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Understanding Financing


While poor management is cited most frequently as the reason businesses fail, inadequate or ill-timed financing is a close second. Whether you're starting a business or expanding one, sufficient ready capital is essential. But it is not enough simply to have sufficient financing; knowledge and planning are required to manage it well. These qualities ensure that entrepreneurs avoid common mistakes like securing the wrong type of financing, miscalculating the amount required, or underestimating the cost of borrowing money.



Owner's Equity


You must always consider the amount of your own resources that you are prepared to invest in your own business.  It is important that some of your own money is invested in the enterprise.  Lenders look at the relationship between your investment in your company and the investment that your creditors /lenders have, or will have, in your company; this is called Debt/Equity or the Debt/Equity Ratio. Generally, a lender would expect a business owner to have at least 25% equity or more in his/her company.  The more equity a company has, the easier it is to obtain financing under favorable terms and conditions. Undercapitalization,” or an insufficient amount of equity, is considered a risk factor; the higher the equity, the lower the risk to a creditor.



Lenders will consider different types of Owner’s Equity, depending on the type of financing being applied for and the lender's policies. Cash is one excellent source of equity but others might include “gifts” from family and friends, publicly traded stock, equity in machinery & equipment and equity in your personal residence. There are others and there are restrictions and regulations covering many, which are best discussed with a professional financial advisor.


Types of Financing


Time Notes, Demand Notes and Lines of Credit- These are all short term (less than one year) financing options. They are designed to provide temporary working capital and have a very short and specific repayment source; normally the conversion of Accounts Receivable, Inventory or Contracts Receivable to cash.


Term Loans: These are moderate term (generally 3-5 years) that provide financing for fixed assets like machinery & equipment. The length of the term reflects the average useful life of the asset.


Commercial Mortgages: These are longer term loans (generally 10-25 years) that provide financing for real estate investments (acquisition, expansion & development). Included in this category are real estate construction mortgages.

Letters of Credit:  These negotiable instruments are designed to help those primarily in the import/export business ensure loading, delivery, performance and payment. Some are designed to replace Insurance Bonds for contractors and developers. Many Lenders do not provide letters or credit so you must research who does and at what cost.

Venture Capital


Another source of Equity Financing is Venture Capital, which is not generally available. Venture capitalists look for specific types of companies to invest in and rely on their own underwriting criteria. For further information on these opportunities, please contact the United States Small Business Administration for a listing of licensed Small Business Investment Companies (SBICs) and Minority Enterprise Small Business Investment Companies (MSBIs), which offer equity financing in your region. 



Venture capitalists are often seen as deep-pocketed financial gurus looking for start-ups in which to invest their money, but they most often prefer three-to-five-year old companies with the potential to become major regional or national concerns and return higher-than-average profits to their shareholders. Venture capitalists may scrutinize thousands of potential investments annually, but only invest in a handful. Venture Capitalists usually expect a major share in your company in return for their investment.The possibility of a public stock offering is critical to them. Quality management, a competitive or innovative advantage, and industry growth are also major concerns.  The main disadvantages of equity financing is relinquishing some of  your  decision-making and some of your  potential for profits.


Following are links to web sites with more information on Venture Capital:

Connecticut Innovations.

Small Business Investment Companies.(SBIC)

National Venture Capital Association (NVCA)'s Top 100 Venture Capital Companies


Small Business Administration Loan Guaranty Programs


We urge you to visit the SBA web site and view their free on-line programs outlining funding opportunities guaranteed by the SBA.  Click here for an overview program.  They will ask for some basic information about you and your business plans, but the program is free.



Finding Local Lenders

Once you have your Business Plan complete and understand the amount and type of financing you need, it is time to look for a lender.  The most common sources for loans are Banks, Savings and Loans, Commercial Finance Companies, Credit Unions, and Economic Development Agencies like seCTer and the U.S. Small Business Administration (SBA). The following links will lead you to these sources.



Contact Annie Chambers at seCTer for information on our Revolving Loan Program, Fisherman’s Loan Fund and Technical Assistance Program. More information on these programs is available on this web site at Programs.  



Bank of America Small Business Services

Chelsea Groton Savings Bank

Citizens Bank

Dime Savings Bank

Eastern Federal Savings Bank

Liberty Bank

People's United Bank

Putnam Savings Bank

Savings Institute Bank and Trust



The Connecticut Community Investment Corporation (CTCIC) is a non-profit economic development lender and is the #1 SBA 504 Lender in CT.









** Some content provided by the U.S. Small Business Administration (SBA)