Step 3: Assess Financial Situation
The Concept:
Businesses require money. Determine your financial needs and explore various sources of capital.
What you need to know:
Money is to running a business what fitness is to running a marathon. If you're out of shape, you prepare for the race by building strength and stamina. If you're launching a startup, you raise capital and consider the various financial challenges.
Similar to the many training regiments athletes can follow, there are a variety of sources for funding your business. To help lenders assess your business you’ll need to be able to discuss your short-term and long-term needs, your personal financial situation and many other factors. Business counseling, including assistance in securing capital, is available at the Ohio Small Business Development Center (SBDC) at the Greater Columbus Chamber of Commerce.
Financial institutions typically review the following issues, known as the "Five Cs of Credit:"
Capacity: Will cash be available on a monthly basis to make the loan payment? Lenders generally seek $1.25 in cash for every $1.00 in loan payment, although this varies from institution to institution.
Capital: How much of your own cash are you willing to invest in your business, and how much cash will you have left? Lenders typically require a capital investment equaling between 10% and 50 % of the total start-up cost, and like to see some cash reserves in case of emergencies.
Character: Lenders assess the character of loan applicants primarily through their credit histories. They may also investigate business relationships and management experience. This evaluation measures your dedication to your business success.
Collateral: What do you own that you can offer the lender to secure the loan? Typically, financial institutions prefer real estate or equipment with at least a five-year life span (i.e. heavy equipment, forklift).
Conditions: The overall economy, and the health of your proposed industry, is always important. How risky is your industry?
Points to consider:
Are you willing to personally guarantee your business debts?
Are you willing to offer your home to guarantee your business debt?
How much money per month do you need to pay your personal debts?
Based upon your situation, what financing source are you most likely to tap in starting your business: Savings? Credit cards? Family and friends? Partnership? Investors? Venture capital? Public-sector programs? Private lending from banks or credit companies?
Are your financing needs short-term or long-term?
Given your personal financial situation, do you believe you have the ability to attain the financing for your business?
Are you a high-risk or low-risk entrepreneur? Where do you fall on this continuum?
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