What You Will Need to Get Small Business Finance

Poor credit is no barrier to small business owners wishing to obtain business finance. When a small business owner plans to expand business and finds that he has already used up available sources of funding and getting additional finance through regular sources may be too time-consuming, then finance from “non-conventional” sources may be a better option.

What would be the requirements for a business owner to obtain small business finance?

A running business

Startups are precluded from obtaining this type of finance on soft terms. In order to be eligible, a business must be in operation for at least a year.

A minimum amount of sales per month

Someone who has started the business recently and is generating revenues of less than $ 10000 by way of credit card sales may not be eligible for small business funding unless the case is assessed and considered on other grounds such as a potential for growth that the owner can justify and support.

Documentary proofs

Small businesses are usually proprietary types. A business owner, even one with poor credit, should not hesitate to obtain small business capital even if it means paying a higher interest amount because it can help him get back on track to fast growth. The documentation is minimal. He needs to submit proof of ownership. The other documents he must provide are bank statements for the previous six months, proof of identity and proof of residence.

An applicant may wish to get small business finance within 3 to 5 days for which he should apply online and keep ready scanned copies of the above-mentioned documents. These may be uploaded along with the preliminary application. Should the application be approved he may be required to furnish printed copies.

What is not required for the small business loan?

• An applicant need not have a stellar credit history.

• He may not have to furnish collateral or mortgage property.

• He may not have to furnish a guarantor.

It is fast. It is easy. However, there are a few things to keep in mind. An applicant must consider the factor rate applied. This is a fancy term for rate of interest though it is not specifically so mentioned. Repayment may range from 3 months to even as long as 36 months and it is tied to the credit card sales as a percentage of daily turnover or a fixed monthly amount. Should sales be high repayment is completed in a shorter time. In real terms, an applicant may end up paying processing charges plus interest that can be as high as 50% because the loan is unsecured. The best thing to do is to examine the offer and obtain such funds only from a lender who does not charge anything upfront, no processing charges and applies a moderate interest rate.

It is easy to get this type of finance if one has a running business but repayment is the tough part. Small business owners would do well to keep in mind to plan to use funds to generate more revenues instead of paying off existing debts.

Sources of Business Finance

Sources of business finance can be studied under the following heads:

(1) Short Term Finance:

Short-term finance is needed to fulfill the current needs of business. The current needs may include payment of taxes, salaries or wages, repair expenses, payment to creditor etc. The need for short term finance arises because sales revenues and purchase payments are not perfectly same at all the time. Sometimes sales can be low as compared to purchases. Further sales may be on credit while purchases are on cash. So short term finance is needed to match these disequilibrium.

Sources of short term finance are as follows:

(i) Bank Overdraft: Bank overdraft is very widely used source of business finance. Under this client can draw certain sum of money over and above his original account balance. Thus it is easier for the businessman to meet short term unexpected expenses.

(ii) Bill Discounting: Bills of exchange can be discounted at the banks. This provides cash to the holder of the bill which can be used to finance immediate needs.

(iii) Advances from Customers: Advances are primarily demanded and received for the confirmation of orders However, these are also used as source of financing the operations necessary to execute the job order.

(iv) Installment Purchases: Purchasing on installment gives more time to make payments. The deferred payments are used as a source of financing small expenses which are to be paid immediately.

(v) Bill of Lading: Bill of lading and other export and import documents are used as a guarantee to take loan from banks and that loan amount can be used as finance for a short time period.

(vi) Financial Institutions: Different financial institutions also help businessmen to get out of financial difficulties by providing short-term loans. Certain co-operative societies can arrange short term financial assistance for businessmen.

(vii) Trade Credit: It is the usual practice of the businessmen to buy raw material, store and spares on credit. Such transactions result in increasing accounts payable of the business which are to be paid after a certain time period. Goods are sold on cash and payment is made after 30, 60, or 90 days. This allows some freedom to businessmen in meeting financial difficulties.

(2) Medium Term Finance:

This finance is required to meet the medium term (1-5 years) requirements of the business. Such finances are basically required for the balancing, modernization and replacement of machinery and plant. These are also needed for re-engineering of the organization. They aid the management in completing medium term capital projects within planned time. Following are the sources of medium term finance:

(i) Commercial Banks: Commercial banks are the major source of medium term finance. They provide loans for different time-period against appropriate securities. At the termination of terms the loan can be re-negotiated, if required.

(ii) Hire Purchase: Hire purchase means buying on installments. It allows the business house to have the required goods with payments to be made in future in agreed installment. Needless to say that some interest is always charged on outstanding amount.

(iii) Financial Institutions: Several financial institutions such as SME Bank, Industrial Development Bank, etc., also provide medium and long-term finances. Besides providing finance they also provide technical and managerial assistance on different matters.

(iv) Debentures and TFCs: Debentures and TFCs (Terms Finance Certificates) are also used as a source of medium term finances. Debentures is an acknowledgement of loan from the company. It can be of any duration as agreed among the parties. The debenture holder enjoys return at a fixed rate of interest. Under Islamic mode of financing debentures has been replaced by TFCs.

(v) Insurance Companies: Insurance companies have a large pool of funds contributed by their policy holders. Insurance companies grant loans and make investments out of this pool. Such loans are the source of medium term financing for various businesses.

(3) Long Term Finance:

Long term finances are those that are required on permanent basis or for more than five years tenure. They are basically desired to meet structural changes in business or for heavy modernization expenses. These are also needed to initiate a new business plan or for a long term developmental projects. Following are its sources:

(i) Equity Shares: This method is most widely used all over the world to raise long term finance. Equity shares are subscribed by public to generate the capital base of a large scale business. The equity share holders shares the profit and loss of the business. This method is safe and secured, in a sense that amount once received is only paid back at the time of wounding up of the company.

(ii) Retained Earnings: Retained earnings are the reserves which are generated from the excess profits. In times of need they can be used to finance the business project. This is also called ploughing back of profits.

(iii) Leasing: Leasing is also a source of long term finance. With the help of leasing, new equipment can be acquired without any heavy outflow of cash.

(iv) Financial Institutions: Different financial institutions such as former PICIC also provide long term loans to business houses.

(v) Debentures: Debentures and Participation Term Certificates are also used as a source of long term financing.

Conclusion:

These are various sources of finance. In fact there is no hard and fast rule to differentiate among short and medium term sources or medium and long term sources. A source for example commercial bank can provide both a short term or a long term loan according to the needs of client. However, all these sources are frequently used in the modern business world for raising finances.

Top Signs That You Need Small Business Finance

It is easy to start a business. To keep it rolling and then grow is the tough part. As one goes along there will always be instances of cash crunch that prove to be roadblocks to further progress. Smart businessmen always keep lines of finances open so that they can take care of such situations. That is not the only reason to have a line of funding; growth and expansion are also equally viable reasons to have access to funds. There are signs that you need finance for small businesses.

Pay vendors and pay salaries

You are already running a business and your funds are committed. It depends on cash flows to keep it running. All of a sudden a customer may delay payment but you must meet your commitment to vendors and to employees. You may consider borrowing from friends or relatives but there is no guarantee they will be forthcoming. This is when you need small business finance from the right lender. There is nothing wrong in borrowing if one has receivables incoming but which are delayed for some reason or the other.

You secure a large order

Small businesses need large orders in order to make a big leap. If a businessman secures a large order the problem is how will he execute it? He needs to buy raw materials, processes it and supplies it. He needs funds to buy materials and then he must manage while the materials are processed and supplied. It takes time from when he invests to when he recovers the money. This is when small business finance comes in handy. He can process orders quickly and by satisfying customers he can expect even more orders.

Expansion

One may start small and as one grows one finds that the present circumstances stand in the way of growth. Equipment may not be capable of high production that the growing business requires. Premises may be too small and cramped. This is the right type to access finance for small business and expand production capability and move into larger premises. One can engage more staff. It is necessary to take this step and expand or just be left behind as customers cannot wait for orders to be executed and they are likely to shift their business elsewhere.

Promotions

A business may have a satisfactory number of clients but it must always engage in promotions, especially during some seasons. Promotions help keep the business visible and attract new customers and one can explore regular channels as well as others such as online. Periodic campaigns will net more customers and help the business sell its products in bulk. Obtaining finance for small business for these purposes will pay rich dividends.

All these signs that a business needs extra finance may or may not occur concurrently. However, they do happen and a businessman is always alive to the signs and takes immediate action to access funds that will help him progress to the next level.