Preparation is key to many things in life. Business financing is no different. In order to properly prepare and position yourself for the journey, make sure you are very familiar with the following 7 steps that may determine your ability to get the financing you seek.
DEFINITION of ‘Financing’ the act of providing funds for business activities, making purchases or investing. Financial institutions and banks are in the business of financing as they provide capital to businesses, consumers and investors to help them achieve their goals.
- Personal credit score. Everything in today’s headlines is about credit and if it’s still available to the small business owner. This affects start-ups (less than 2 years in business) as well as experienced companies. Be familiar with the information stored about you on all three reporting bureaus, TransUnion, Equifax and Experian. Understand the FICO range, 300-850, and know your score. Strong credit is generally considered 720 and above. Many leasing companies will consider applications with minimum scores of 650. Make sure you know what your credit history says about you before applying.
- Collateral. Collateral is widely required for many financial products, unless you are specifically seeking an unsecured financial solution. Collateral becomes even more important if your credit is not strong. Lenders are generally credit or collateral based; you must be strong in one area of the other. The $125,000 equipment you are looking to lease may not even qualify as stand-alone collateral for the lease or loan; additional collateral may be required, such as real estate or additional equipment already in your ownership.
- Ability to repay debt. It’s great that you’ve determined how much you need, but how will you pay the debt? Businesses often take months before they generate enough revenue to completely cover debts. Lenders know this. They’ll want to analyze your current revolving debt amount from your credit history, your business bank statements, personal financial statements, as well as your most recent profit and loss statements. You should review this information prior to making application to ensure you can make the necessary payments.
- Proof of ownership. Be prepared to disclose 100% ownership of your business, although you may only need to provide financial information on anyone who owns 20% or more of the business. IRS documents are normally used to verify business ownership.
- Planned use of equipment or cash. It’s simply not good enough to say you want the equipment or that you need the cash for your business. You must be able to show the equipment is essential to your business or how the additional capital will help you purchase inventory to grow your business or consolidate your debt. Be prepared with detailed equipment listings from the vendor, including product specifications, intended location of use and delivery dates.
- Understand the terminology. Personal injection is not a self-induced vaccine shot. It often refers to the down payment or investment amount the business owners bring to the financial transaction. To fully understand your lease payment alternatives, you must know the difference between FMV and $1 out option. Do you know the difference between interest rates and a money factor or how to calculate your loan to value (LTV) ratio? Most terms can be easily researched on the Internet, but if you unsure of how a term affects your transaction stop and ask the financial professional you’re working with to explain each unknown term to you.
- Finally, remember it is just business, nothing personal. No one will ever be as passionate about your company or business idea as you. If your financial broker or lender doesn’t get the same emotional feeling about your products and services as you do, it’s because they’re not supposed to. Lenders are primarily interested in evaluating transactions as risk factors against the likelihood of them getting fully paid on their investment. A good financial partner may even need to remind you of this to better prepare you for submission of your credit application.
Resources at Amazon Corner
- Business Finance
- Corporate Finance for Dummies
- Entrepreneurial Finance, Third Edition
- Finance Basics
- Focus on Personal Finance
- Multinational Business Finance
- Reasons for seeking finance
- Why 99.95% of Entrepreneurs Should Stop Wasting Time Seeking Venture Capital
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