Business Networking !

You have your business idea, your business plan in tow, your ducks in a row, and you’re ready to get your business off the ground except for one problem – you have no start up capital. Unless you were born into wealth and have it at your disposal, then you are like most small businesses and need a helping hand.

How can you raise start up capital? There are a few ways to go about it:

Small Business Bank Loans
Many financial institutions provide some type of small business loan program. In order to get funding from a bank for your small business, you will need a solid business plan. You’ll have to prove that your business will generate enough cash to make the loan payments. Each bank’s requirements are different but if you are able to articulate how you will succeed, have decent credit, and possibly a co-signer, you may be able to secure a small business bank loan.

SBA (Small Business Administration)
The SBA is a great resource that provides information on requirements, credit factors, how to apply for loans, etc. The web site is a good starting point before attempting to apply at a bank. The better prepared you are, the easier it will be when you begin the application process.

Family & Friends
A lot of small businesses raise start up capital this way. Family and friends usually want you to succeed and believe in your business. It is wise to treat these relationships as real business relationships. Plan how you will repay their loans, the time frame, and at what interest rate.

Angel Investors & Venture Capital Firms
Private angel investors and venture capital firms work primarily in the same way. They invest in the equity of your business and expect a return in the form of an acquisition, IPO, or stock buy back in the future.

The key to any of the above methods is to have a well written business plan. A good business plan will prove that you are serious about your business and that you can demonstrate the way you plan on making it successful.

Most small business borrowers are understandably confused by all of the different interest rates for commercial loans. How does a small business borrower decide what is the “best” rate? Is it the lowest rate or is it more complicated than that?

Commercial loan rates are indeed a source of confusion for most business owners. There are many variables in determining these rates, including the type of business, loan-to-value, length of loan, credit scores, how long rates will be fixed, stated income or tax returns used to qualify, assumable loan or not assumable, and whether recall or balloon features are included/excluded.

If a small business borrower wants the lowest rate, this will usually be found in a short-term bank loan that has recall/balloon terms and other generally undesirable features. Although this type of loan might have the lowest rate, it will not necessarily have the “best” rate. The lowest-rate loan typically involves the worst terms, not the best terms, even though the interest rate might look appealing. Here is a suggested definition of what constitutes the best rate for a business loan: the “best” rate is one which is associated with business loan terms that are not detrimental to the long-term financial health of the commercial borrower’s business.

The concept of “trade-offs” will help small business borrowers when they are confronted by the “lowest” rate versus “best” rate decision. There are two primary definitions of “trade-off” that are relevant to the points made below:

(1) Giving up one thing in return for another.

(2) Balancing of factors that cannot be maximized at the same time.

It is easy to see the concept of “trade-offs” in commercial real estate loan decisions every single day. The most common application is when a lower interest rate is given up in return for more favorable terms such as a longer business loan (25-30 years instead of 3-5 years). Because these trade-offs are by no means obvious to the typical small business borrower, perhaps the most important function that a business loan advisor performs for their clients is a thorough analysis and explanation of the various trade-offs involved in each commercial real estate loan that they provide.

It is critical that this analysis involve more than just the underlying interest rate for each commercial loan program. In fact, one of the most important lessons to be learned from a thorough analysis of “trade-offs” is that the lowest rate is almost never associated with the best deal for the commercial mortgage borrower. As you might imagine, this is extremely hard for most commercial borrowers to understand and accept. Most commercial lenders take the easy way out and sell the lowest-rate loan to their commercial borrowers because it is an easier transaction, but this approach rarely results in the commercial borrower getting the business loan that they should have. An experienced business loan advisor will take the more difficult path which involves a more hands-on approach with small business borrowers to ensure that they understand all of the “trade-offs” associated with their business loan choices.

Most borrowers think that they need the lowest possible interest rate without realizing what they are truly giving up in order to get that rate. As stated above, the loan terms given up in exchange for the lowest rate are usually much more valuable to the commercial borrower than the lowest rate.