The basics of arranging finance for your small business.

Poor planning and management definitely results in a failure but then an equally important reason cited for business failure is insufficient or inopportune financing. Funds are needed both at the times of expansion and during the starting up phase. Again availability of funds is not the only requirement, what is required alongside is good knowledge of small business loan source and proper planning to manage the funds in the most efficient manner. An entrepreneur with a good sense of financial planning will be able to avoid common mistakes like getting the wrong type of financing, inability to judge the right funds requirement, or remaining ignorant about the cost of borrowing money.

Before you begin looking for financing options for your small business here are a few issues that you need to contemplate on.

1. Is it possible for you to manage a small business loan source with the existing cash flow or additional capital is required

2. What is the exact requirement that is whether you need funds to expand, to set up or to make provisions for risk

3. The urgency of the financial requirement. It is better to anticipate future fund requirements rather than looking for funds under intense pressure.

4. What are the evident risks along with their degrees The type and degree of risk what affects the cost and availability of funding alternatives.

5. During the development stage and transitional stages the needs for funds are more critical.

6. The purpose for which you require funds should be clear, as most lenders will provide you with capital based on your specific needs.

7. The current status of the industry matters, like whether the industry is going through a depression, is stable or is growing at a fast rate. There are different approaches and different money requirements for each of these states. The cost of the funds and resources will also vary according.

8. What is the type of your small business loan source revenue flow is it seasonal, constant or cyclical Seasonal requirements are mostly for a short term and cyclical industries generally require support during the depression phases.

9. The strength of the management team running your small business is an important element to be considered by most money resources.

10. Due attention should be given to how well your finance needs gel with the business plan. A very composed business plan would normally enlist out the capital requirements for starting up and the growth phase making it easier for you to allocate the right capital resources for each phase.

Now lets move on to understand the different types of financing alternatives. What we are going to discuss here are the two main types of financing which are equity financing and debt financing. When you begin your search for funds for your small business there is a one main consideration:

* Your businesses debt to equity ratio which is the relation between the amount of money that you have borrowed and the amount of money that you have invested in your business.

If the small business loan source owner has made good investments in his small business it will be easier for him to attract and convince financing firms. On the other hand if this ratio is high you should look forward to getting debt financing. However, you can also work along the lines of increasing your ownership capital to generate funds through equity financing. Doing this, will reduce the vulnerability of your company to getting shut down, because of over leveraging.

Equity based financing:

Equity financing is a more frequently used method of generating funds for setting up a business as also for the growth of business. Normally a small business owner can acquire additional equity for his business through nonprofessional investments such as funds coming in from friends and relatives, customers or at times from industrial colleagues. However on the professional front the most common and the most suited equity source is venture capital. Venture capitalist may be seen as an institutional risk taker and generally they are formed by a group of prosperous individuals, they can also be government assisted resources or at times some big financial institutions. Venture capitalists usually specialize in one or two closely related industries.

The main idea with which the venture capitalists work is to find businesses which will get them higher returns for the money that they invest in such businesses. Venture capital for startups is a little difficult as they generally prefer companies which are three to five years old and have immense potential to become leaders in a short Span of time, which is possible only if you show above average profits. Some of the main concerns of the venture capitalists are a business with competitive and innovative abilities to beat the competitors and of course they prefer to invest in industries which show good growth prospects.

Each venture capitalist may have a different approach to the management of the business in which he invests his money. Mostly their influence is passive, but if the business is not performing as per expectations they may impose pressure to change the management or the strategy. One of the main disadvantages of taking venture capital is that you will need to surrender a certain amount of decision making authority and of course profits too to these capitalists.

Debt based Financing:

Debt financing can be had from a multitude of sources such as banks, commercial finance companies, individual lenders and SBA (small business administration promoted by the government of U.S.). Several programs have been designed over the recent years by the state and the local governments to egg on the growth of small businesses, considering the positive impact that these businesses have on the economy.

Over the ages the banks have been the biggest source for this type of funding for small businesses. The principal role played by them is that of a short term lender providing demand loans, machinery and equipment financing and seasonal lines of credit. Banks normally avoid giving long term loans for small businesses but with the SBA guarantee they are able to endow small businesses with loans. The SBA guarantee, stands to reduce the risk and leverage the funds, thus encouraging not just the banks but even the other lending institutions to come forward. There are thousands and thousands of firms who have reaped the benefits of SBA guarantee.