Financing Your Business
Financing Your Business
Opening a retail business can be very expensive. You have to secure a location for your business and open utility accounts. You have to buy or lease equipment and fixtures for your store. You need to stock your store with merchandise. The list can go on and on, and many smaller details when added together can amount to a small fortune. Unless you have independent wealth to draw from, you will need to seek financing to get your business up and running for at least three months.
Before seeking the financing, be sure that you understand what your business will need. Start-up capital should consist of the amount of money that you will need to secure and outfit your location. This also includes beginning inventory for your store, advertising, and wages for employees that you will use to help get the store open. Don’t forget professional services like legal fees, insurance, and accountants that you may require before opening. Operating capital will consist of money that your business will require to stay afloat in the face of no or too little income. The IRS does not expect a business to make a profit for the first three years. While you may not be able to secure that much, three months is the minimum that you should anticipate needing. The more operating capital that you are able to secure, the better your company’s chance for survival will be during the first year.
In order to locate the financing, understand that you must be able to market yourself and your business to the finance community. These are not risk takers. You must convince them of your ability and idea. You must show them that you know what your business will look like in the future. Develop a business plan before seeking any loans. You usually must turn over three years of personal or business tax returns and three to five year financial projections. There are consultants who will, for a fee, help you prepare these documents and bind them into packages that will allow you to present them in a professional fashion. Consider this an interview, and include into the package letters of recommendation from others whom you have had business dealings with.
Even with a stellar presentation and excellent credit record, be prepared to have to secure the loans with personal assets. The truth is that most new businesses fail and financial institutions do not want to be left holding the bag. Sometimes they will approve a portion of the loan based on the condition that you find the rest of the money yourself, either through your own savings, inventory financing, or the SBA.
Inventory financing is a line of credit that is dedicated to the purchase of goods for resale. It frees up a business’s cash by keeping your money from being tied up in inventory. Interest is calculated and payable monthly, as well as payments on the principle for items sold. These types of plans are expected for stores that sell large or expensive goods like automobiles – in which case it is called floorplan – or manufactured housing. If you have a franchise, inventory financing is usually offered by the parent company. Many financial institutions will extend it to other types of retail businesses as well.
Finally, do not forget the Small Business Administration. SBA loan programs offer a guarantee to the banks to repay all or a portion of your business debt should you default on the loan. The loan is still a commercial loan and must be structured according to the SBA guidelines. As this is part of the Federal Government, be prepared to fill out mountains of paperwork and expect that it will take longer to receive a rejection or approval than a conventional loan. The SBA also licenses Small Business Investment Companies that use their own funds and money borrowed through the government to invest in small businesses. These companies are privately owned and profit driven, and may need as much convincing as the banks.
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