses. It is most effective when your profit margins exceed 15%. You can also use the accelerated funds for business expenses and to pursue new business opportunities.
Factoring companies will always buy your invoices in two installments. The advance is the first installment. It covers up to 85%. After the customer has actually paid the invoice, the remaining 15% (less the discount), will be refunded. Invoice discounting can be done quickly and easily. Reliable clients are the most important qualification. If you have a lot of late-paying invoices, consider invoice discounting.