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Small Business Financing during Customer Discovery

12/2/2011

4 Comments

 
PicturePutting together the financial pieces
_Customer Discovery is the process of having potential customers review your Personal Business Model and finding out if you really have a market, or just an idea that excites only you. Seeking investors before you have a proven your market is not only difficult, but if successful, the business is often lost to those same investors.

Finding sources of small business financing at this stage is often a better alternative than finding investors. Some businesses will eligible for term loans, such as the Small Business Administration backed loans offered through banks. Generally, all term loans, such as SBA notes or mortgages, are secured with collateral. A business still in the customer discovery phase may be short of collateral which is why many  business owners often jump right to finding investors. However, there is another alternative, the unsecured business line of credit.

A warning is needed here. Even though a business line of credit is not secured with specific collateral, it will still require the personal guarantees of the business owners, as do most other sources of small business financing. The advantages of an unsecured business line of credit over a term loan are:
  1. They are based on the creditworthiness (Credit scores) of the borrower and not the value of a secured asset; And
  2. You only pay interest on what is actually borrowed. As borrowed funds are paid back, not only is interest reduced but your credit "reserve" is increased.
The amount of funding you will need can determine the the sources for an unsecured credit line. There are two general approaches.

Business Credit Cards

A credit card is a line of credit. Credit card strategies are often used for amounts up to $100,000 (sometimes more). Lenders will issue these to business owners; however, there are many considerations to a credit card strategy, including cost and impact on the owner's personal FICO score. Consider using a business credit card consultant to assist in the development of an appropriate strategy for your specific situation.

Business Line of Credit

A line of credit arrangement with a lender becomes appropriate for amounts over $100,000. These can range as high as several million dollars as long as the creditworthiness of the owners and the use of funds support it. The costs are somewhat higher than term loans and typically lower than pure credit cards. Unsecured business lines of credit went away during the banking crisis; however, sources, are starting to appear for small business financing providing sales have reached at least $500,000 and there is 3 years of business history.

Raising cash through selling equity has it's place, especially in financing ongoing growth. However, selling ownership can be too expensive at the wrong time. Consider alternative sources.


4 Comments
Commodity tips link
6/26/2012 12:31:46 am

I was very encouraged to find this site. I wanted to thank you for this special read. I definitely savored every little bit of it and I have you bookmarked to check out new stuff you post.

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Bob Fariss link
6/26/2012 01:47:24 am

I really appreciate your note. Small business financing is always changing, so we have recently setup a new website at http://preQualifyHere.com to assist those seeking smaller business financing.

Reply
Jobs in Africa link
7/12/2012 06:41:16 pm


I visit this first time & it has a very valuable information. & some decent design as well. I would like to appreciate writer's nice effort. Wish u best of luck

Reply
Bob Fariss link
7/17/2012 07:48:53 am

Thank-you. I get so disappointed these days in our election process where our leaders are arguing about everything except job creation. It's very encouraging to get a compliment from someone else who gets the idea that this is the world's greatest issue. All the best!

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    Bob Fariss writes about the issues facing Executives in career development. He teaches Business Model Thinking  and also represents individuals with an entrepreneurial flair seeking to sell, buy, or start-their own business.

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