How to Find Money to Grow Your Business in Every Stage
Even with the most disciplined cost control and effective collection of money your business can run short of cash. As a matter of fact, this is a fairly constant situation when you are growing your business.
There are two key periods of capital consumption you should consider: the launch phase and the growth phase. Sources of available capital differ somewhat during each of these periods. But raising money never comes easily.
The Launch Phase
This period includes the time from the day you crystallize your business concept through the first six-twelve months after you officially open for business. You can look at your business during this phase as a “money sponge”–everything you do seems to require cash.
You can feel very conflicted during this period regarding your money. You have read or been told that you need to conserve your cash in the early days of your business, and yet there seems to be so many expenditures you must make. The key question to answer is: Can you successfully pursue your marketing strategy while keeping tight control on your available cash? If not, you will find yourself visiting the bank for a cash advance more often than you may wish.
Sources of Start-Up Capital
Savings
The is probably the most commonly used source of start-up capital, as it should be. Be realistic — why should anyone else take a financial risk on you until you have proved that you can make a profit with your own money?
The ideal scenario would be for the new business owner to have planned ahead enough that she accumulates all of the seed money she needs before she quits her job and opens for business. The reality is that the personality type that will undertake a new business launch is also characterized by impatience. This often leads to fudging on the amount of money you start with.
Your family’s active help can make the money go further by pitching in on necessary tasks, such as typing billing, stuffing envelopes, answering the phone, doing the bookkeeping, passing out flyers, etc.
Credit Cards
If you enjoy good personal credit, you will receive at least several offers of “cut rate” credit cards. A common technique is to offer you a “special introductory interest rate” of between 6.5% and 8.0%. If you read the financial pages in the newspaper, you know that this rate is below the current prime rate.
So what is the catch? The rate is usually only good for six months, at which time it typically rises to 6.5% over prime (around 15%). Obviously if you plan to carry a significant balance more than six months, you may want to reexamine the use of these supposed special deals.
It is, however, very convenient to be able to walk into a bank and walk out with 0000 in cash, without having to deal with a bank officer. We recommend that you apply for at least one of these reduced-rate cards and put it away safely until you find your business in a first-year emergency or until a very certain selling opportunity comes along.
Family Loans
This source of capital is probably the second or third most-widely used source of seed money. If you have thought out your business idea even a little you can usually approach at least one family member for a 00-00 loan. We call this “love money” because they lend it based more on their love for you than from a thorough review of your business plan. Dollar amounts above this level are more difficult to obtain without some more formal commitment, such as a promissory note. If you fall behind in paying, don’t be surprised if at Thanksgiving dinner you are approached by the lender for a “heart to heart” talk.
One key guideline to follow: Don’t borrow from a family member who can’t afford to lose the money. Unfortunately, you probably only have a 60% chance of paying the money back so default is not uncommon.
Home Equity Loans
During the 1980′s, borrowing money on the equity in your house was a popular way to finance a business launch. The most important fact to remember with this type of loan is: If you default, you don’t just walk away and chalk it up to experience. The bank will be on your trail fast! They usually don’t really want to have to sell your house, so they will press you to agree to a repayment schedule, which will often require that you find a JOB very quickly.
Be aware: Apply for a home equity before you quit or lose your job, unless your spouse brings in a substantial income.
Insurance Loans
Although it is less frequent today than it was in the ’70′s and ’80′s, many people today own a type of insurance known as whole life. This policy is a combination of life insurance and savings, as part of your premium goes into a pool which is invested by the insurance company. After the first 3-4 years, the dollar value of the savings portion, known in insurance parlance as “cash value” starts to increase fairly dramatically. For example, on a seven-year old 0,000 face value whole life policy, the cash value is ,000 or more. You have the right to borrow all of the available cash value (total value less any previous loans) at very attractive interest rates–averaging 8%. You are charged interest only, once per year. If you die before repaying, the loan amount is deducted from the death proceeds.
Barter Exchange
Barter is defined as “to trade without the exchange of money.” The key to the exchange is a method for acceptably valuing each parties offer. This is where barter exchanges come in. These are businesses whose business is to introduce traders to each other, establish fair dollar values and record the transaction for the IRS.
Active traders use the barter exchange’s computer to keep track of how many barter “points” they have accumulated and how many points it takes to buy certain products and services. A typical barter exchange might start with a carpet installer offering $ 1000 of installed carpet in return for $ 1 000 in oil changes which are traded to a trucking company, for $ 1 000 in trucking which is then traded by the carpet installer to a printer who offers $ 1 000 in printing.
As a new business owner, you can create your own barter exchanges simply by approaching suppliers of goods and services you need and don’t want to pay cash for.
Informal Investment Groups
Some very successful business concepts derived their initial funding by putting together a group of private investors among the founder’s friends and acquaintances, We are personally familiar with a start-up that was funded by obtaining a $ 1 000 investment from each of 25 investors, all members of the same softball league, who bought shares of stock in the new corporation with the clear understanding that they could lose all of the money, but that they would enjoy some very fun stockholder meetings.
If you desire to explore this option, we suggest that you consult first with a small business attorney experienced in equity investments for new corporations.
The Growth Phase
Growth can be fun, but it also can introduce additional money worries as you realize that you can’t buy materials or inventory fast enough to keep up if you use only the money being generated by your new customers. This is particularly true when the typical payment time in your business is over 60 days.
At this point it is not uncommon to become frustrated–you can see the sales ready for the taking, if only you could find some more money to pay your sales reps or to restock that hot-seller in your store.
It is time now to approach more traditional sources of financing to assist in the expansion of your business.
Introduction to Bank Loans
Once you have successfully turned your personal investment in your business into a profit, financial institutions may be interested in talking with you about borrowing their money.
Be careful. Bankers are pretty savvy people. Even when you can show a strong credit rating and possess collateral they still demand that you explain in sufficient detail how you will use their money, what profit you expect to make with it and how you win pay it back. Bankers are loath to advance money to you just to improve your lifestyle.
Bankers when considering your request for a loan-they would like to see you produce of profit for every of their money borrowed often use an unspoken formula. In order to produce this financial result you must invest a substantial portion of your loan in well focused marketing activities, such as magazine ads, direct mail promotions and adding inside and outside sales assistance.
Keep one fact in mind when considering a bank loan: more than anything else, bankers must assure that they get paid back, on time. Be prepared to offer several ways that they can use to get their money back if the worst happens to your business. Don’t take this attitude as a personal insult. It is simply how the world of commercial banking works.
The Eight Step Approach to Asking For A Bank Loan
Be realistic however, when you are considering the request for bank financing–it can take several months to finish your business plan summary and pull together the necessary documentation to satisfy the bank’s demands. Allow enough time before you apply. Avoid waiting until you are desperate for cash!
Step 1 — Why Do You Want Money?
Most common reasons:
Pay off debts
Substitute new debt for equity
To buy equipment, vehicles, and buildings
To expand business through more marketing, inventory, people,etc.
Be honest. Have you really checked out sources of money other than banks?
Examples: Credit terms from suppliers, payment advances from customers, loans from family, friends, private investors
Step #2: How to Check Out Banks
Check out how financially sound the banks are you are considering.
Ask for the bank’s latest annual report. Read the description of how their business was last year and look at their financial statements
Ask the banker to compare their capital reserves to the requirements of the federal regulators.
Ask to be shown a sample loan application package before you decide which bank to choose
Read the package over, making notes on anything you question or don’t understand
Contact the bank lending officer with your questions. If you are not comfortable with how they are answered, look elsewhere.
Step #3: Communicating With The Bank
May not require full-blown business plan, but at least:
The history of your company
Summary of market conditions, including competition, and your marketing strategy the 5 P’s– People, Product, Price, Place & Promotion.
Historical financial results & future projections — Profit & Loss and Cash Flow
Err on the side of conservatism
Best to have past financials on accountants letterhead
Your resume–Why are you qualified to run the company?
Examples of products or services (photos, brochures, videos, etc.)
Personal financial statement
If applicable: inventory requirements; accounts receivable aging
Step #4: What To Expect When You First Visit the Bank
Try to meet the loan office first outside of the bank, say for lunch–this is “neutral turf.”
Come prepared with a combination one-page business plan summary and loan request
On the loan request –indicate how much money you are looking for; what you win use it for (be specific); how long you want to borrow it; how you will pay the loan back; and what you plan to do if your revenue isn’t enough to cover the loan payments.
Expect them to examine your personal credit history, so do it before they do by contacting one of the three big credit agencies: TRW, Equifax, & Trans Union.
Think in advance what you will use as security for the loan–that is collateral.
Expect the loan officer to ask some pointed questions about your certainty of attaining the future sales and profits you are projecting.
Know your personal and company finances forwards and backwards!
Step #5: Realize The Importance of Cash Flow & Credit
Realize the essential reality of borrowing from a bank: They want their money back! And they want it on a regular schedule. They don’t really want to have to take over your company or sell your collateral.
This reality results in the banker doggedly pursuing your projection of cash flow for the year or two after you will receive the loan.
The “C” of cash flow is one of five “Cs” that bankers look for from good loan applicants. The list of ” 5 C’s” is:
Capacity – Ability to repay.
Character – Your willingness to show discipline and keep your promises to repay
Capital – How much have you and other investors put into the business?
Conditions – How is your industry doing?
Collateral – Your security.
Step #6: Understand the Types of Loans
The most commonly used loan types are:
Short-term loans. For one year or less. Normally used for short-term uses, such as inventory. Need for loan and repayment occur in the same 12 month period.
Working capital loans. Also short-ten-n, usually to cover your cash needs after you make and sell your product, but before you get paid.
Seasonal loans. Loan is paid off at the end of season.
Term loans. Maturities of one to five years. Used primarily to purchase capital equipment and to give semi-permanent increase in working capital. Paid back in monthly payments.
Long-term loans. Over five years in length. Used to build, buy real estate, acquire an existing business or buy a franchise.
SBA loans. Loans where the principal repayment is partially guaranteed by the U.S. government. Line of credit. Similar to a credit card loan.
Step #7.- Learn How Loan Decisions Are Made
Banks use the following process to evaluate your request:
They assess the 5 C’s
They look for a persuasive marketing strategy
They look for determination on your part
They look for financial projections that support your marketing strategy
They look at how much they can make on your proposed loan
They look for significant experience in managing your type of business
They look at how much of your own (or family’s) money you have put into the company
They look at what you will do with the money.
They examine the most recent financial results for your business.
They examine what security (collateral) you can put up.
What to negotiate with the bank:
Interest rate–Get two banks to bid and compare their rates.
Length of loan–Set a maximum monthly payment you wish to make and drive for a repayment length that will allow this.
Personal guarantee–Hard to avoid, particularly if you are a corporation. But you’ll never know if you don’t ask.
Collateral–Try to get by with only business collateral. If they insist on personal collateral, DO NOT up your house. Try putting up a CD instead.
Shop around–Don’t settle for the first bank offer. If you proposal package is good enough to be considered for any bank loan, it is good enough to show to several banks.
Step #8: Understand What Happens After the Loan Request is Accepted
You should review the paperwork with your accountant to make sure it is in your best interest. You may wish to use your accountant as your negotiator with the banks offering you financing. At the loan closing, you must:
Produce title to your collateral.
Usually sign personal and commercial guarantees.
If a corporation, sign a corporate resolution to borrow” which says you are the authorized corporate officer allowed to sign agreements.
Sign signature cards if you open business bank accounts.
Sign a promissory note(this is where you sign your life away).
Sign a disbursement request to release the funds to you. On term loans, you receive the whole loan at once. On credit lines, you only receive what you need initially. The remainder is approved but not drawn, which saves you interest cost.
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Jeff Williams
Jeff is the founder and CEO of Chicago-based Bizstarters.com, selected as “The Top Entrepreneurial Website For People Over 50″ by Kiplinger’s Personal Finance magazine.
Jeff started his first entrepreneurial training company at age 40 and has since launched two additional businesses, both after age 50.
He is the author of eight workbooks, guides and DVDs on business start-up including his latest workbook – “The Ultimate Boomer Business Start-Up Guide”.
Jeff also serves as Featured Expert for Boomer Entrepreneurs for SBTV.Com, the #1 Video Source For Smart Small Business Information.
He can be reached at jeff@bizstarters.com.
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