A.

Introduction This chapter helps your writing process because it gives you an idea of what lenders and investors want to see in a finished plan. Your ability to understand your financiers motives can mean the difference between getting a loan or investment and coming up empty-handed. If you already have financial backing, you can skip this chapter. any people and institutions are looking for sound loans and investments. !rom their side of the fence, it can often seem e"tremely difficult to find a good one. any potential financiers have been frightened by news stories about small business financial problems, con artists selling phony ta" shelters, business bankruptcies, and so on. #hat does this mean to you$ %imply that you must both create a sound business plan and present it, and yourself, in a way that appeals to lenders and investors needs for security and profit. If you have a good business idea and are patient and persevering, you should be able to find financing. It was &alvin &oolidge who, sometime in the '()*s, said, +The business of America is business., Its no less true today. -. #ays to .aise oney -efore you can sensibly plan to raise money, you need to know how its commonly done. '. /oans A loan is a simple concept0 %omeone gives you money in e"change for your promise to pay it back. The lender could be a bank, friend, family member, or anyone else willing to lend you money. The lender will almost always charge interest, which compensates the lender for the risk that you wont pay back the loan. 1sually, the lender has you sign some papers 2called a note and loan agreement3 spelling out the details of your loan agreement. 2%ee &hapter '*, %ection 4', for e"amples.3 #hile these basic concepts are simple, not everyone seems to clearly understand them. !or e"ample, some people put a great deal of energy into arranging to borrow money, but think little about the hard work that goes into repaying it. The important thing to understand is that the lender e"pects you to pay the money back. Its only fair that you honor your promise if you possibly can.

Your business may be so successful that you can pay back the loan sooner than the original note calls for and save some interest e"pense in the process. %ome state laws allow repayment of the entire principal at any time with no penalty. 5owever, laws in some states allow the lender to charge a penalty of lost interest if the borrower pays the loan back sooner than called for. ake sure you read the loan documents and ask about prepayment penalties. Your lender may be willing to cross a prepayment penalty clause out of the agreement if you ask. As for the manner in which loans are repaid, there are about as many variations as there are loans. 5ere are the most typical0 6 !ully amorti7ed loan.This type of loan repayment provides for principal and interest to be paid off in e8ual monthly payments for a certain number of months. #hen youve made all the payments, you dont owe anything else. The interest rate and the number of years or months you agree to make payments can change your monthly payments a great deal9 pay close attention to these details. !or e"ample, if you borrow :'*,*** for five years at '*; interest, you will agree to make <* monthly payments of :)').=>, for a total repayment of :'),?=>.>*. That means you will pay :),?=>.>* in interest. @ow lets say you borrow :'*,*** for five years at )*; interest. Your monthly payments will be :)<=.() and you will end up paying :'A,>(A, including :A,>(A in interest. 6 -alloon payment loan.This loan 2sometimes called an interest-only loan3 calls for =B= 5C# TC #.ITD A -1%I@D%% E/A@ repayment of relatively small amounts for a preestablished period of time. You then pay the entire remaining amount off at once. This last large payment is called a +balloon payment,, because its so much larger than the others. ost balloon payment loans re8uire interest-only payments for a number of years until the entire principal amount becomes due and payable. Although this type of repayment schedule sounds unwieldy, it can be very useful if you cant make large payments now, but e"pect that to change in the near future. Eroblems #ith &osigned /oans -ankers sometimes re8uest that you find a cosigner for your loan. This is likely if you have insufficient collateral or a poor or none"istent credit history. Eerhaps someone who likes your idea and has a lot of property, but little cash, will cosign for a bank loan.

A cosigner agrees to make all payments you cant make. It doesnt matter if the cosigner gets anything from the loanFshell still be responsible. And if you cant pay, the lender can sue both you and the cosigner. The e"ception is that youre off the hook if you declare &hapter ? bankruptcy, but the cosigner isnt. &osigning a loan is a big obligation, and it can strain even the best of friendships. If someone cosigns your loan, you might want to consider rewarding your angel for taking this risk. !rom my own e"perience, I cosigned a car loan for an employee once, and Ill think twice before I do it again. I didnt lose any money, but the bank called me every time a payment was )= hours late, and a couple of times I thought I might have to pay. I didnt like being financially responsible for a car that I had never driven and might never see again.