How to finance a small business

Loan guarantees from SBA may be an answer for financing a business.

Financing the growth of a small business takes planning and usually a business plan. I work with many entrepreneurs who want to grow their business but need additional capital to expand. There are many ways to get additional capital, but you will still have to have collateral to obtain financing.

When a small business wants to expand, the owner will have to prove that the company can afford the cost of expansion. The proof comes in the form of a written business plan. The business plan typically includes a detailed income statement from the past three years and pro forma income statements for the next three years, which will project the increase in sales to justify a loan. Along with the income statements are the written narrative of the business plan. Business owners will also have to submit a current balance sheet.

Financing a business will require collateral. If your expansion plans include a new building or property, you will be required to pledge the building, and other assets, for collateral. Most financing comes with a collateral commitment that is pledged to the financing group. Loans are not made for 100 percent of the value of the collateral. Entrepreneurs should declare their net worth on a balance sheet.

Your business net worth is calculated on your balance sheet. When seeking financing, you should have a strong balance sheet with plenty of assets to cover any financing you are seeking. Basically, you have to own more than you owe. But this is really calculated based upon market price of your assets, not necessarily the book value. If your business is showing stress, by ratios calculated using your balance sheet, you may be able to get a loan guarantee.

On a basic business loan from a bank, your bank could apply for an SBA loan guarantee, if your loan officer is concerned about principle repayment. The SBA has many business loan guarantee programs available for small business. You simply have to ask your banker to apply for the loan guarantee.

As an Michigan State Univeristy Extension educator I have many years experience in small business ownership and entrepreneurship You can obtain free business counseling by registering with the MSU Product Center.

Related Articles