Build a foundation for your business

Make money from your photos, videos and blogs. Get Started Now!

Posted in: Business Article in betterbusiness's Blog

Regardless of the capital you seek, you must start by building a foundation for your business. As a general rule, you need to separate your personal and business activities as much as possible. The first step is to incorporate. You need to be a corporation (S or C) or LLC if you are serious about raising capital for your business. Without a corporation you are limiting yourself to personal loans in Tier 3, which we will discuss later. You have no options for the other tiers and will not be taken seriously anyway. Investors can not invest in a sole proprietorship: You need to have membership shares or units if you want to bring on investors. From this you can see that if you have not incorporated you have your business seriously handicapped.

You will give life to your corporation by establishing a corporate credit profile, which belongs to the business that is separate from yourself and your personal credit profile. The process of building business credit will help to ensure that you have the fundamentals in place. The fundamentals include operating in a manner that lends legitimacy to your corporation. The business financing or credit industry has a standard of what a legitimate business should look like, if you do not meet that standard you are going to be shut out of many financing options. So the smart next step is to build business credit.

The four tiers of financing
There are four tiers of financing available to small business owners. It is important to be familiar with each tier and to develop a financing strategy for your business that cleverly uses these tiers. Here is a brief summary of each:

     * Tier 1: basic trade credit. The largest source of capital in the world is business or trade credit. These are companies granting credit business without the need for a personal or business credit check and they rarely require a personal guarantee. Tier 1 is the most basic trade credit and when a corporation is rightly prepared, it will serve as a building block for establishing credit for that corporation. Going after Tier 1 financing without building a business credit profile can be a disaster, but if you are rightly prepared you can benefit greatly from this source of capital.
     * Tier 2: advanced trade credit. Like Tier 1, this is the capital extended by business to business. The difference is that Tier 2 companies will conduct a business credit check before extending credit. Tier 2 usually includes larger credit lines, longer terms and in some cases can be used for equipment financing. If you need to purchase something that is created or sold by another company, chances are you can finance it with the first two tiers of financing.
     * Tier 3: bank lending. This is the best-known type of business financing. Typically banks offering Unsecured business lines of credit. A personal and business credit check and personal guarantees are required. The most basic level of bank financing, for the most part, is driven score and business history. For larger loans and lines, you need to be prepared with a good business plan and financials. Banks and credit card companies are Tier 3 lenders.
     * Tier 4: investors. Tier 4 is to move outside of institutional credit and commercial lending to the world of venture capitalists, angel investors and other private investors. This level requires much more sophistication and a business that is out-performing or will out-perform its industry peers. As a general rule, these investors want businesses that have been around a couple of years and can provide detailed financials and growth strategies.