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4 Questions For Greater Success With Small Business Capitalization

Starting a new business or expanding an existing one often requires a capital investment. No matter how lucrative the possibilities of this investment are, owners often lack the necessary funds for self-capitalization.

A loan provides one solution to the problem, and it should be weighed against others. After deciding on a loan, there are many lenders to choose from. The best option should reflect a comparison of lenders and the risk perceived by yourself and the lender.

What Are your Loan Options?

New owners tend to only think of major banks when it is time to find capital. Loans from big banks can offer the best terms, but these terms tend to be reserved for businesses presenting the lowest risk. Until credit history is established, any loans from this source will require sufficient personal or business collateral and a personal guarantee. With a credit history of at least six months and business assets, such as inventory and verified revenue, it will be possible to fully separate business from personal finances.

Another option is to stay with your local bank. They will help you prepare loan documents and are generally more sensitive to local businesses. The Small Business Administration also offers a variety of loan guarantees. These can be used to ensure sufficient capital and receive better loan terms.

Do You Perceive a High or Low Risk of Default?

Your perception of risk should be as objective as possible. Simply believing your business will be successful is not enough when your family’s home and your future income are on the line. With a newer business, there should be a plan that shows exactly how the loan will be used and exactly how much is needed. Established businesses need the same plan, but this will be used to decide between the increased options. Lenders may also benefit from the plan. They will be better able to determine risk, justify the loan amount, and consider the practical effects of their investment on the community.

Do Terms Vary Considerably Between Lenders?

Before you begin filling out applications, several lenders should be identified for comparison. The primary terms to consider are fees, interest rates, repayment schedules, and default penalties. Is the repayment schedule fixed, or can you pay it off faster than scheduled without penalty? Is the interest rate fixed or variable? Fixed rates and repayment make it easy to calculate loan costs, but it may be possible to get a better deal with more flexible loan packages.

Are You Prepared to Seek a Loan?

Every owner should start preparing early for the inevitable loan and/or credit applications. These actions prevent many common business problems. The first is to register for an Employer Identification Number (EIN), and use it to open a business checking account and dedicated land-line or wireless account. Next, register for a DUNS number with the business credit bureau Dun & Bradstreet. You will need to register all business accounts here to ensure you get credit for on-time payments.

The 2009 recession resulted in stricter rules over lending. You can still find good deals with the right preparations and understanding of terms.


This is an article contributed to Young Upstarts and published or republished here with permission. All rights of this work belong to the authors named in the article above.

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