The Entrepreneur's Ultimate Financial Guide
Step 1: Flight Plan
Maybe you have a million-dollar idea that’s going to revolutionize the world. Maybe you have found your calling – a blend of something you enjoy and something that adds value to others. Or maybe you are just sick of being stuck in what Robert Kiyosaki calls the Rat Race, and you want to take charge of your own financial destiny. The only thing standing between you and your goal is funding.
You’re confident in your plan and serious about taking the leap of faith, so approach friends and family first. They will be more flexible with repayment and will likely give you better rates than financial institutions. But unless you have a relative that can give you a small loan of a million dollars, you will have to take out a personal loan at some point.
You may be wondering, “If it’s to start a business, why wouldn’t I take out a business loan?” I’m glad you asked. First, your business has no track record. When lenders are evaluating a business loan application, they look at your personal credit, business credit, business plan, and your business’s financial statements. Because you are just starting out, lenders are unlikely to grant you a business loan. Second, business loans are often secured, meaning that they are backed with collateral. If your business is not off the ground yet, you won’t have capital to secure the loan with. Third, personal loans are approved much faster than business loans, allowing you to get to work sooner. Finally, loans for new businesses often require personal guarantees. That means that your personal credit is on the line, and that you are personally responsible for ensuring that loan is repaid.
In summary, personal loans make a lot of sense for new entrepreneurs without a track record. They are fast, easier to get, and don’t require collateral. You will be personally responsible for repayment on both personal and business loans, so you might as well treat yourself to an easier application process.
Step 2: Lift Off!
Congratulations! Your business is six months old! As a business owner, take this opportunity to celebrate how far you’ve come. Don’t beat yourself up if your expectations haven’t been met. You have overcome innumerable obstacles and learned countless lessons. You have accomplished something that many only dream of. You should be beaming with pride.
If you haven’t already, separate your personal and business bank accounts. Practically speaking, separate accounts will make taxes and bookkeeping significantly easier. A business bank account also helps prove legitimacy to the IRS and helps if there is ever an audit. Financially speaking, a business bank account limits your personal liability. Finally, it looks more professional if you are writing business checks instead of personal checks. While there is a cost to maintain a business account, it should be considered a company asset.
After six months, your business qualifies for a line of credit. This safety net allows you to withdraw funds for short-term risks and opportunities, such as making payroll or purchasing additional inventory for the holiday season. It is wise to apply for a business line of credit when you need it least, as financial institutions are more willing to lend when you have high cash flow. Click here to learn more about business lines of credit.
Another option for financing is revenue-based funding, which is a cash advance with a flat fee. Your business’s daily income is used to calculate the one-time fee, and this does not compound over time and can be very competitive over longer time frames. Lenders place more importance on revenue than on credit scores, so if you or your business is suffering from bad credit, revenue-based funding may make sense. Click here and here to learn more about revenue-based funding.
Step 3: Cruising Altitude
Happy two-year anniversary, and welcome to traditional term loan territory!
If you have a credit score of more than 620 and an annual revenue of at least $150,000, you qualify for Small Business Administration (SBA) loans. The SBA partially guarantees the loan, meaning that the SBA will pay the debt up to the guarantee amount if you default. This lowered risk for lenders translates to more favorable loan terms for you. There are a wide range of loan programs, ranging from microloans to disaster assistance to business modernization. Since you are dealing with Uncle Sam, though, you can expect a lot of paperwork, long approval times, and red tape. Click here to learn more about SBA loans.
If you have a credit score of more than 650 and an annual revenue of at least $180,000, you also qualify for term loans, which have shorter terms than SBA loans. At first glance, this may seem intimidating and daunting, but it pays to carefully consider which option best suits your needs. Longer terms are more comfortable but tie up your money for longer, limiting your ability to respond to opportunities and threats. Shorter terms equate to higher payments, but they actually decrease the amount of long-term risk to your business. Click here to learn more about what to consider when taking out a loan.
If you or your business suffer from bad credit, read this article about the importance of credit scores and how to improve yours in the short-term.
Step 4: Into the Stratosphere!
A banker leans back in his chair, arms crossed. “So, how much do you need?” he asks. You quickly run some numbers in your head. “Around $100 million,” you say calmly. The banker’s eyes bulge. You have just asked for one-eighth of the SBA’s annual budget. He stutters, “C-could you repeat that?”
We both knew when you started that you were going to go big. As President Ronald Reagan once said, “There are no great limits to growth because there are no limits of human intelligence, imagination, and wonder.” Congratulations on making it this far!
At Aldora Capital, we offer hard money loans up to $100 million. Hard money loans use real estate as collateral for a short-term loan, and you can expect to receive up to 75% of the current property value. This means that if you have a property worth $134 million, you can leverage that to receive a loan for $100 million. You can use this to expand, purchase equipment, or finance large projects. Contact one of our specialists to learn more.