Ask SmallBiz: Financing a Business Startup
By Karen Sakihama, Small Business Administration
Q. My son wants to start a business but doesn’t know how to go about it. Where should he get started? He is most concerned about financing.
-Raveen Rama, accounting, Hawaii Reserves Inc.
A. While financing is very important, there are steps your son should take before he launches his small business or seeks financing. Pre-venture planning will test his readiness and map a path to a viable business. Planning early in the startup process increases the likelihood of creating a successful business. Writing a business plan is critical for enhancing chances for success and minimizing failure. It’s also a necessary element in any financing proposal to lenders. This plan describes the products or services the business will provide, the marketing plan and financial forecasts. Whether the plan is 10 pages or 100, getting ideas, strategies and resources on paper will determine the feasibility of the proposed business. Financing is a major concern for all businesses, particularly for startups without track records. Insufficient capital and failure to realize that it can take six months or more to generate sufficient revenues to support operations are principal reasons many businesses do not make it. Anyone thinking about opening a small business must check his or her credit report. For new businesses, business and personal credit are not separate. Personal credit history determines the perception of potential lenders and impacts loan approvals. If credit problems appear, act promptly to clean up your financial picture. While many small businesses find funding through their own savings or from loans from family or friends, others turn to banks. In making decisions, lenders consider your credit, business plan and the repayment ability from the projected cash flow of the business. Good character, management capability, collateral and owner’s equity contributions are also factors. When a financing proposal presents too much risk, lenders may consider structuring the loan with a guaranty from the SBA. To get an SBA loan, a business applies to a commercial bank that will structure the loan according to SBA requirements and provide the funds. The guaranty transfers a percentage of the risk of borrower nonpayment to SBA, allowing banks to make loans to small businesses and startups when they need financing the most.