For many people, building and running their own business is a dream they want to achieve. Most people would love to stop working for ‘the Man’ and become their own boss and work on their own schedule. Some people have worked in a career or trade skill for so long that their experience reveals niches in their industry that could be improved upon or managed better. Others may have always wanted to get into an industry that came from a hobby. Setting yourself up to get your dreams financed is a whole other ballgame that needs to be addressed.
Achieving the Most Basic
When you are ready to start your business, you need to have your ducks in a row. Each industry has its own requirements but they all require a business plan. A business plan is important, not just for potential lenders, but also for business owners themselves. As a result, it takes time and effort to build. You need to go through every aspect of the business you want to start, including research, planning, and talking through the rough patches. It might take time to find the answers you do not know right away. It is important to know within the first six months what the company burn rate will be.
The Small Business Association (SBA) will require a business plan from startups to show how serious business owners are about their business and how much effort they have put it. This also helps business owners understand the risk in lending money and fitting into the federal requirements parameters.
Building a Solid Foundation
When building a solid business foundation, it all starts with the potential business owner. What is his personal credit history? Most startup loans require personal guarantees from the business owner. The lenders will look at how he has managed his personal finances because it is a direct indication of how he will handle his business finances. If his personal finances are a mess, it forecasts how his business will look. Even if it is a profitable business right away, the credibility of the business owner is at risk. The starting place for most lenders is a 640 or greater credit score for business loans. In order to go below that, there must be tangible collateral. For example, real estate with equity, such as the business owner’s home.
Another Route to Go
If the business owner is a home owner, it is strongly recommended that he takes an Equity Line of Credit on his home to start his business. Typically, rates will be lower and payments on the line of credit will be more manageable. Lines of credit cannot exceed the loan to value ratio (LTV) of the home. To see if a line of credit is the way to go, it is critical to check the home’s value against the mortgage balance. Lenders vary on what the acceptable LTV can be. Usually, 60-75% is standard.
Startups are Rough
Financing a business is hard. Financing startups are even harder. Hopes and dreams do not mitigate the risk for banks. Alternative (hard money) lenders are more flexible but they want to make sure they get paid as well. If someone wants to start a business and needs financing for it, please understand that the riskier the borrower or the business idea is, the higher the rates will be. A business owner can always refinance once established. The best way to find the strength of a business owner’s foundation is to submit a loan request through Magilla Loans and see what types of proposals come in. It will be a good snap shot of where the borrower stands.