A small business is one with less than a hundred employees for a wholesaler and less than 500 employees for a manufacturer or a small retail business with average three yearly sales of less than six million dollars. Once you set up a small business with a respectable turnover, you need access to cheap finances for various expansions and to set up new projects. Most financial institutions hesitate to give loans to small businesses because they are prone to bankruptcy and the loans turn in to bad assets. However there are organizations like the SBA set up by the federal government specially for small business financing. They give loans for working capital, at reasonable rates of interest.

Need for finance

When you start a small business, whatever your area of specialization, you need money for various purposes. Some of the money is your own while you need from other sources to supplement this. You need money; to incorporate and register your business .You need capital for purchasing fixed assets like land, building, and machinery. Estimate your expenses for the first few months to decide the amount of loan required. You need working capital to keep your business running. You may need to buy inventory in bulk before the start of the season and to avail of discounts. Secondly, creditors and customers always take between thirty to sixty days to repay the outstanding amounts. To tide over this interim period you need loan from external sources. Hence, create a list of variable and fixed expenses to arrive at an amount for the loan.

If you are an established business, you need finance to start a new unit or to set up shop in a new city. Sometimes your business may face a downswing and you need finance to tide over this critical period.

Types of finance

• Short-term finance-You need this to finance costs like accounts receivable or inventories. Short-term generally indicates a period of a year or less.

• Long-term finance This indicates need for capital for a number of years, like purchasing land or equipment.

• In case your company has a steady growth pattern, you must take long-term financing to cover recurring short-term expenses.

• Things to keep in mind when applying for finance

The bank or the SBA will check your repayment ability first before approving your loan. You must have your accounts in order and provide your balance sheet for evaluation to the lender. The lender will analyze if you can return the loan based on your past performance and the collateral offered for the loan. A collateral is an asset that you can sell to repay the loan in case of a default. If you have no assets, you may require a cosigner with a collateral to get the loan. An established small business will get financing easier as compared to a new business that will have to give detailed explanations about its loan repayment.

All lenders will examine your creditworthiness by going through your credit report. The credit report contained details of all credit that you have taken in the past, the repayment, and the default on repayments. In case you have an adverse remark in the credit report, you will have difficulty in getting a loan for your business. Therefore, you can take a copy of your credit report from the agency and then prepare a detailed explanation for your defaults. Moreover, you must check for any mistakes in the report and get the necessary corrections before applying for the loan.

The lender will check for the owners equity in the business. It indicates the level of interest and commitment of the business owner to his venture. This must be at least twenty percent so that they can leverage this equity to grant the loan. Usually lenders will give you up to four times the equity amount as the loan. Lenders also see how much experience you have in running the business. In case you are a novice, you must hire professionals with proper experience in your field of business. This gives lenders the confidence that the business has the proper leadership to help it achieve its goals.

Documents needed when applying for a small business loan

You need to give a brief description of your business, annual sales, and the ownership. Explain then purpose of the loan, how the loan will be utilized, and the loan amount required. You need to include copies of your balance sheet for the past three years and the current financial statements. You must also include copies of the cash flow statement and income statement for the same period. Indicate the accounts receivable and payable. As the owner, you need to give your personal financial statements indicating your assets and liabilities and the tax returns for the past three years. Most importantly, give cash flow projections and budgets over set time limits that indicate how you will repay the loan. You may need to include copies of a lease agreement, franchise agreement, contracts, partnerships, and articles of incorporation, among others.

Types of financing available

You can get the basic loan guaranty from the SBA for working capital, and purchase of fixed assets among others. This is ideal for a new business and is available through commercial lending institutions. The loan tenure is ten years for working capital and 2 years for fixed assets.

A variation of this loan is the CDC 504-loan program for community development. This is meant for small businesses requiring capital to purchase land or equipment. The borrower contributes ten percent of the loan and the balance comes from a private non-profit lender. The aim of the loan is to develop the local communities through a public private partnership.

A third type of loan is the micro loan for non-profit small businesses needing technical assistance for modernization and expansion. The SBA gives a loan of $35000 for working capital requirements. The SBA guarantees the loan that is disbursed through an intermediary. This intermediary also provides management expertise to the small business.

The SBA has a prequalification facility for small businesses. In this, applicants can have their loan application examined for correctness. This ensures that they will get the loan of $250,000 from the SBA. This facility is for minorities, women, and disabled war veterans who want to start small businesses.

In sum, these are the various aspects of financing for a small business. You can therefore apply for financing and get a loan approved for your small business.