Financing your small business

One of the major reasons for new business failures is lack of sufficient capital. Yet developing a good funding package can be difficult.

The primary structures of financing are:

  • Debt/Loan: this is money that you will need to pay back and is the most prevalent type of financing
  • Equity: you usually do not need to pay this money back, but you will be giving someone else partial ownership and partial control of the business. You will usually have to share profits with your financing partner.

Grants

Grants, or money that does not need to be repaid, are practically non-existent for small businesses. You might have seen infomercials about government grants to start your business, but these grants do not exist except in very restricted situations. Any grant that might be available from the federal government can by found by searching the federal grants search engine Grants.gov.

Sources of financing

  • Personal savings
  • Friends and relatives
  • Banks and credit unions
  • Venture capital firms

Preparing your financial request

  • Before asking for money for your business, have your financial needs organized and your business well thought out. This starts with a good business plan.
  • Prepare several financial documents outlining your company's finances. Have these documents ready before you talk to your lender. These documents include, but are not limited to:
    • Cash Flow Statement
    • Income Statement
    • Balance Sheet
    • Personal Finance Statement

Financial documents

  • Cash Flow Statement – a document that shows monthly cash coming in and going out and the net cash balance. Example (MS Excel document)
  • Income Statement – shows revenue and expenses over a period of time: the difference between the two is your profit. Example (MS Excel document)
  • Balance Sheet – the statement showing the value of your assets compared to the value of your debts or liabilities. Example (MS Excel document)
  • Personal Finance Statement – This document is a personal balance sheet. Lenders expect you to provide a certain amount of your own money and assets to finance your business. They also want to see how you have managed your personal finances. Example (PDF document)
  • Other statements. Depending on the lender, there can be a number of additional forms, statements, and sources of information you will be asked to provide.

The 3 C's

There are three areas that a lender evaluates when looking at a loan application.

  • Character: Have you managed money responsibly in the past, do you have the proper background, education, and skills to run your own business?
  • Capacity: Does your cash flow cover the loan payment?
  • Collateral: Do you have something of value that can be used to service your debt if you can't repay the loan?

Small Business Administration

The Small Business Administration (SBA) has a number of financing programs for start-up and existing small businesses. The most active is their 7(a) Loan Program. The purpose of the loan guaranty is to help small businesses who might not otherwise qualify for a conventional loan. The loan is not given directly by the SBA, rather SBA guarantees a large percentage of a loan made by a commercial bank which reduces the bank's risk exposure.

Other Resources

Library resources

Financing Your Small Business book jacket

The Library has numerous books that can help you learn about business financing. They can be found by using the subject headings "Small business finance" and "Small business loans." Some sample titles include:

For additional information, contact an H&R Block Business & Career Center librarian by phone, 816.701.3717, or by e-mail, bcc@kclibrary.org.