Redwood City Bankruptcy Attorney Discusses Federal Reserve Survey Say Small U.S. Firms Are Expanding Their Financing Sources

From 1999-2003, in the United States, the Federal Reserve says that more small business looked to non-banking sources, such as brokerages, finance and leasing companies, venture capitalists, relatives, other individuals, and credit/debit-card processors, for financial services.

Survey results were based on information on 42,400 U.S. firms.

A majority of the firms surveyed were small, owner-managed businesses. More than 80% of the firms surveyed had less than 10 employees.

Survey results show that commercial banks, however, were still the dominant provider of checking accounts, loans, lease financing, and credit lines. Small business also increased their use of “nonstandard work arrangements,” including working with consultants and contractors.

Of the companies surveyed, 47% of small firms registered as corporations (31% were “S” corporations and 16% were “C” corporations).

The United States Small Business Administration suggests that you ask yourself the following questions when looking to finance your business:

· Do you need more capital or can you manage existing cash flow more effectively?
· How do you define your need? Do you need money to expand or as a cushion against risk?
· How urgent is your need? You can obtain the best terms when you anticipate your needs rather than looking for money under pressure.
· How great are your risks? All businesses carry risks, and the degree of risk will affect cost and available financing alternatives.
· In what state of development is the business? Needs are most critical during transitional stages.
· For what purposes will the capital be used? Any lender will require that capital be requested for very specific needs.
· What is the state of your industry? Depressed, stable, or growth conditions require different approaches to money needs and sources. Businesses that prosper while others are in decline will often receive better funding terms.
· Is your business seasonal or cyclical? Seasonal needs for financing generally are short term. Loans advanced for cyclical industries such as construction are designed to support a business through depressed periods.
· How strong is your management team? Management is the most important element assessed by money sources.
· Perhaps most importantly, how does your need for financing mesh with your business plan? If you don't have a business plan, make writing one your first priority.

Here are following Pros and Cons regarding whether to borrow money for your business:

Advantages of Borrowing Money:
The main advantage of borrowing money is that, while the lender will charge you interest for using the money, the lender won't have any say in how you run or manage your business. More importantly, a lender won't be entitled to any of the profits you make; all you have to do is repay the loan on time. In addition, you can typically deduct the interest payments (but not principal repayments) as a business expense.

If you can borrow money from a friend or family member, you'll typically pay a lower rate of interest than if you borrow the money from a commercial lender, and you can avoid paying the loan fees commercial lenders tend to charge. As an added bonus, you may be able to negotiate more flexible repayment terms than a commercial lender would permit.

Disadvantages of Borrowing Money
If you borrow money, you may be committing your business to a fairly large business expense. You may have to make loan payments when your need for cash is greatest (usually during your business's start-up or expansion). And if you have problems paying the loan back or keeping up with the payments, you can ruin your relationship with family or friends.

Sagaria Law, P.C. helps clients in the San Francisco/San Jose Bay Areas with their business formation matters, such as assisting you in determining what types of financing will insure future success. If you have a business or wish to start a company in the counties of Santa Clara, Monterey, and Alameda, contact Sagaria Law, P.C. for a free consultation.

Small Firms Broaden Financing Sources, Fortwayne.com/AP, October 29, 2006

Financing Basics, United States Small Business Administration

Financing Your Business, Nolo.com

Related Web Resources:

Entrepreneur.com

Business Finance Directory, Businessfinance.com