Starting a business is a very big financial commitment. Most of the time, entrepreneurs do not have enough to support it on their own. Sadly, it is often difficult to get a bank loan to start your business. Banks have hard time lending to startups. Capital is often found from private investors or friends and relatives looking to invest in your business.
Equity Capital is the money you or an investor put into the business. Debt Capital is any money lent from the bank. Most banks look for the owner to put at least half of the equity that is needed from their own pocket. This is known as skin in the game, this shows the commitment you have to the business and the belief that it is going to succeed.
The unwillingness to do so, shows the exact opposite. If you are unwilling to put any of your own collateral into the business. Banks are unwilling to lend resources. Ideally banks look for 30%-50% capital before they give out a loan. Some Small Business Administration (SBA) loans require as little as 10% equity capitals depending on the type of business.
Acquiring capital for your business can be a struggle. Be sure to have a solid business plan before approaching banks or investors to help with the journey of starting your business.
12/23/2019
By: Gary Grottke, CPA, Quality Back Office LLC
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