Breaking The Myths of Small Business Funding
Tuesday, March 15, 2016
by Kelly Weaver, Small Business Development Center Regional Director
Over the years I have worked with hundreds of existing and prospective business owners. There are some common myths that I hear, particularly from those new to small business financing.
Grant Money – In general, there is NOT grant money to fund for-profit business activities. Two exceptions exist in very niche areas: persons with a qualified disability and businesses doing research focused on Federal agency priorities. Beyond this, “free” money may come in the form of prizes for business plan competitions or other contests offered randomly by private organizations.
Personal Credit – Your personal credit score DOES affect your ability to get money for your business. Funders view your credit score as a reflection of how well you manage money. Those habits will flow over into your business operation where cash flow management is critical. If there are extenuating circumstances for a low credit score, tell your story. Also be sure to review your credit history to confirm there are no errors adversely affecting your score. Free credit reports can be obtained at www.annualcreditreport.com.
Down Payment – Funders expect you to bring something to the table. Cash is preferred but assets to be used in the business (equipment, inventory, vehicle, etc.) can also be considered part of your down payment. Generally speaking, traditional lenders would expect 20% or more of the business to be funded by the owners. Public lenders may be willing to accept as little as 10%. The exact amount is dependent on the specifics of each project.
Equity vs. Collateral – These terms are often confused. Equity is the cash or assets the owner(s) is investing in the business, i.e., the down payment discussed above. Collateral is the assets that are pledged to your loan. Business assets will be used as collateral but often personal assets must also be offered as collateral. Owners are also expected to sign a personal guarantee. Lenders want you to pay back their loan with profits you make from the business. If that does not happen, however, they will look to the collateral as the second way to recover their funds.
Beyond these myths, there can also be confusion about funding options for your business. There are many funding sources that are available but not all sources fit every project and some sources are more expensive than others. Each business is unique and therefore the funding sources are unique to each project. Helping business owners figure out these options is one of the valuable resources that the Small Business Development Center can offer. We can help explain what programs are a match and help brainstorm other options to consider. Understanding the basic tenets of business financing and options available is critical to providing a solid foundation for your business.
Kelly Weaver is the Regional Director of the Small Business Development Center in Aberdeen which offers free, confidential business consulting to start up and existing businesses. She can be reached at (605) 626-2565 or firstname.lastname@example.org. The Center is hosted by GROW South Dakota (also known as Northeast South Dakota Community Action Program).
Category: GROW SD