Only Those Who Have Money Can Borrow Money

Here is a typical story: A passionate would-be entrepreneur launches a venture, often with the romantic and exciting intention of bootstrapping the finances.  But realistically, bootstrapping is not the correct description of the financial plan.  The term that applies here is under-capitalized.  The idea may have been realistic,  but before our intrepid entrepreneur could get traction with the concept, the money ran out.  The only thing remaining was debt.

Our hero would like to start over, since valuable lessons were learned and baked into business plan and model 2.0.  However, start-up capital that was not requested in the first go-round must be sought now, because the realization that there will be no success without adequate funding is now apparent.  What can be done to give our story a happy ending in a world where it takes money to make money? Let’s take a look at some possible funding options, some common and others less so.

Friends and family financing

Besides your own bank account, the most obvious place to look for start-up capital is with friends and family, that is, if you have a very good idea of whom you can do business with and those relatives or frenemies who must be avoided.  Many business ventures are funded in this way.

If you choose to borrow from family and friends, put into writing the loan amount, terms and repayment schedule and agree only to what you are certain you can uphold.  According to CircleLending’s Business Private Loan Index, the average current interest rate on business loans made by family members and friends is 7.6%.  Do everything possible to preserve relationships and not let money divide you.  The last thing you want are tense holidays (there are more than enough ways for that to occur as it is).

Micro-lenders and web-based lenders

There are several non-bank lenders found only online that offer micro-loans to small entrepreneurs.  The loan amounts are usually between $5000 – $25,000 and these outfits can be excellent sources of start-up and expansion capital for entrepreneurs with debt and /or limited resources.  There is sometimes a potentially very useful credit repair feature available through certain of these lenders when loan repayments are reported to credit bureaus.  On-time payments will raise your credit score, improve your credit rating and lower your future interest rates.

Here are sites to visit, including the Small Business Association’s Micro-loan Program:  http://prosper.com   http://www.zopa.com   http://www.accion.com https://www.sba.gov/loans-grants/see-what-sba-offers/sba-loan-programs/microloan-program

There may as well be small not-for-profit organizations that are micro-lenders in your state, but they may not be found online.  To obtain contact information on these loan source possibilities, please visit  www.microenterpriseworks.org

CircleLending data demonstrated clearly that comparison shopping is a must-do.  The loan interest rate at Accion was 12%, while the rate at Prosper was more than 20%, for those with poor credit.

In 2016, the National Small Business Association found that 73% of small businesses used some type of funding to launch a venture, expand a business, purchase inventory or equipment, or strengthen the company’s financial foundation.  The 2012 U.S. Census Bureau Survey of Business Owners found that 57% of start-ups launched the venture with personal savings; 8 % used personal credit cards; 6% used other personal assets (retirement account?); and 3% used a home equity loan. Only 8% used a bank loan.

While it is possible for individuals who are in tight financial constraints to obtain bank loan financing and business credit cards as noted above, interest rates are high.  More than that, even those who might qualify for bank loans are not going there.  You want to put your money not into interest payments, but rather into building your venture into a successful enterprise and paying off debts, in that way positioning yourself to save and invest capital and build for yourself a strong financial future.

Thanks for reading,

Kim

Triple Dollar Signs, Andy Warhol (1982)   Christie’s Images, Ltd.

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A Capital Campaign for Your Enterprise

Businesses are powered by capital and the “capital” includes all resources that contribute to the success of the business.  The emerging field of corporate sustainability, which translates the goal of long-term business growth that is simultaneously respectful of stakeholders inside and outside of the business venture into pragmatic action items and encourages business owners and leaders to recognize and quantify forms of capital, in addition to financial capital, on its own terms.

Mark W. McElroy, PhD, consultant, author and educator in the field of corporate sustainability and founder of the not-for-profit Center for Sustainable Organizations in Vermont and Martin Thomas, former head of global strategic planning at Unilever, recently developed the MultiCapital Scorecard, the first and only context- and capital-based integrated measurement, management and reporting system. Using the Scorecard, business leaders and owners of any size organization can assess company performance in terms of impact on all types of capital used.  Which resources is your organization maxing out, which are under-utilized and how do these practices impact prospects for sustainable growth?

1.  Economic capital

All financial resources, including access to investment capital,  credit and loans and also the value of the brand the business possesses.

2.  Human capital

The combined expertise, experience, knowledge, motivation, focus and discipline that you and your employees and consulting specialists possess and your shared intellectual capital.

3.  Relationship capital

The extended team you work with, including any networks, strategic partners, your informal business advisory board, referral sources and in addition, your reputation as a professional.

4.  Constructed capital

The infrastructure that we depend upon, including transportation, electricity, heating and air conditioning, the internet, effective and appropriate laws and regulations, public safety and available places where business commerce might take place.

McElroy and Thomas advocate for the MultiCapital Scorecard to be used to create a sustainable vision, mission, goals, management and business practices for organizations. They recommend that the organization first identify its internal and external stakeholders and the duties and obligations owed to them. Next, define the ideal standards of performance and apply context-based metrics to measure your organization against those standards.

Small businesses and self-employed Freelancers can make use of the Scorecard to account for the various types of capital that is available,  measure the use of each form of capital and better understand how to manage and nurture resources.  Goal-setting will become more obvious as priorities surface and opportunities and weaknesses emerge. The stage will then be set making plans that usher in sustainable growth and profits.

Thanks for reading,

Kim

C x 5 = Success for Your Business

If one intends to succeed in business,  then it is necessary to manage the business effectively,  because in the long run,  the better-managed businesses  succeed.  Dan Barufaldi,  Freelance management consultant active in metro New York City,   authored the 5 C’s for Success in Business list.  According to Dan,  success in business requires that you attain and leverage these five resources:

Clients

Credibility

Cash flow

Credit

Capital

I.   Clients

But of course a robust client list is necessary if one expects to keep the doors open.  Clients are the life blood of every business and priority is given to acquiring and retaining the  source of revenue.  There are a number of tactics  strategies that business owners can use to find and retain customers,  including:

Advertising and promotion

Advertising in newspapers,  blogs,  newsletters,  trade journals

Email marketing campaigns

Trade show and conference  exhibits

Participation in local charity events

Brand

The focus may not be on a specific product or service,  but branding is marketing/advertising designed to enhance the reputation of the company/ consultant in the marketplace.  It is important to communicate to current and potential customers that the company/consultant is reliable and trustworthy.

Customer service

Create good word of mouth  (still the best form of advertising)  and stimulate referral business by providing excellent customer service and exceeding expectations every time.

Networking

Those whose target clients are B2B will greatly benefit from membership in the local chamber of commerce,  Rotary Club and neighbor hood business association.  Those whose target customers are B2C will be wise to take part in neighborhood charity events and otherwise be visible in the community.  B2G oriented businesses and Freelancers will attend information sessions and certified vendor conferences sponsored by city,  state,  county and federal organizations.

II.  Credibility

Freelance consultants and small business owners must package and present ourselves and our products and services in a professional manner.   We cannot afford to advertise and brand like the major corporations,  so we must be creative in our use of promotional resources.  A good ongoing branding campaign to enhance reputation is essential,  as is excellent customer service.  Promote your brand and build trust with good customer service,  to create good word of mouth that can earn you recommendations and testimonials.  Teaching is a time-honored way to demonstrate one’s expertise.  Speaking on (or moderating)  a panel at a professional development symposium is another excellent way to create visibility among your peers and potential clients.

III. Cash Flow

For Freelance consultants and small business owners,  cash flow can sometimes take precedence over  short-term profitability.  Cash flow glitches will result in unpaid accounts payable,  the inability to take advantage of special offers,  an unmet payroll and/or the inability to cover immediate and urgent expenses.  It’s a smart idea to project cash flow needs over 8 – 12 weeks,  so you’ll know when to invoice clients,  when receivables are expected,  when accounts payable are due and have time have time to cover any gaps that appear.  It may be possible to extend the due date on certain accounts payable,  accelerate the collection of accounts receivable,  adjust expenses or even get a bridge loan  (or a temporary job).

IV. Credit

Available credit supports cash flow management.  An honored request to increase the credit card limit allows one to float expenses when accounts receivable collections are unexpectedly slow,  or allows the business to stock up on inventory when prices are favorable.  Those with good credit ratings pay lower credit card interest rates,  which is also good for cash flow.

V.   Capital

Those looking to grow their business may need to make large expenditures and that will require access to capital.  If significant business growth is part of your organization’s three-year plan,  start now and improve your credit rating by paying off debts,  if that is an issue.  The establishment of a good relationship with a bank,  along with a credit rating and financial management practices that demonstrate good judgment and fiscal responsibility,  will be very helpful when it is time to seek financing.  Make an appointment with the manager of your bank to discuss your plans,  learn how much you are qualified to receive and the payment terms.  Meet a banker as you network at the local business association and get a second opinion.

Thanks for reading,

Kim

The Best Business Plan for Your Business

A well-conceived business plan does much more than merely describe what will become your business.  Your business plan must sell you first and foremost,  along with the products or services you’ll offer,  the business model you will follow,  the marketplace in which you’ll compete,  plus reasonable estimates of start-up and monthly operating expenses.  If outside funding is required,  then the plan must convince lenders or investors that you are prepared and qualified to build a significantly profitable enterprise.  A good business plan will do the following:

  • Define the business mission
  • Describe the products and services
  • Identify target customers
  • Identify and evaluate major competitors
  • Describe the business environment
  • Detail the business model
  • Describe the business strategy
  • Detail the marketing plan
  • Demonstrate how a profit will be made
  • Provide an exit strategy

Here are business plan options for three scenarios:

The Executive Summary

An Executive Summary is a condensed version of a full-dress business plan and often runs to about 5-10 pages in length.  When written well,  the Executive Summary nevertheless functions as effectively as a traditional business plan.

It is a useful tool for Freelancers who will open a consultancy and will have relatively modest start-up costs and monthly operating expenses and are savvy enough to appreciate the value of a road map to launch their venture.  It is not a business plan option for those who will approach lending institutions or investors.

The Executive Summary states the business mission,  describes the products/services,  describes the primary clients and competitors and details the business strategy,  business model,  marketing plan and relevant financial data.  To be useful,  the document must fully integrate that information and demonstrate how the business will become profitable.

The Operational Business Plan

An Operational Business Plan is produced by an existing business with several years’ performance history,  usually with a goal to either apply for business expansion capital or prepare for the sale of the company.  Operational Business Plans may also be used to upgrade and streamline how a business runs,  functioning as a guide for the management team.

The Operational Business Plan delves into great detail about production,  customers,  competitors,  the marketplace and business environment,  sales distribution channels,  management and staffing.  Historical data are available and five years of financial statements are typically included,  along with financial projections that forecast the company’s expected performance over the next three years.

The business plan to attract investors

When outside investment is sought,  it goes without saying that the potential for strong profits must be demonstrated.  The more money that is requested,  the bigger the promised profits must be and the more quickly realized.  The break-even statement,  which shows at what point in time the business will go into the black,  along with credible financial assumptions and projections,  are critical in this scenario.

If the business is an existing one,  the financial projections must appear to be attainable,  based on the five year financial history given.  Make sure that your business and personal credit scores are 700+,  or you won’t see a dime from a bank.

Venture capitalists and angel investors may be somewhat more forgiving of a less than perfect credit rating if your business concept and model are extraordinary.  Beta test the product/service and business model with target customers to verify demand for what you intend to sell and your ability to efficiently deliver the goods to the marketplace.

For VCs, the potential for big profits is king.  They are in it for the pot of gold that comes when the company goes public and stock is offered.  Angels are not totally dissimilar to VCs,  but they are drawn to an entrepreneur’s vision and passion in addition to the pay-off.  That’s why they’re called angels!

Thanks for reading,

Kim

Wheel and Deal—Fast Cash

I recently heard about a company called The Receivables Exchange.  The company hosts an online real-time auction of accounts receivable and invites businesses to sell outstanding invoices to raise money quickly.  The auctions enable businesses to sell their  receivables to bidders in the global institutional investor market.  Sellers are paid the auction value of the receivables and thus gain access to working capital.

According to The Receivables Exchange,  typical sellers have more than 60% of their working capital tied up in accounts receivable and are therefore limited in their ability to take advantage of important opportunities or otherwise expand their businesses.

Collecting receivables has become an adventure for many business owners and Freelancers,  as we all know.  Customers may be asking for extended payment terms.  Big corporations that can well afford to pay on time have sometimes adopted the mean-spirited practice of paying their small business vendors in 45-60 days,  or even longer.  This can put businesses  in an ugly cash flow bind.

The Exchange can make available  badly needed capital to (certain) businesses that cannot obtain traditional financing or cannot wait out a credit approval process.  The Receivables Exchange can give access to a quick  infusion of cash when it’s needed most. The process is similar to factoring,  that old-school trick used to raise cash fast.

In factoring,  receivables are sold to a financial institution at a pay-out rate that is usually between 75-80% of  face value.  The 20-25%  held back is called the reserve. The quality of receivables determines the reserve amount,  as does the historical average turn-around time of invoices.  In other words,  if big companies like Verizon or CVS are the receivable accounts and they tend to pay within 30 days,  the reserve percentage will be lower.

Cash is usually sent in 5-10 days.  There is no credit check.  Once the receivables are paid up,  the business owner is paid back the reserve,  minus a factor fee of 2-5%.  Additionally, there is a fee of 1/8 to 1/15 %  assessed for every day past 30 days that the receivable is outstanding.  It’s a heavy hit to take,  but money is quickly raised and with few questions asked.  Moreover,  the factoring company assumes the risk of customer default.

When evaluating whether or not factoring makes sense for your business cash flow challenge,  do your homework.  Ask your accountant for a recommendation and then check references.   Make sure you understand those numerous fees.  Liquid Capital liquidcapital.com is a well known factoring company.  You might also visit the websites of the Commercial Finance Association or the International Factoring Association.

But now there is a marketplace where receivables are sold to the highest bidder.  As a result,  it is often possible to obtain more favorable rates than factoring.  This option is not available to everyone,  however.  To be eligible for membership,  the business must have minimum annual sales of $2 million,  must have operated for at least 2 years,  must be registered to do business in the US and can have no tax liens.  The app. fee is $500.00. Sign up online to become either buyer or seller receivablesxchange.com.

The Exchange is no scam.  In January,  Bain Capital gave the New Orleans based company $17 million in financing.  In our credit challenged business environment, there is plenty of upside potential for the company.

Thanks for reading,

Kim

Starting A Business? Consider Your Financials Part III

Investors and lenders require significant demonstration of your ability to repay money that will be extended to your business.  Lenders will want to know when  your business can be expected to  make a profit,  so they can be shown in yet another way that you will have the ability to repay the  loan.  Investors will want to know when they can expect some ROI.

Both groups will also want to know the rationale for your financial calculations and for what purposes loan and investment capital will be utilized.  The following three statements will answer those questions.

THE BREAK EVEN ANALYSIS

The point in time when sales revenues generated equal business operating expenses is called the break even point. This is an important calculation for a new business,  perhaps  more so for those who seek funding. The Break Even analysis is also useful for established businesses that will launch a new product or service.

The B-E analysis demonstrates how much product must be sold at a given price for the business to stop losing money.  The business owner can then think about the road to profitability.  Investors will be able to think about getting paid back and eventually receiving their ROI.

Refer to your P & L  2 or 3 year projections and get the data for fixed and variable expenses and  gross revenues. Use an Excel spreadsheet to set up your B-E analysis. You will be able to experiment with different product/service prices to learn how much product must be sold at each price point to bring your business to B-E.  So now you have yet another way to help determine pricing.  Excel will also create graphs for the analyses.

FINANCIAL ASSUMPTIONS

When you have completed each of the five financial statements,  it is customary to explain your rationale for calculating things the way you did.  In a new business so much is an educated guess and in an existing business past performance points the way to the future.

Events beyond your control may occur,  an extreme example being the tanking of Lehman Brothers in September ’08 that set off our global financial crisis.  That ruined a whole lot of financial assumptions, that’s for sure!

Give an overview of the financial picture and then discuss the P & L,  Cash Flow,  Balance Sheet and B-E Analysis.  Let’em know you did your homework.  Explain and defend your decisions.

SUMMARY OF FINANCIAL NEEDS

If you seek funding for your business, then you must document for investors or the bank how you will use their money and when you will need the infusions of cash.

Will you use the loan to finance an expansion of the business? Must you buy new equipment, hire employees, increase advertising expenditures or obtain larger office space? Provide detailed info on the costs associated with making it all happen.

Creating a timetable for the roll-out will make you look very prepared, as will including references to the sections of your plan that discuss these actions.  Be convincing as you discuss how these actions will increase revenue and profits and bring in the money needed to repay the loan on time.

There are categories of financial needs:  Working Capital–money you’ll need to keep the cash flow healthy so you can do business as you should; Growth Capital–money used to expand the business and increase profits; and Equity Capital–money to be used for permanent needs, it is offered to investors who will take a risk and receive a piece of the business or dividends.

Next week we’ll take a look at options for the legal structure of your business.

Kim