Finance For the Long Term

One of the major causes of small business failure is inadequate start-up financing. Admittedly, it is more difficult for small businesses to obtain financing than their larger competitors. However, the owner who borrows too little up-front money may quickly see the business close down because of lack of capital to keep the operation running.

"The most hazardous period for a new business is the first two years due to insufficient working capital," says Bernard Schnitzer, a counselor at SCORE. Many over-eager entrepreneurs open their doors without the necessary funds to keep the business going until the profits begin to roll in. They have only enough for a couple of months' rent, some fixtures and minimum inventory.

Before you open for business, it is critical to plan how much cash you will need. That amount depends on the type of business you are opening (sales and manufacturing need more; service businesses need less) and the type of person you are.

You also should ask yourself what you need the money for; how much you need; does the amount allow for unexpected developments; how and when you will repay the money; can you afford the cost of borrowing; and what is the outlook for business in general and your business in particular? By carefully planning your financial projections, you can avoid some of the financial crises that arise from a future shortage of funds. Hinden/Owen/Engelke, specialists in financing for small businesses, recommend the following "Ten Commandments of Smart Corporate Financing";

Stay in contact with several lenders. - Anticipate financing needs and make arrangements well ahead of opening your doors. - Borrow as much as you can. - Get all commitments in writing. - Never assume silence is approval of a loan request. - Don't make the interest rate the major consideration in evaluating financing. - Don't surrender or assume that if one lender says "no," they all will. - Watch for turning points in the operation of your company. - Tight money doesn't mean no money. - Don't limit your sources just to banks.

There are a number of sources of financing available to the small business owner (besides family and friends): private sector financing-- banks, savings and loans and other financial services institutions; government financing--the U.S. Small Business Administration and local community groups like the Small Business Investment Companies and the Minority Enterprise Small Business Investment Companies; and venture capitalists--wealthy individuals and firms who make their money as investors. Before you fill out your loan request--no matter who the prospective lender is--find out what documentation you will need. For example, banks and the U.S. Small Business Administration require a resume of the applicant's education and work experience with emphasis on experience related to the particular business; a personal financial statement detailing net worth and income tax statements for at least the two previous years; the aforementioned business plan; and credit references. Finally, borrow carefully. "Having financing is critical at the growth phases," says one small business owner; "But be careful not to overextend yourself."