7 Kinds of Business Financing

Is 2020 your year to launch a business, or is growth and expansion of your existing venture on this year’s must-do list? If so, congratulations and best of luck to you! I’m sure you’ve thought of the most advantageous way to obtain the required financing for your plans and we’ll look at some good options right now.

A study conducted by the National Small Business Association found that 19% of small business owners cite a lack of available capital as the biggest challenge to plans for future growth and 82% of businesses outright fail because of cash flow management issues. In preparation for borrowing, I remind you that financial institutions will evaluate your credit score, so make paying off bills and boosting your savings immediate priorities.

According to the 2018 Small Business Lending Index, big (national) banks approve 25% of loan applications made by small business owners and smaller (community and regional) banks approve nearly 50% of loan applications made by small business owners. So whether it’s your food supply or your money supply, keeping it local is a good thing, am I right? https://www.biz2credit.com/small-business-lending-index/january-2018

Line of credit

A business line of credit functions like a credit card and it’s available to borrowers with either good or less than perfect credit. Borrowers can be approved for a potentially generous amount of funding that can be accessed immediately. The application process to obtain a line of credit is usually quick, and many businesses receive approval in a day or two. Interest rates range from 7% – 25% and repayment terms are usually between six months and one year, (meaning that one cannot run a balance ad infinitum) depending on the business’ revenue and credit score.

Short-term loan

Pursue this type of loan to, for example, bridge cash flow gaps, stock up on inventory that is available at an attractive price, or take advantage of a lucrative business opportunity. Surprisingly, borrowers often don’t need a great credit score to be approved for a short-term loan and that can be an advantage. In fact, the borrower could use the loan to pay off higher-interest debt and improve the credit score. Furthermore, short-term loans tend to involve less paperwork and processing is usually fast, making funds available quickly.

Short-term loans must be repaid in rather a short amount of time, often in just one year, and payments are usually due weekly, not monthly. They also generally come with a relatively high interest rate when compared to other types of loans and loan amounts are usually capped.

Secured loan

Secured business loans require a specific piece of collateral, such as a business vehicle or commercial property, that the lender can claim if the borrower fails to repay the loan. Unsecured loans, on the other hand, are not attached to collateral. Personal loans, student loans and credit cards are common examples of unsecured loans. Unsecured loans have higher interest rates and stringent approval requirements, to ensure that lenders gets their money back. Secured loans are often easier to obtain and may also have a lower interest rate, because the lender has a guaranteed way to recoup money lost to default by selling the borrower’s collateral.

Because of the increased risk an unsecured loan represents to the lender, borrowers may be asked to sign a personal guarantee in order to receive approval. If the borrower defaults on the loan, s/he will then be personally liable for repaying it. While a creditor can’t seize business property under a personal guarantee they can legally claim the borrower’s personal assets, including bank accounts, cars and real estate, until the loan is repaid.

Another common method used by institutions to mitigate the risk associated with secured loans is by reserving the right to file a blanket lien against the borrower’s business assets. Most business loan terms include a blanket lien clause that allows the lender to claim and resell business assets to collect the debt.

Term loan

Term loans, also known as long-term loans, are best for business owners with great credit and who are requesting a big loan. They may not be a good option for those who are launching a new business, however, since lenders usually want to see a track record of success (evidenced by 3- 5 years of business financials) before taking on the risk. 

The term loan application process is lengthy. If the application is accepted, borrowers must pay a principal amount plus interest each month until the debt is paid in full. Term loans are most often used to buy real estate, acquire another business, remodel or renovate a commercial space, or support long-term business expansion.

Equipment loan

Owners of businesses large and small often need to purchase, replace, repair, or upgrade various kinds of equipment to process, manufacture, or produce their products and equipment loans are essential to this process. These loans can be a great option for start-ups as well as established businesses, and they can be used to finance nearly every type of business equipment, including company vehicles. Owners of new businesses can take advantage of an equipment loan because the equipment secures the loan, regardless of the success or failure of the company. Interest rates are often reasonable and will reflect the individual’s or business’ credit rating and financial picture.

Be aware that excellent credit is required for most equipment loans. In general, borrowers will be able to finance 80% of the total purchase price of the equipment. A down payment of about 20% is typically required for most small business equipment loans.

Borrowers with less than stellar credit should investigate the terms of leasing the desired equipment. Leasing typically does not require a down payment and that especially benefits businesses that have little or no available working capital. When a down payment is required, it is typically relatively small compared to what a traditional loan down payment would be.

Purchase order financing

To qualify for purchase order financing, the company must sell finished goods (not raw materials or product components) to B2B or B2G customers with profit margins of at least 15%. Start-ups can qualify for PO financing because approval is based primarily on the creditworthiness of, and borrower history with, those customers and suppliers. The chances of being approved are even greater if customers and suppliers are well-established, reputable companies.

PO financing can present a great opportunity for start-ups that receive lots of orders but don’t have the cash to fulfill them. In these cases, similar to invoice financing, the purchase order secures the loan. Once the business receives a purchase order from a customer, the lender directly pays the supplier to manufacture and deliver the product to the customer. Once delivery is accepted, the customer pays the lender. The lender then deducts their fees from this amount and pays the remainder to the borrower, which can be counted as profits. 

PO financing is a great way to help your business grow without taking on bank debt or selling equity in your company. If sales outpace your incoming cash flow, then purchase order financing might be a good strategy to fulfill big orders.

Invoice financing

Also known as accounts receivable financing or factoring, this loan allows Freelance consultants to survive slow-paying clients. Small and medium- sized businesses will be able to manage the increasingly common practice of “net 90” receivables payment that large companies impose on smaller organizations, in exchange for big orders.

With invoice financing, lenders advance to borrowers the value of accounts receivable, less a fee of perhaps 15%. The borrower will pay a weekly fee while waiting for the customer to pay up. Invoice financing helps businesses improve cash flow, meet the employee payroll, pay vendors and suppliers and reinvest in operations and growth earlier than they could if they had to wait for clients and customers to pay their balances in full.

Thanks for reading,

Kim

Image: Money Lenders (1784) an etching by Thomas Rowland. The aspiring borrower (L) is George, Prince of Wales (George IV 1820 -1830).

Recipe For Success

Solopreneurs and owners of small businesses can benefit from what can be called a basic recipe consisting of time-tested business practices that will put you on the path to building a profitable enterprise that will make you proud.

Business strategy

Every business needs a strategy and a business plan is a very helpful tool that supports you as you implement your strategy to develop and launch your venture.  A complex strategy or business plan aren’t necessary to achieve success.  A one-page business strategy and a five-page business plan may do the job, as long as both are well thought out and executed.

A good business strategy (and plan) defines and drives the activities and behaviors of the entire organization. Without it, the business becomes a rudderless ship, lost at sea.  A well-conceived business strategy and properly written business plan reflect and support the business model and always address marketing, operations, finance, staffing and customer service, at a minimum.

Business model

The business model is the plan for how your company will generate revenues and make a profit.  The business model answers the question “Who is the customer and what does that customer value?” As a result, your business model must also spell out the company’s value proposition and what differentiates your products and services from those of competitors.

The business model will keep company leaders focused on the core markets and measuring success as defined by the business strategy.  Here you’ll detail a step-by-step action plan to operate profitably within your marketplace.

Marketing

In order to develop a realistic and potentially effective marketing strategy, it is essential to thoroughly research the most likely target customers for the venture.  What problem or goal will be solved with your products or services—what is the customer’s motive for doing business with you? How much will potential customers pay to obtain the solutions that your venture will offer?

Finding out which competitive products target customers now use to get their needs met is another essential marketing research function.  As well, you must learn the type of marketing and information gathering outreach that potential customers will find and trust.  An effective marketing strategy addresses how you will:

  • Identify target customers
  • Identify the products or services now used  (competitive products)
  • Describe how you will promote your products and services to those customers
  • Explain the positioning strategy for products and services
  • Discuss the branding strategy
  • Describe the sales strategy—how will you sell to customers
  • Address the pricing strategy
  • Identify advertising and social media marketing activities

Sales

The sales strategy that you adopt will depend on your target customers, your access to those customers and the competitive landscape.  You may be able to build referral arrangements and strategic alliances that allow you to generate enough sales to be profitable.  On the other hand, cold calling may be the most effective way to generate sales for your organization.  Will you sell in a physical location, or online? Will customers pay immediately, or will they be billed? The preferred selling approach a company uses is defined in the marketing plan.

Operations

Predictable, practical and streamlined business operations processes are a must.  The customer experience is closely linked to what happens in the behind-the-scenes delivery systems of products and services.  Think of it this way—when you go to your favorite breakfast place to get a muffin and coffee, you expect to receive what you’ve ordered with a minimum of fuss. That is how you start your day because it’s convenient and it makes you feel good.  You, business owner and leader, must create a similar experience for your customers if you intend to retain them.  Smooth business operations also play a role in building good word-of-mouth for your business.  Fail to develop a good operations plan and things could blow up in your face as disappointed customers spread the word about your shortcomings.

Unfortunately, many businesses give short shrift to the operations section of their business plan.  The purpose of thinking through operations processes is to increase business productivity and reduce costs as you offer the same (or better) outcomes to each customer, time and again.  There may be some trial and error along the way, but most of all it takes thought and planning.

Successful business leaders understand the need to continually improve business processes, to become more efficient and productive and able to respond to market changes faster, all the while providing excellent service to customers.

Technology

While technology is important, it needn’t be complex or costly to be effective.  Up-to-date technology products enable upgrades within any number of company functions: product manufacture, delivery of services, inventory management, payment systems, sales and distribution, marketing campaigns, quality control and customer service.

Finance

A realistic financial plan is the cornerstone of building a profitable enterprise.  Every business requires a financial roadmap and budget, along with the discipline to follow it.  You must anticipate and plan for business start-up or expansion costs,  projected sales and assisted by a break-even analysis, project that point in the future when the business will be positioned to make a profit.

The financial plan ensures that the business owner recognizes the most likely sources of business launch or expansion capital (will a bank loan or a partner be necessary?). A financial plan reminds owners where and how to spend money and it provides ways to measure progress, promote healthy cash-flow and warn of impending shortfalls.

Customer service

Smart business leaders treat customers well, because they are aware that there can be no business without customers who make purchases that create revenue and lead to profits.  Integrate customer service into your business practices and review those practices frequently to ensure that they are having the intended effect of facilitating customer satisfaction, repeat business and referrals.

Thanks for reading,

Kim

Image: One scene in a mural displayed in the Templo Mayor Museum in Mexico City, where thousands of artifacts were excavated from the ruins of Tenochtitlan, the former capital of the Aztec Empire (now called Mexico City).

 

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.

In the Belly of the Beast: Selling to 4 Types of B2B Buyers

Sometimes, decisions are made by committee—groan!—and that means a lot more leg work for a Freelancer who’s trying to sign a contract or a sales professional trying to sell a product or service.  When you must gain the confidence of several staff members, you may never know whose opinion really controls the sale (although you can ask).  All you can do is be prepared by understanding the kind of information that the designated contact person in each department is likely to appreciate and make sure that you deliver it.

Finance

When the Finance Department contributes to buying decisions, you have to know that tangible and intangible value received in exchange for dollars invested is the primary concern. Therefore, present your product or service in language that communicates the expected ROI of the purchase, over the short and long-term, and indicate whether the organization will save or earn money when the product or service is introduced.  A case study to illustrate the financial impact of your product or service on a reasonably comparable organization (in terms of operating revenue or type of business, for example) would be greatly appreciated by the this team.  If Finance does not have confidence in the pricing or ROI of what you’re selling, you will be asked to make monetary concessions or the C-Suite execs will decline the project.

IT

If your product or service will require technical support, this decision contributor will want to be assured that its set-up and maintenance will be easy and compatible with other systems currently in use.  Provide the team with information on how to integrate the online requirements of your product or service with the existing technical infrastructure and software.  Reliability is another IT concern and the fear of system crashes lies just below the surface.  Present data to demonstrate that the online component of the purchase will be dependable and low-maintenance.  Finally, a show-and-tell to illustrate that the system is intuitive and user-friendly, thereby minimizing staff training time or frustration of the end-users.

C-Suite

As you might expect, C-Suite executives, including department heads, are the most important of all those with input into the decision-making process because they have the power to green-light your proposal or kill it outright.  When selling to the higher-ups, it’s important to learn which factors matter most and whose opinions will have the most sway on their opinions (usually the end-users).  If the end-users clue you in to the hot button issues, then discuss them and keep your message simple and clear.  Emphasizing high-level value, as the executive defines it, is probably a useful guideline.  A case study that makes you and your product or service look particularly brilliant, especially regarding the most pressing issues, would be a good selling tool.  Be aware that C-Suite executives are usually too busy to process a complicated sales narrative. Think of soundbites that communicate impactful and tangible benefits.

End users

These team members will use your product or service most often.  Their opinion carries a great deal of weight and their approval of your product or service is a priority of the C-Suite.  Key selling points for this team revolve around the functionality, practicality, ease of use and time-saving potential of your product or service.  Seek feedback from this team as to what they consider the most relevant features and benefits and as well, how you might best promote your sale to the other decision-makers.  You may be able to convince this team of the benefits of certain add-ons and upgrades, which will enhance the user experience and the amount of the sale or billable hours.

Take time to demonstrate and ensure that your product or service will reliably meet or exceed the expectations of the end-users because if it does not, this is the team guaranteed to express concerns that will damage your credibility and the potential for future business and referrals.  Your in-house advocate will be found in this department  (try to cultivate a team member with a title that confers authority) and if you cannot convince the right person to step forward and take on the role of champion, then your sale or contract will most likely suffer diminished prospects for approval by the ultimate judges in the C-Suite.

Thanks for reading. May many billable hours find their way to your door in the New Year!

Kim