Sources of Business Financing
- Personal savings
- Friends and family
- Crowd funding
- Investment capital
- Credit cards
- Bank loans
- Community (nonbank) lenders
Uses of a Business Loan
- Equipment
- Inventory
- Supplies
- Materials
- Working capital
- Start-up expenses
Establishing the Cost of Capital
- What’s the term of the loan – how many years?
- What’s the interest rate?
- Is it fixed or variable?
- Is it simple or compound?
- Is it APR or other price?
- What additional fees are charged?
- Closing?
- Application?
- Insurance?
Why Get a Term Loan?
| EDFC LOAN | CREDIT CARD | KABBAGE LINE OF CREDIT | |
| Amount Borrowed | $10,000 | $10,000 | $10,000 |
| Interest Rate | 10% simple APR | 15.49-21.49% variable compound (calc @ 19%) | 1.5-10% monthly fee (calc @ 6.%) |
| Closing Costs | $250 | -$650 | $0 |
| Monthly Payment | $323/month | ~$300 (3% of balance)/month | $1,433 then $958/month |
| Total Interest Paid | $1,616 | $10,035 | $4,350 |
| Time Frame to Pay Off | 3 years | 14.5 years | 1 year |
| Total Cost | $1,866 | $9,385 | $4,350 |
It saves you money!
The Five Cs of Credit
The 5 Cs of credit are the basis many banks and lenders use to determine whether they can make a loan.
- Character – Does the applicant have a history of repayment? Does their past history show they can be trusted to repay?
- Capital – What are the owners investing into the business to show that they are committed to the project?
- Collateral – Does the borrower have something they can use to secure the loan in the event that the business fails?
- Capacity – Will the business be able to replay the debt based on the business’s cash flow and other outstanding debt?
- Conditions – Are there outside influencers or economic conditions that will impact whether the business can succeed?
For more information about financing in Mendocino and Lake Counties, contact EDFC at 707/237-5705 or edfc.org.
Capacity: Can You Pay It Back?
- For every $1 you owe, you need at least $1.25 of net income
- For $10,000 @ 10% APR for 3 years:
(Monthly PMT = $323 / Monthly income = X) = $1.00 / $1.25
Business NET income must be $404/month or more
Getting Ready to Apply
Start-up checklist:
- Business plan
- Financial projections
- Equity/Owner investment
- Collateral
- Tax Returns
- Bank statements
- List of purchases/uses
- Cost estimates
- Licenses/planning/zoning info.
Existing business checklist:
- 3 years of financial statements
- Financial projections
- Equity/Owner investment
- Collateral
- Tax returns
- Bank statements
- List of purchases/uses
- Cost estimates
- Licenses/planning/zoning info.
Developing a Relationship
- Contact the lending institution BEFORE you fill out the loan application
- Be 100% honest with your lender
- Ask questions and make sure you understand the answers
- Be prepared to do the work
Help Getting Started
- Business planning
- West Business Development Center – 707/964-7571 or westcenter.org
- SBA – sba.gov
- Loan packaging assistance or questions for EDFC
- Call: 707/234-5705
- Visit website: edfc.org
- Email: heather@edfc.org
About the Author
Heather Gurewitz is Executive Director of the Economic Development and Financing Corporation (EDFC), a nonprofit business lender serving Mendocino and Lake Counties.