How to get additional capital

Dear Professor Bruce:

I initially funded my small business from savings, home equity and generous almost retired parents. The business is holding its own after the first year but I need additional capital to get it to the next level. What are my chances of getting a loan? What do I need to do?

Answer: A written business plan will help you obtain the loan. Be precise in stating your goals and outlining how you intend to achieve them. Describe your company's activities, history, and future opportunities for accelerated growth; if it has the right financing. Explain why and how much cash is needed, when it is needed, and how long it will be needed. Describe how the cash to repay the loan will be generated. Ask your Certified Public Accountant (CPA) and outside experts to review the plan and test your assumptions. Also, I would ask your advisors to explain programs that provide financial assistance or credit enhancements to companies like yours.

According to Jay Trien, senior partner in the CPA firm Trien Rosenberg and president of the Venture Association of New Jersey, "Lenders usually divide their customers into industry or loan groups according to sales volume, size of the loan requested or both. In looking at your loan application potential lenders will compare your company's performance with industry performance, assess the future of your industry and examine the quality of the loan's collateral."

Lenders ask for personal guarantees because it is one way to ensure you will stay with the business no matter how tough it gets. The truth is that it is easier to sell off your personal stock portfolio or apply your savings account to the loan than it is to take it over and run your business. If you have to guarantee the loan, try to get an agreement that the lender will go after the business assets first. You may be able to give only a partial guarantee if you can get the bank to agree to an amount of personal liability that is significant to you, but not everything you have. A trap that many entrepreneurs fall into is to think that they can get a loan cheaper, but that shouldn't be the focus. When you borrow the most important issues are:

1. That the loan is funded when you need the money,

2. That the loan is for as much as you need and

3. The loan's term is for as long as the loan is needed. The least important issue is getting the lowest interest rate. As in many other business contracts, the terms are more important than the price.

If you can present a good business plan, demonstrate your management ability and find a supportive loan officer you have a better chance of getting the loan.

For further information, please visit www.trienrosenberg.com.

Bruce Freeman is president of ProLine Communications, a marketing and public relations firm in Livingston, N.J. and author of Birthing the Elephant (Ten Speed Press). E-mail questions to Bruce(at)SmallBusinessProf.com.