Start-up Financing

The following is a general overview of eligibility criteria to qualify for start up business financing.

1) Capital Injection of 30% of project cost
The first thing you will need to get a start up business loan is some of your own money to put towards the project costs. As a general rule, you will need to come up with 30% of the total project cost, and you will request financing of 70% of the project. For example, if it will take $100,000 to start your business, you will need to inject 30% or $30,000 into the start up costs and you will request financing of 70% or $70,000. If you have no money of your own to inject into the project, it is not possible to get start up financing through any programs we are affiliated with. You must have 30% of the total project costs. Your capital injection can come from your own savings, home equity, or a gift from another person. The equity injection can not be financed elsewhere, it must be either your money or gifted to you. Half of your injection must come directly from your own personal sources.

2) Two years of experience in the industry
Secondly, you will need to have a minimum of two years of experience in the industry in which you are starting the business. For example, if you have managed a tanning salon for three years and now you want to open your own salon, you have the necessary experience to qualify for a loan. It’s important to note here that your experience needs to be directly related to the business you are starting. Having managed a tanning salon is not sufficient experience to qualify you to open a women’s retail clothing store. If you do not have the required experience, but have identified a manager who has worked in the field for at least two years, this may mitigate the lack of experience on your part.

3) Reasonable credit
Thirdly, the lender will look at the personal credit of all principal owners of the business. If there are principals owners that do not work in the business, but still own at least 20% of the business, their credit will be reviewed. The lender wants to see that you are current in your existing debt, that you do not have any major derogatory marks on your credit report and that if there are a couple of delinquencies, there is a reasonable explanation as to why they occurred. If you have a bankruptcy from the past, it needs to be at least four years old and your credit must not have any delinquencies since filing.

4) Collateral
Your loan will be secured by your business and personal assets. If you own your home, you should be prepared to pledge it to secure the loan. Otherwise business assets will secure the loan. Items purchased with the loan proceeds can also be used as collateral. The lender likes to get as close to full collateral as possible. This means that they would like the value of your collateral to be equal to or greater than the value of the loan. Not having collateral would not preclude you from qualifying for a loan, but having it strengthens your situation significantly. The higher the loan amount, the more emphasis the lender puts on collateral. Also remember that as a start up business, your loan is already risky, so the more you can strengthen your situation the better.

5) Past income and other sources of income
The lender will also look at your employment and wages for the last few years to ensure that you have historically earned enough money to cover your personal living expenses, as well at looking at any other sources of household income that you have. Other sources of income would include any outside employment, a spouse’s employment, child support, disability income or retirement. Any form of income from outside the business would strengthen your situation as it would show that you are not as dependent on a draw from the business to meet your personal living expenses.

6) Business Plan, projections, assumptions that the projections are based on
You will need to submit a business plan, financial projections and assumptions on which the projections are based. The business plan needs to be complete and thorough and explain what your business will offer, who will operate it and how you will market the company. You should plan on creating monthly projections for one year, then two more years of annualized projections. It is important to include with these projections, the assumptions that they were based on. This can be a one page summary explaining how you arrived at both your income and expense figures.

For more information on start up business financing, feel free to call Susan Lamping at (619) 291-3594.