Some 400,000 new businesses start up in the United States each year. The most daunting challenge that new business owners face will be the bottom line: How to finance the business, how to seek funding and how to determine startup costs.

If you’ve created a viable business plan, you are close to making your dream a reality. Follow this guide to learn how to obtain the financing you need to move your business forward.

How much money will I need?

Some small businesses, including home-based franchises, can be launched with as little as $1,000. Others could cost millions. Whatever you’re planning, you must be realistic about how many upfront costs you’ll be covering, especially since your business may not make a profit for months or even years. Assuming you’re starting your business from scratch, your basic analysis of initial costs should include the following, according to the Small Business Administration. Use a spreadsheet to assign projected costs to each category, seeking advice from other business owners or experts if you need help.

  • Expenses associated with establishing your business such as a website, marketing materials, insurance, licenses and permits, lawyers and accountants, market research, and other startup costs.
  • Capital expenditures for physical assets such as inventory, property and vehicles.
  • Consistent operational expenses including payroll, rent, utilities, etc.

Next, complete a cash-flow analysis, using profit and loss reports and income statements to compare expenses to assets. That document should take into account activities related to operating, investing and finances.

Finally, calculate the breakeven point at which your income should cover all expenses and your business should begin making a profit. The simple formula is: fixed costs/(unit selling price – variable costs).

A simple calculator recommended by the SBA may help put it all in perspective. Note that creditors and potential investors could request financial projections for the next five years, divided monthly or quarterly for the first year, and quarterly or yearly thereafter.

Potential pitfalls

Common mistakes while calculating the appropriate loan amount include overestimating sales, forgetting expenses, underestimating taxes and failing to plan for growth. You may want to consider adding 10 to 15 percent extra to your loan request as a safety net. You can reinvest that money in the business to cover unexpected events, emergencies or cyclical lulls.

Finally, make sure your financial projections align with funding requests when approaching a lender.

“Creditors will be on the lookout for inconsistencies,” the SBA advises. “It’s much better if you catch mistakes before they do. If you have made assumptions in your projections, be sure to summarize what you have assumed.”

Don’t hesitate to seek professional help if the numbers are too difficult to compile on your own. Organizations that can help check the soundness of your financial planning include the Small Business Development CenterWomen’s Business CenterVeteran’s Business Center and SCORE.

What are my possibilities for funding?

Most small business owners use one or more of the following strategies to raise money.


Funding your business using personal savings or a second mortgage on your home. A recent study found 83 percent of small business owners used this method. Three-quarters reported their primary source of funding was their own savings, followed by banks and family/friends.

Small business loans

Founders can seek funding from banks, credit unions or commercial finance companies. Be aware these may be more difficult to secure than other options, and such institutions often enforce balloon payments and shorter repayment times. The total cash amount of such loans in the United States dropped 16 percent between 2008 and 2015, a fact some attribute to competition from innovative startups. Others point to banks’ relatively low approval rate for small business loans. The banks themselves have pointed to lower profit margins on smaller loans and increased regulation following the financial crisis. Wherever you seek a loan, do shop around for the best possible interest rates.

Nonbank lenders

Peer-to-peer borrowing allows small businesses to connect with funding using technology, in lieu of a bank. These loans often appeal to entrepreneurs without strong financial histories. Alternative lenders typically determine eligibility by combining traditional and nontraditional credit metrics, including social media presence and payments to vendors. The lending process tends to be faster, though interest rates may be higher.

Small Business Administration loans

These loans are provided through an intermediary lender and guaranteed by the SBA. They typically range from $25,000 to $5 million, are repaid in monthly installments and come with more stipulations than bank loans. But the terms tend to be relatively favorable to borrowers. The Basic 7(a) Loan Program is the SBA’s most frequently used. Special SBA loans are available for projects involving recovery from natural disasters, veterans’ deployment, the support of exporting, pollution control and negative effects from NAFTA.

Loans via state and local governments

These funds may be available in your area. Check with your city and state of residence on any lending tools in place to further commercial development by industry or geographic area.

Equity or venture capital

Investors fund your business in exchange for shares of ownership. The recipient of venture funds does not incur debt. Investors may include friends, relatives, employees, customers or industry colleagues, but most commonly they’re venture capital groups. Such groups risk their money because they expect to turn a profit (typically around 120 percent) if/when your company goes public. For this reason, startups that want to raise capital by this method generally benefit by forming a corporation. The downside to this funding method is reduced control of your business: Venture capital groups may eventually replace senior management, reduce your workforce and sell off your assets.

Government startup grants

Grant funds are designed to stimulate economic growth. Government grants are available to a very small percentage of businesses, usually those in high tech or R&D fields. In 2014, for example, 300 businesses engaged in national scientific research received grants amounting to an average of $624,807.


Some businesses get funded by a large group of investors. Through this relatively new option, would-be startups post profiles on crowdfunding websites requesting monetary donations for their projects. A survey found that only 2 percent of small business owners had used the method, citing concerns about risk, lack of trust and uncertainty regarding the technology involved.

Required documentation

Before you approach a lending institution, you’ll need the right documentation — and a lot of it — to be perceived favorably by lenders and increase your chances of securing a loan. The SBA recommends preparing the following:

  • Strong answers to the following questions:
    • Why are you applying?
    • How will proceeds be used?
    • What assets need to be purchased, and who are your suppliers?
    • Who makes up your management team?
  • Information about your personal background including previous addresses, names used, criminal record, educational background, etc.
  • Your resume, preferably with evidence of management or business experience.
  • Your business plan with projected financial statements, including profit and loss, cash flow and a balance sheet — calculated within the last 180 days.
  • Personal credit reports from all three major consumer credit-rating agencies (TransUnionEquifax and Experian). Be sure to address any inaccuracies or outdated information before applying for financing. Most lenders seek a minimum credit score of 700-800.
  • Your business credit report, if you’re already in business.
  • Income tax returns, usually dating back three years.
  • Signed personal financial statements are usually required if you have more than a 20 percent stake in your business.
  • Records of other loans for which you’ve applied.
  • Personal and business bank statements dating back a year.
  • Collateral documents may be required describing the cost or value of personal or business property used to secure the loan.
  • A list of names and addresses of your subsidiaries, affiliates, controlling interests and other concerns affiliated by stock ownership, franchise, proposed merger, etc.
  • Other required documents, perhaps including business licenses and registrations required for you to conduct business; Articles of Incorporation; copies of contracts with third parties; franchise agreements or commercial leases.

What factors will be reviewed?

While perusing those documents, lending institutions are likely to place importance on the following:

  • The amount you’ve already borrowed versus the amount you’ve invested in the business from your own resources or other investors. Most banks want to see total liabilities/debt amounting to less than four times equity, the SBA advises, with 20 to 40 percent of equity coming from the owner.
  • Your net worth, representing your assets less your debt.
  • Your ability to repay a loan based on cash flow from your business and a secondary source such as collateral.
  • Personal and business credit history. You probably can’t obtain a loan if you’ve been repeatedly late with credit payments, have an unpaid charge, have a judgment against you, or have declared bankruptcy in the last seven years, unless you can prove mitigating circumstances.
  • Sufficiency of collateral, or your personal and business assets that can be sold in case the business income is insufficient to pay the loan. Collateral value is typically less than current market value. Without collateral, a co-signer may be necessary.
  • Collateral coverage ratio, calculated by dividing your total discounted collateral value by the total loan request.
  • Your managerial expertise and education, as well as your commitment to the business, since poor management is the factor cited most frequently in business failure.
  • The future of your industry. Your industry’s risk is rated based on government SIC codes.
  • Your competition and its strengths and weaknesses.

Feeling overwhelmed by all those requirements? You’re not alone. Applying for a small business loan is a notoriously rigorous process. But securing funding is the most crucial step in establishing a thriving business.

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