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.