Finding business capital in Arizona

There is little doubt, if any, that finding capital to finance your business venture is the most basic and important of all your business activities. It also can be the most frustrating.

by Bruce L. Hodgman — 

Ask any entrepreneur, actual or potential, what their biggest holdup to launching or growing their business is, and the answer will come quick and sure — money.

There is little doubt, if any, that finding capital to finance your business venture is the most basic and important of all your business activities. It also can be the most frustrating, if you do not know where and how to look — but it need not be so. Finding capital can be a smooth, rewarding experience, provided that you study diligently and plan effectively.

However obvious it may seem, the first thing you need to know before setting out in search of money is how much you need. Here, again, a thorough business plan will be critical in determining your financial needs.

Once you have determined how much money you need, you may consider several sources for financing. It is important to explore all your options before making a decision.

Personal savings — The primary source of capital for most new businesses comes from savings and other personal resources. While credit cards are often used to finance business needs, there are usually better and less expensive options available, even for very small loans. In fact, most lenders will not refinance credit card debt.

Friends and relatives — Many entrepreneurs look to private sources, such as friends and family, when launching a business venture. Often, money is loaned interest-free or at a low interest rate, which can be beneficial for someone who is just getting started.

Banks and credit unions — The most common sources of funding, banks and credit unions, will provide a loan if you can demonstrate that your business proposal is sound. This generally is accomplished with your business plan, which clearly indicates your ability to repay the loan.

Private or angel investors and venture capital firms — These individuals and firms help expanding companies grow in exchange for equity or partial ownership. Most venture firms are seeking larger investments while angels, or private investors, may be willing to put up a smaller amount.

“Be prepared” is an old saying, but one that is very true when seeking capital. Borrowing money from a bank or other financial institutions to start a business — and even for an established small businesse — usually is viewed as difficult. Inexperienced or ill-prepared borrowers do not make matters any easier by submitting incomplete or poorly prepared loan applications, or by showing up without a business plan, prompting lenders to assume that they may be a high risk.

To improve your chances of obtaining a loan, you must be prepared and organized. You must know exactly how much money you need, why you need it and how you will pay it back. You must be able to convince your lender that you are a good credit risk.

Approval of your loan request depends on 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 they know will be repaid. The best way to improve your chances of obtaining a loan if you are a start-up is to craft a well-prepared, comprehensive business plan; an existing business will use a well-written, comprehensive proposal.

A business plan precisely defines your business, identifies your goals and serves as your firm’s resume. It helps you allocate resources properly, handle unforeseen complications and make good business decisions.

Because a business plan provides specific and organized information about your company and how you will repay borrowed money, a good business plan is a crucial part of any loan application. Most, if not all, business lenders require an all-inclusive business plan before they will consider any loan application.

If you need help, the SBA, through their local District Office and resource partners, can help you prepare a sound loan application that will enhance your chances of receiving the funds you need. And if you are initially turned down by a lender or have monthly payments you cannot afford, ask them about an SBA 7(a) loan guaranty. Often, there’s very little additional paperwork, and a guaranty can generally be approved within a short period of time.

For assistance about obtaining capital to start or grow your business, visit SBA’s Web site, atsba.gov/financing/basics/basics.html.

Bruce Hodgman is the deputy director of the United States Small Business Administration in Arizona. [email protected].

Reprinted from AzNetNews, Volume 25, Number 3, June/July 2006.