by guest contributor
Jeff Clawson, Chief Credit Officer
Growth Opportunity Partners, Inc.
You had an idea, your friends and family told you that you were on to something, you decided to go for it, and now you’re looking for capital for your new small business.
Access to capital to start or grow a small business is a big topic. I’ll try to draw back the curtain on the process and give you a few tips to make your search easier.
First, be prepared. When I say “be prepared,” I mean that when you are ready to borrow, or when you think you are, you need to put in some time to figure out your numbers. The numbers I am referring to include your credit score, the cost of the project you want to finance, how much you think you want to borrow, your cash flow, and the value of potential collateral.
We could do an entire newsletter on each of these topics but, I’ll hit each one quickly;
- Your credit score is important; know it, understand as much about it as you can. Many services are available to get, monitor, and improve your credit score. (In today’s world, we should all do this anyway). Your credit reflects how you handle your finances, and funders use that as a proxy for how you would manage your small business’s finances.
- Understand your project cost as best you can. Get quotes on services or equipment and think about hidden expenses that are part of the project. For example, if you buy a welder that runs on 220v but, your garage has 110v service, you’ll need to upgrade to 220v, which should be part of the project cost. Determine if the project can occur in stages and what each stage would cost.
- Get a good idea of what cash flow is. Figuring cash flow can get complicated but doesn’t have to be. You need a feel for the cash that comes into and goes out of the business so you know what size payment you can afford.
- Determine the amount you want to borrow. Once you know the project cost and how much cash flow you have access to, you need to figure out where to get the money. Sources of funding for your project would include the money you have on hand (sometimes called your “equity” in the project) as well as the money that you will borrow. Please, NEVER approach a bank or funder and ask, “how much can I get?” because this gives the impression you haven’t got this all figured out. Instead, base the amount you seek to borrow on the project cost and the business’s ability to make payments.
- Lastly, get behind the value of your potential collateral. Funders and banks want collateral for most loans that they provide. Some collateral is better than others. Hard assets such as home equity or equipment have easily determined values. Valuation of customer lists or trademarks is subjective and not as readily confirmed. Understand that lenders have limits for what they will lend against most types of collateral and those limits vary from lender to lender.
It’s hard to put into a short column like this everything that I would tell you about searching for capital when your small business has a project to finance, and this one only hits the high points. If you have questions or want to talk about finding capital your business needs feel free to get in touch. I’d be happy to talk about it with you. Please reach out to Sean Brady and he will make the connection.
About the author
Jeff is the Chief Credit Officer at Growth Opportunity Partners, Inc. His background is in underwriting for commercial banking and small business banking. He takes an active role in the business development and qualification of prospective clients to determine their alignment with the mission of Growth Opportunity Partners.
Before joining Growth Opportunity Partners, Jeff was a Senior Credit Officer at KeyBank’s Credit Campus in Brooklyn, Ohio, responsible for a team of underwriters managing small business loans throughout Ohio, Michigan, and Indiana.
Growth Opportunity Partners, Inc.