Question

Suppose you are a business consultant. You have just taken a client, a manufacturer of soap-dispensing bottle brushes. The client has decided to set the business up as private company. Everything is done, he just wants to know how to finance the business & has come to you for advice. Write a report for your client recommending the appropriate sources of finance for this business & also explain why this recommendations. And why other sources of finance would not be appropriate? Since, the client is the start-up phase, you should initially focus on sources of finance appropriate for that phase of business's life-cycle, but in order to provide quality service to the client, also recommend best sources of finance for future expansion of the business.

Answer 1

A manufacturer of soap-dispensing bottle brushes is small business. Every small business sometimes needs loans to meet their daily operations needs until their earning assets are sufficient to cover their working capital needs. As the business grows and their own assets enable them to earn money, they can repay the working capital loan to the bank.

Most banks will not issue SBA loans to start-up companies. They require a couple years in business or, when do they lend to start-ups, they generally expect the business owners to have experience in the industry. As a start-up, it can be hard to raise capital. So I cannot recommend traditional bank loan.

I recommend approach investors. If you have an established relationship with an investor, you can ask them for the funds you need to buy assets for your business. Then, you can use these assets to secure a loan with a commercial bank or other lender. You might want to consider a Small business Administration loan.

Here are five steps to help you qualify for a small-business loan.

1. Build credit scores.
2. Know the lender's qualifications and requirements.
3. Gather financial and legal documents.
4. Develop a strong business plan.
5. Provide collateral.

1. BUILD PERSONAL AND BUSINESS CREDIT SCORES

Your personal credit score ranges from 300 to 850 (the higher, the better), and evaluates your ability to repay your personal debts, such as credit cards, car loans and a mortgage. The FICO score, commonly used in lending decisions, is based on five factors: your payment history (35% of your score), the amounts owed on credit cards and other debt (30%), how long you’ve had credit (15%), types of credit in use (10%) and recent credit inquiries (10%). Small-business lenders require a personal credit score for loan applications because they want to see how you manage debt.

2. KNOW THE LENDER’S MINIMUM QUALIFICATIONS AND REQUIREMENTS

Meeting a lender’s minimum qualifications and requirements will make you a stronger applicant. Some lenders may offer some flexibility if you’re underperforming in one area but over performing in another, but your best chance of getting approved is meeting or exceeding all of their minimums.

Borrowers typically need to meet minimum criteria related to credit scores, annual revenue and years in business. And lenders generally frown upon recent bankruptcies and other past delinquencies.

If you’re looking for loans backed by the U.S. Small Business Administration, you have to meet additional SBA loan requirements. Your business must meet the SBA’s size standards because these loans are only for small businesses. Borrowers typically need to have strong personal credit and business revenue, and must be current on all government loans with no past defaults. So if you’ve been late on a federal student loan or a government-backed mortgage, you’ll be disqualified.

3. GATHER FINANCIAL AND LEGAL DOCUMENTS

Banks and other traditional lenders typically ask for a wide range of financial and legal documents during the application process. They can include:

1. Personal and business income tax returns
2. Balance sheet and income statement
3. Personal and business bank statements
4. A photo of your driver’s license
5. Commercial leases
6. Business licenses
7. Articles of incorporation
8. A resume that shows relevant management or business experience
9. Financial projections if you have a limited operating history

4. DEVELOP A STRONG BUSINESS PLAN

Lenders will want to know how you plan to use the money and will want to see that you have a strong ability to repay. They may require a solid business planthat details the purpose of the loan and how you expect it to increase profits.

Your business plan should include current and projected financials, and clearly demonstrate that your business will have enough cash flow to cover ongoing business expenses and the new loan payments. This can give the lender more confidence in your business, increasing your chances at loan approval. Your business plan should include:

1. Company description
2. Product and/or service description
3. Management team
4. Industry analysis
5. Facilities and operations plan
6. Promotional, marketing and sales strategy
7. SWOT analysis (strengths, weaknesses, opportunities, threats)

5. PROVIDE COLLATERAL

To qualify for a small-business loan, you may have to provide collateral to back the loan. Collateral is an asset, such as equipment, real estate or inventory that can be seized and sold by the lender if you can’t make your payments. It’s basically a way lenders can recover their money if your business fails.

SBA loans require “adequate” collateral for security on all loans, plus a personal guarantee from every owner of 20% or more of the business. A personal guarantee puts your credit score and your personal assets on the hook.

For expansion of the business you can take traditional bank loan on your growing business credit.