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Financing Assessment

Finding the money needed to start a new business is almost always one of the most difficult hurdles a new owner faces. At this point in the process of analyzing your business idea, you should have examined both the costs of starting a business and the characteristics of your market. The result of that analysis should be that you know how much it will cost and how much you can expect to earn. Assuming that the startup costs are more than you have on hand, and more than you'll be able to earn right out of the gate, the next step is to figure out whether you can raise the difference.

Commercial lenders tend to shy away from new small businesses because they believe the risks of failure are too high. Commercial lenders want to see a history of success and a solid credit record. Thus, a lot of small businesses that need to borrow funds to get started find themselves in a classic catch-22: the banks won't lend them money unless they have a solid track record, but they can't build that record until they get the money.

Financing Options

What to do? One possible solution is to look to smaller lenders with good reputations for small business lending. Bank mergers and consolidations have forced some of the smaller banks to take some chances they perhaps wouldn't have taken before. Small businesses are often the beneficiaries of those changes. Each year, the Small Business Administration publishes a report that rates commercial banks on their small business lending performance. More detailed information can be found on the SBA site.

Some banks will offer small business loans through the SBA. Ask your banker about SBA loans, but be aware that the SBA loan program is being squeezed from all sides. First, Congress is looking to reduce funding. Even if Congress is unsuccessful in reducing funding, current funding levels are not expected to grow in the coming years. Second, this funding stagnation comes at a time when loan requests from the SBA are at an all-time high because so many people are starting their own businesses, so there are fewer dollars to go around. Third, the SBA is under pressure to be more selective in who it loans money to because of recent high default rates. As a result, getting a loan from the SBA is becoming more difficult all the time.

Another solution chosen by many small business owners is to raise the money yourself, such as by taking out a second mortgage or by selling some of your possessions. A third solution is to borrow from family and friends. A fourth solution is to take on partners and investors.

Other possible sources include venture capital firms that finance startups, debt capital, cash flow financing, asset-based financing, receivables financing, state economic development pools, and city and county funds.

For a complete discussion of the pros and cons of these choices, see getting financing for your business.

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