Financial help for entrepreneurs
Financial Assistance for Small Businesses
One key to a successful business start-up and expansion is your ability to obtain and secure appropriate financing. Raising capital is the most basic of all business activities. But as many new entrepreneurs quickly discover, raising capital may not be easy.
It is not enough to simply have sufficient financing; knowledge and planning are required to manage it well. These qualities ensure that entrepreneurs avoid common mistakes like securing the wrong type of financing, miscalculating the amount required, or underestimating the cost of borrowing money.
There are several sources to consider when looking for financing. It is important to explore all of your options before making a decision.
- Personal Savings: The primary source of capital for most new businesses comes from savings and other forms of personal resources. While credit cards are often used to finance business needs, there may be better options available, even for very small businesses.
- Friends and Relatives: Many entrepreneurs look to private sources such as friends or family when starting out a business venture. Often, money is loaned interest free or at a very low rate, which can be very beneficial when starting out.
- Banks and Credit Unions: The most common source of funding, banks and credit unions will provide a loan if you can show that your business proposal is sound.
Before inquiring about financing, ask yourself the following:
- Do you need more capital or can you manage existing cash flow more effectively?
- 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, make writing one your first priority. All capital sources will want to see your business plan for the start-up and growth of your business.
Approval of your loan request depends upon how well you present yourself, your business and your financial needs to a lender. Remember, lenders want to make loans, but they must make loans that will be repaid. In order to analyze the cash flow of the business, the lender will review the business's past financial statements. If you are starting out, provide a projected balance sheet and income statement for three years.
One of the first things a bank will determine when a person/business requests a loan is whether their personal and business credit is good. Therefore before you go to the bank, or even start the process of preparing a loan request, you want to make sure your credit is good. You will be asked to complete a Personal Financial Statement on yourself and on each of the principal owners of the business.
Financial institutions want to see a certain amount of equity in a business. Equity can be built up in a business through retained earnings or the injection of cash from either the owner or investors. Most banks want to see that the total liabilities or debt of a business is not more than 4 times the amount of equity. (Or stated differently, when you divide total liabilities by equity, your answer should not be more than 4.) Therefore if you want a loan you must ensure that there is enough equity in the company to leverage that loan.
Don't be misled into thinking that start-up businesses can obtain 100% financing through conventional or special loan programs. A business owner usually must put some of her/his own money into the business. The amount an individual must put into the business in order to obtain a loan is dependent on the type of loan, purpose and terms. For example, most banks want the owner to put in at least 20 - 40% of the total request.
There are two types of financing: equity and debt financing. When looking for money, you must consider your company's debt-to-equity ratio - the relation between dollars you've borrowed and dollars you've invested in your business. The more money owners have invested in their 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, experts advise that you should increase your ownership capital (equity investment) for additional funds. That way you won't be over-leveraged to the point of jeopardizing your company's survival.
Financial Assistance Programs
SBA administers three separate, but equally important loan programs. SBA sets the guidelines for the loans while SBA’s partners (Lenders, Community Development Organizations, and Microlending Institutions) make the loans to small businesses. SBA backs those loans with a guaranty that will eliminate some of the risk to the lending partners. The Agency's Loan guaranty requirements and practices can change however as the Government alters its fiscal policy and priorities to meet current economic conditions. Therefore, past policy cannot always be relied upon when seeking assistance in today's market. http://www.sba.gov/financing/sbaloan/snapshot.html
Rochester’s SBA Lenders
FUNCTION: Serves as the SBA’s primary business loan program to help qualified small businesses obtain financing when they might not be eligible for business loans through normal lending channels. It is also the agency’s most flexible business loan program, since financing under this program can be guaranteed for a variety of general business purposes.
Loan proceeds can be used for most sound business purposes including working capital, machinery and equipment, furniture and fixtures, land and building (including purchase, renovation and new construction), leasehold improvements, and debt refinancing (under special conditions). Loan maturity is up to 10 years for working capital and generally up to 25 years for fixed assets.
CUSTOMER: Start-up and existing small businesses, commercial lending institutions
DELIVERED THROUGH: Commercial lending institutions
FUNCTION: Provides long-term, fixed-rate financing to small businesses to acquire real estate or machinery or equipment for expansion or modernization. Typically a 504 project includes a loan secured from a private-sector lender with a senior lien, a loan secured from a CDC (funded by a 100 percent SBA-guaranteed debenture) with a junior lien covering up to 40 percent of the total cost, and a contribution of at least 10 percent equity from the borrower.
CUSTOMER: Small businesses requiring “brick and mortar” financing
DELIVERED THROUGH: Certified development companies (private, nonprofit corporations set up to contribute to the economic development of their communities or regions)
FUNCTION: Provides short-term loans of up to $35,000 to small businesses and not-for-profit child-care centers for working capital or the purchase of inventory, supplies, furniture, fixtures, machinery and/or equipment. Proceeds cannot be used to pay existing debts or to purchase real estate. The SBA makes or guarantees a loan to an intermediary, who in turn, makes the microloan to the applicant. These organizations also provide management and technical assistance. The loans are not guaranteed by the SBA. The microloan program is available in selected locations in most states.
CUSTOMER: Small businesses and not-for-profit child-care centers needing small-scale financing and technical assistance for start-up or expansion
DELIVERED THROUGH: Specially designated intermediary lenders (nonprofit organizations with experience in lending and in technical assistance)
FUNCTION: Allows business applicants to have their loan applications for $250,000 or less analyzed and potentially sanctioned by the SBA before they are taken to lenders for consideration. The program focuses on the applicant’s character, credit, experience and reliability rather than assets. An SBA-designated intermediary works with the business owner to review and strengthen the loan application. The review is based on key financial ratios, credit and business history, and the loan-request terms. The program is administered by the SBA’s Office of Field Operations and SBA district offices.
CUSTOMER: Designated small businesses
DELIVERED THROUGH: Intermediaries operating in specific geographic areas.
Local Financial Resources
In order to create and sustain an entreprenurial environment, the City of Rochester has created the Job Opportunity Benefit (JOB) Loan Program. The purpose is to expand Rochester's small business community and provide increased employment opportunities for low and moderate income persons. To insure that the second goal is met, the business must document that at least 51% of the jobs created or retained will be filled by low and moderate income persons (as defined by HUD).
Funds from this program can be used to acquire land and buildings, construct or rehab buildings, purchase machinery or equipment and be used for working capital. For a confidential appointment to discuss your business idea or financial needs please call Economic Development Manager, Karen Pollard at 603-335-7522.
- Interest rate fixed at time of closing, not to exceed 75% of the prime rate.
- Loan amount is generally between $10,000 to $50,000 with some exceptions.
- Terms up to 15 years, tailored to the economic life of the asset to be financed.
- Collateral - The City will participate in a secured position secondary to a lending institution.
- Financial reporting is similar to that for a bank loan.
The City of Rochester's JOB Opportunity Loan Program is funded by the U.S. Department of Housing and Urban Development (HUD) through a Community Development Block Grant. The JOB Loan Program is an equal opportunity lender. For information (in Adobe format) about our JOB Loan program.
Rochester recognizes the challenges business face when they want to make important sign and facade improvements. To support the efforts of businesses in the three Downtown Business Districts (Rochester, East Rochester and Gonic), the City is offering technical assistance and a supplemental grant of $1,000 when you invest a minimum of $5,000 in improvements. It is suggested that you consult with the Economic Development Department prior to investing in designs to ensure that proposals meet City design guidelines. To qualify for the grant your application must be reviewed and approved before starting your project.