How to Finance Your Business

A leading cause of small business failure is inadequate start-up capital. Before you begin your new
venture, you must realistically project not only your start-up costs for such things as equipment,
renovations, and promotion, but also your cash flow requirements for the early stages of operation.
It often takes time to build sales levels, yet rent, utilities and other costs are immediate. During this
time, bills are arriving faster than the customers, cash reserves can help the business survive.
Funding needed for start-up and operation of a business is available in two forms: (1) debt capital -
borrowed funds; and (2) equity capital - funds generated through the sale of stock, or by the investment
of the owner.
The terms on repayment of debt capital vary and are negotiated between lender and borrower.
Raising capital through the sale of stock is complex and highly regulated; you should seek legal
advice. More than half of all businesses are started with capital invested by the owner or the
owner’s family. Should you decide that your own resources are insufficient, the traditional sources
of financing are: banks, local, state and federal agencies, and venture capital firms.
In many cases the most fundamental document you will need for a loan application is a business
plan, because it shows the lender your ability to research and envision the establishment and
operation of the firm. In the previous section of this guide, the business plan outline contains several
items marked with an asterisk (*). These items are particular additions for a business plan being
used with a loan application. In addition to the plan, lenders consider several factors in evaluating a
business loan:

Management Experience: your background compared to the skills required for your chosen
business.

Repayment Ability: your realistic projection of business income allows you to maintain loan
payments.

Collateral: your pledge of assets toward business stability and loan repayment.

Credit: your historic and current record of repayment of obligations.
Obtaining a loan requires preparation and credit worthiness, but a bit of sales ability can help. You
will be competing with many other business owners, and knowing what the lender needs when
requesting a loan is just as important as knowing what a customer needs when selling your product.
Many lenders want assurance that:

You have something at risk in starting and operating this business. (Do not ask them to go out
on a limb to back you if you are not out on the limb yourself. You must have resources committed
to your own venture to secure the support of others.)

Your proposal is a sound one based on the 5 C’s of credit: capacity, capital, collateral, character,
and condition (industry).
Refer to Section IV, Pennsylvania Resources for sources of financing