Post on 01-Jan-2016
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Chapter 9: Shaking the Money Tree – Locating Hard Cash
Learning Objectives:1. Discover your risk tolerance2. Determine your credit
situation3. Explore credit card usage
and risks for your business4. Understand inherent risks in
borrowing from friends and family
5. Scour the lending arena for money to fund your new business
6. Introduce strategies for approaching bankers
7. Become familiar with the programs & services of SBA and SBDC
8. Explore vendor financing9. Understand the dynamics
of crowdfunding10. Learn how to access angel
financing11. Explore the venture
capital market & the changes occurring within
Before Committing Money
Committing your own money is essential for all entrepreneurs
Lenders & investors will make sure you commit before they do
Most ventures are self-financed in the start-up phase
Determine your risk tolerance and that of your family members & partners
Credit Reporting Agencies: What Do They Know About You?
If your credit report does not pass you will not get a loan
Clear up credit problems before searching for capital
Credit Karma keeps track of your credit score for free
Cautionary Steps – how much money are you willing & able to personally commit?
To Receive a Copy of Your Credit Report and Scores
Equifaxhttp://www.equifax.com
Experian http://www.experian.com
Trans Union Corporation http://www.transunion.com
Credit Scores Made Simple
1. Payment history on account (35%)
2. Amounts owed (30%)
3. Length of your credit history (15%)
4. New credit (10%)
5. Types of credit in use (10%)
Concerns That May Need to be Addressed
1. Costs of continuing existing or purchasing new health insurance
2. Apply for additional credit cards or increased limits
3. Consider applying for a personal line of credit
4. Explore the possibility of a home-equity loan or line of credit
5. Check into borrowing for your 401(K) plan
Additional Thoughts to Consider as You Explore Your Bottom Line
Income stream: What can you count on from your business?
Profit from sale of business: What is the potential profit if the business is sold?
Profit life cycle: How long will it take for your business to move from start-up to a profit position?
The rule: Your business should provide you with two sources of financial return: an income stream and growing equity. Just income is not enough. No income means nothing to live on.
Shaking the Most Fruitful Branches First
More than 90% of start-up capital comes from self-financing, family & friends
Most new ventures begin with bootstrapping Banks usually fund established businesses SBA & micro lending institutions can benefit
new ventures Crowdfunding platforms are growing with the
passage of the JOBS act Venture capital usually comes once you have a
proven product in a highflying market
Self-Financing: Your Money & Your Credit
Consider the following when selecting credit cards: Payment Dates Annual Percentage Rate (APR) Annual Fees Maximum Credit Limits Additional Fees Grace Periods Mileage Points or Other Incentives Late Fees
Family & Friends
Parents are a major source of start-up capital but many potential problems
Consider their emotional ties to money Make sure you are not affecting their lifestyle Consider asking them to cosign loans instead Consider putting up collateral Consider waiting & saving your own money
instead of borrowing
Borrowing From Family & Friends – Ways to Alleviate Difficulties
Put everything in writing Make it a business loan, not a personal loan Include a provision for repayment in case of
emergencies Discuss the company’s goals with your family
& friends Make clear to relatives & friends the difference
between a loan & equity in the firm Discuss your fears for potential problems &
encourage lenders to discuss their issues
Banks
Bankers tend to choose the safest deals Chances of a bank loan increases after
being in business for several years Consider a small, local community bank Microlending programs may be
available ACCION: Capital Available for Struggling
Entrepreneurs Check out Kiva& the Opportunity Fund
Lenders’ Expectations
Solid Business Plan with projections Experience & Background in the Industry Assets to live on for 6-12 months Personal financial commitment & Possibly a cosigner Second salary in the family 2 – 3 years of successful operations Projected income statements Detailed explanation of how funds will be used Compelling product or service with strong marketing Capacity to repay the loan Solid relationship with the potential borrower
Strategies for Working with Your Banker / Make Your Banker a Member of Your Team
Seek your banker’s advice on pulling your Business Plan together
Comparison shop for money Ask your banker questions The more successful you become, the
more you need a close banking relationship
Small Business Development Centers Action Step 42: Befriend a Banker
SBA Programs
Program: Basic 7(a) Loan GuarantyFunction: SBA’s primary & most flexible loan guarantee
program
Program: Microloan, 7(m) Loan ProgramFunction: Provides loans of up to $50,000 for up to 6 years
Program: 7(a) Express & Pilot ProgramsFunction: Offers streamlined loans with a turnover in as little as 36 hours mostly to military & borrowers from distressed communities
Program: Certified Development Company, a 504 Loan ProgramFunction: Provides long-term fixed-rate financing to acquire fixed assets for expansion or modernization
SBA Programs
Other Major Avenues of Government Assistance: Small Business Investment Companies The Small Business Innovation
Research Program STTR Program Community Development Financial
Institutions SBA/Bank Financing Checklist SBA Loan Application Checklist Global Village: Export Loan Programs
Vendor Financing
Probe vendors & suppliers for the best prices & terms available
Vendor info is the starting point for negotiations Action Step 43: Designing a Vendor Statement
Form Your vendors’ verbal promises become
written promises Be firm, pleasant & tough Determine the standard terms in the
industry Use a lot of open ended questions during
negotiations
Angels with Money
People willing to invest as individuals or part of an angel investment group
Search out potential investors Individual angel financing is appropriate for
$20,000 to $2 million Angels primarily come in during the seed stage Many individuals have joined together to form
groups Kaufman Foundation has formed the Angel
Resource Institute (ARI) Visit ARI and Angel Capital Association websites
Venture Capital Firms & Social Entrepreneurship Funding
Venture Capital Firms usually do not invest in start-ups
Most prefer second stage when a proven business needs a large infusion of cash
Are you Ready for Venture Capital? The Seven Forces Disrupting Venture Capital
Amazon, Angel Investors, AngelList Kickstarter, Crowdfunding, Y Combinator “New Venture Capital”, Secondary Markets
Social entrepreneurs need to seek various funding sources
Action Step 44: Prepare to Meet Your Lenders
Part A: List potential lenders & investors Begin with family & friends Move on to business acquaintances &
institutional lenders Part B: List reason why lenders & investors
should risk their money on you Part C: Check out the popular crowdfunding
sites Part D: Test your pitch with you colleagues Part E: Go out & meet with potential lenders
& investors – shake additional branches of the money tree
Think Points for Success
Your banker may be a doorway to the world of money. Use that door.
Conserving capital is essential in the beginning and prudent at all times.
Take as little capital out of your business as possible.
In dealing with bankers and vendors, use lots of open-ended questions.
Become operational as fast as you can. Aim for your break-even point and strong cash
flow as soon as possible.