• News
  • SAN DIEGO
  • Finance

Financing your business — the basics

Related Special Reports

The U.S. Small Business Administration (SBA) and its partners help millions of existing and prospective small business owners start, grow, and succeed. They help with SBA loans, counseling, training and contracts. SBA also helps businesses and families recover from disasters with loans and is a voice for small business, helping reduce regulatory impact. Each month, this section provides information to start, expand, and manage small business.

While poor management is cited most frequently as the reason businesses fail, inadequate or ill-timed financing is a close second. Whether you’re starting a business or expanding one, sufficient ready capital is essential.

Before inquiring about financing, ask yourself some questions. Do you need more capital? How do you define your need? Do you need money to expand or as a cushion against risk? How urgent is your need? You can obtain the best terms when you anticipate your needs rather than looking for money under pressure.

How great are your risks? All businesses carry risks, and the degree of risk will affect cost and available financing alternatives.

In what state of development is the business? Needs are most critical during transitional stages.

For what purposes will the capital be used? Any lender will require that capital be requested for very specific needs.

What is the state of your industry? Depressed, stable, or growth conditions require different approaches to money needs and sources. Businesses that prosper while others are in decline will often receive better funding terms.

Is your business seasonal or cyclical? Seasonal needs for financing generally are short term. Loans advanced for cyclical industries such as construction are designed to support a business through depressed periods.

How strong is your management team? Management is the most important element assessed by money sources.

Perhaps most importantly, how does your need for financing mesh with your business plan? If you don’t have a business plan, write one. Lenders will want to see your plan for the start-up and growth of your business before they finance it.

There are two general types of financing: equity and debt financing. The more money, or equity, you have invested in your business, the easier it is to attract financing. If your firm has a high ratio of equity to debt, you should probably seek debt financing.

However, if your company has a high proportion of debt to equity, you should increase your equity before you borrow additional money. That way you won’t be over-leveraged to the point of jeopardizing your company’s survival.

There are many sources for debt financing: banks, savings and loans, commercial finance companies, and the SBA are the most common. Many state and local governments have small business lending programs. Family members, friends, and former associates are also potential sources.

Traditionally, banks have been the major source of small business funding. Their principal role has been as a short-term lender offering demand loans, seasonal lines of credit, and single-purpose loans for machinery and equipment. Banks generally have been reluctant to offer long-term loans to small firms.

The SBA guaranteed lending program encourages banks and non-bank lenders to make long-term loans to small firms by reducing their risk and leveraging the funds they have available. Visit www.sba.gov/financing/index.html for more information on SBA loan programs.

Additional equity can be sought from non-professional investors such as friends, relatives, employees, customers or industry colleagues, although venture capitalists are the most common source.

Most specialize in one or a few closely related industries. Most venture capitalists prefer three- to five-year-old companies that have the potential to become major regional or national businesses and return higher-than-average profits. You may contact these investors directly, although they typically make their investments through referrals. The SBA licenses Small Business Investment Companies, which make venture capital investments in small businesses. Check the Web site www.sba.gov/INV/forentre.html for more information.

Small business success

The Dinner Studio was born out of the realization that almost nobody has time to cook on a regular basis anymore and that more people these days are turning to convenience meals.

Dinner Studio co-owners, Katherine Christensen and Gloria Otten, shared similar views on the need for an affordable and convenient way for families in San Diego to eat well everyday.

The Dinner Studio combines the best aspects of a personal chef service and fast meal preparation at an affordable price. The Dinner Studio’s goal is to create a space in which you can create the bulk of your monthly meals in a few hours, with as little stress and as much help as possible.

The Dinner Studio opened its first location in 2003 in Vista and added a second location in Tierrasanta this June. The expansion was funded in part by SBA guaranteed loans through US Bank.

The two locations enjoy a regular clientele of 800 families today, and with the planned addition of several new locations, have a goal of expanding that number to 1,600 by the end of 2006. Christensen and Otten are also clients of the Small Business Development Center - North San Diego County. In the beginning, they received help developing their marketing plan, consultation regarding the process of incorporating, and more.

User Response
0 UserComments