Posted on May 9, 2016

Startup Financing

It’s no secret that you will need capital to launch your new business. Many entrepreneurs struggle to get their businesses off the ground because they’re unable to secure adequate funding. The good news is that billions of dollars are available to fund small business ventures like yours.

Before you begin the process of securing capital, you will need a written business plan that defines your business, management team, market, products and services, competitive advantage and the financial forecast and analysis that determines the proper amount and type of financing.

Determine Capital Needed for Fixed Assets

As you prepare the financial part of your business plan, you’ll need to provide a detailed list of your capital needs separated into the following categories that correspond to common asset categories and specific types of business loans. Consider the following as you create your list of capital needs.

  • Location — Will you buy, build or lease? What kind of materials and labor might you need to build out the space?
  • Equipment — List every major piece of equipment you will need and provide the cost for each and consider options for a capital lease versus making a purchase.
  • Technology — Divide your list into hardware and software. Don’t include software, data storage or website hosting that will be acquired on a subscription basis. Those services generally should be listed as operating expenses.
  • Furniture and fixtures — List the quantity and prices from major distributors for desks, file cabinets, tables, chairs, shelving, displays, cubicles and so on.
  • Vehicles — List cars and trucks essential to the operation of your business, such as delivery or service vehicles. Fleet vehicles may also be leased.

Evaluating Types of Working Capital Financing

The types and terms of working capital loans vary significantly depending on their intended purpose and corresponding risk. The following are some of the more common ones.

Lines of Credit

Lines of credit are common sources of short-term working capital financing. often, a business is approved for a line of credit up to a certain amount — much like a credit card — and the line can be used for fluctuations in accounts receivable, inventory and seasonal business cycles. Many banks won’t extend a line of credit until your business has been operating for 12 months. Generally, you will pay interest on your outstanding balance on a monthly basis. The principal of your loan is “callable” by the bank subject to the notification requirement of the note. Lines of credit typically are secured by accounts receivable and inventory and can also be required to be personally guaranteed by the business owner and subject to restrictive covenants.

Trade Credit

As your business begins to grow, establishing trade credit with your primary suppliers will help you finance your growth — often at no cost to you. Trade terms usually are 30 days, but in some industries (retail for example), you can negotiate substantially longer terms once you’ve established a relationship with a supplier. The key to establishing trade credit is “ask,” and when terms are extended to you always pay on time. Your first trade account will serve as a credit reference for your next and so on.

Preparing for Requests and Questions from Potential Lenders

While every loan program has specific forms you need to submit, you will likely need to provide much of the same information to each of the lenders for different loans. These documents include:

  • Personal Background
  • Resumes
  • Business Plan
  • Personal Credit Report
  • Business Credit Report
  • Income Tax Returns
  • Financial Statements
  • Bank Statements
  • Collateral
  • Personal Guarantee
  • Additional Legal Documents

For a detailed list of the documents that each lender will likely request, download the Guide to Acquiring Startup Financing, which includes a comprehensive Business Loan Application Checklist.

In addition to providing the above documentation for your new business, be prepared for lenders who will likely ask the following questions.

  • Why are you applying for this loan?
  • How will the loan proceeds be used?
  • What assets need to be purchased, and who are your suppliers?
  • What other business debt do you have, and who are your creditors?
  • Who are the members of your management team and what are their qualifications?
  • Why do you think this business will be successful?

As you make your way through the financing process and begin evaluating your funding options, keep in mind that your local CPA can be your most trusted professional business adviser. Your local CPA already advises other small businesses in your area and has relationships with local banks, insurance agents, attorneys, investors, municipal and county regulatory officials and more. Your CPA can be an important ally in helping you determine how much capital you need, evaluate available funding options and choose the ones that best meet your needs.

SB Startup Financing Guide CoverFor the complete guide on how to acquire startup financing for your small business, click here to download. In this guide, certified public accountants (CPAs) offer their most helpful tips on the following topics.

  • Forecasting revenue, expenses, and operating capital requirements
  • Types of working capital financing
  • Determining capital needs for fixed assets
  • List your personal assets and liabilities
  • Identify potential funding sources
  • Financing package development
  • Business loan application checklist