How will you fund your business?

How will you finance your business? The majority of the initial funding may need to come from you. Personal savings or loans from family and friends finance the majority of business start-ups. Other sources of funding may include bank loans, partners, and private investors.

How will you finance your business?  The majority of the initial funding may need to come from you. Personal savings or loans from family and friends finance the majority of business start-ups. Other sources of funding may include bank loans, partners, and private investors.

When you meet with a lender, you should bring:

  • A resume
  • A listing of personal assets
  • Credit references
  • A business plan

Where do you find the money? Personal sources of funds may include checking and savings accounts, personal loans, second mortgages, home equity, profit sharing, or retirement accounts from former jobs, certificates of deposit, personal assets that can be sold, or credit card borrowing. While credit cards are sometimes used, this type of unsecured debt can be expensive and problematic for a new business. Often times, entrepreneurs do not include a plan on how they will pay back the money. Financial contributions from family, friends, and colleagues may result in a desire to have a voice in how your business is managed.

Types of financing: Financing is typically categorized into two fundamental types: debt financing and equity financing.

Debt financing means borrowing money that is to be repaid over a period of time, usually with interest. Debt financing can be either short-term (full repayment due in less than one year) or long-term (repayment due over one year or more). The lender does not gain an ownership interest in your business and your obligations are limited to repaying the loan. Often the lender will require a security interest in assets of your business to help ensure repayment. In smaller businesses, personal guarantees are likely to be required on most debt instruments; commercial debt financing thereby becomes synonymous with personal debt financing. Debt financing is usually available only after a commitment or expenditure of equity financing from yourself and/or others.

Banks are the primary providers of formal loans. Most banks will make a personal loan to good customers with a good credit rating. Commercial banks, savings and loans, credit unions, and finance companies also provide funding. These institutions will require collateral, be concerned with your character and reputation, want to know about the cash flow of the business, and your willingness as the borrower to risk your own money.

NWBDC, WBIC and NWREDF each operate revolving loan funds. While each of the loan programs is slightly different in the eligibility, uses, and repayment of funds, none are used as the primary lender of a project and will require that some of the funding of the project is from another source. Eligible applicants must be located in one of the ten Northwest counties of Wisconsin served by the Northwest Regional Planning Commission (NWRPC). All loans will require collateral, job creation or retention, equity injection and personal guarantees.

Equity Financing describes an exchange of money for a share of business ownership. This form of financing allows you to obtain funds from investors without incurring debt; in other words, without having to repay a specific amount of money at any particular time. The major disadvantage to equity financing is the dilution of your ownership interests and the possible loss of control that may accompany a sharing of ownership with additional investors. The equity holders or investors are the "owners" of the company and participate directly in the success or failure of the company to the extent of their investment. Types of early stage equity investing include angel investors, venture capital firms, and certified capital companies. WREF is a community-based venture capital company managed by WBIC.

Selecting your Financial Institution

How do you decide where to seek financing?

  • Consult an attorney or accountant familiar with your type of business
  • Shop around and talk to different bankers to find one with an understanding/appreciation of your type of business
  • Network with other small businesses
  • Research several institutions to find the one that is the best fit for you. Banks offer different business services and their rates will vary.

Questions to Ask a Financial Institution/Banker May Include

  • Have they financed this type of business before?
  • What is the average size of the loans they finance?
  • What are their professional backgrounds, especially in terms of whether they are commercial or consumer lenders?
  • Do they have the level of lending authority you need?

When meeting with the financial institution/bank:

  • Make an appointment – do not walk in "cold" to make a loan request.
  • Remember that first impressions are lasting.
  • Be prepared - the better prepared you are the better reception you'll get.
  • Find out how they handle loan requests – verbal presentation first, and/or submitting a written loan request prior to meeting face to face.
  • Follow up on any questions for which you do not have answers.
  • Listen carefully to their suggestions or proposals.
  • Set time-frame for follow-up/review

Questions you may be asked:

  • Do you have experience operating a business?
  • How committed are the chief operators to the business?
  • Can the business repay the loan? (Will cash flow be greater than debt service?)
  • Can you repay the loan if the business fails? (Is the collateral sufficient?)
  • How will your business collect its bills?
  • How will your business control its inventory?
  • How will your business pay its bills?
  • How will your business control expenses?
  • Will you have any discretionary cash flow?
  • What is the future of the industry?
  • Who is your competition and what are their strengths and weaknesses?