Captain BUZ's Blog
Perspectives about small business start-up, growth and success.
Where's the money???
May 5th, 2008
Lucille from Alaska wrote to me with the following question:
Dear Captain BUZ:
We are getting ready to launch our business but now I am very worried with all the stories I am hearing about the banking troubles. My question is: Where can I go to finance my business?
Dear Lucille,
This is not a simple question to answer.
The first questions are:
- How much financing do you need? And
- What do you need it for?
The good news is that there are ways to finance both the start-up and growth of your business:
- Family, Friends and Fools
- US Small Business Administration
- State, Regional and Local Programs
- Commercial Mortgages
- Merchant Advances
- Factoring
- Venture Capital and Angel Investors
But first, here is a typical and unfortunately unhappy scenario:
You know you need financing to start your new venture - after all, most new businesses do - right?
You go to your friendly neighborhood bank and share your new idea and enthusiasm. Unfortunately, unless you have a great deal of personal collateral, or unencumbered assets, that you can pledge, the bank will tell you that they do not lend to start-ups. Their advice - use your own resources, savings, and resources other family members or friends may loan, and get started that way. Come back in six months with a track record, and they may be able to reconsider.
Elated with that advice, you go home, use your savings, borrow some more from your family or friends, take a home equity loan on your house, and, because you still need more financing, take advantage of multiple credit card offers and max out on each.
You survive the six months and eagerly go back to your bank. They tell you - but you don't have any personal resources, you have maxed out your real estate, and you are top heavy with high interest credit card debt. As a result of all of this, your credit score is through the floor and so, of course, they can't loan you any more.
How to avoid this sad story?
Start with what I said earlier:
- How much financing do your need? And
- What do you need it for?
What exactly do you need this start-up financing for - to fund a start-up / to cover a cash flow gap as you grow? Well, consider this: Don't spend the money!
Do you really need a whatever? Can you buy second-hand? Is it essential to your operation - or can it be postponed? Can you lease vs. tying up precious capital? Can you get customers to pay earlier? Can you get suppliers to extend payment terms?
Have a financing plan, manage growth and manage your spending. If you still need some early stage financing, there are some alternatives to consider. Check out this article in BUZGate: Financing Proposal.
If, after considering what you really need for financing you still require outside resources, there are options to consider:
US Small Business Administration (SBA)
The SBA does not directly loan money to businesses, but indirectly and through local and online financial institutions, offer a number of financing programs:
Microloans - These are SBA loans made to community non-profits who, in turn, loan money to very small and emerging businesses.
CDC 504 Program (Certified Development Company) - These are SBA loans to a CDC who then makes long term loans to business for major fixed assets, such as land and buildings. They may also partner with local banks or other programs to put together the loan.
7(a) Loan Guaranty Program - Here, the SBA guarantees a portion of the business loan (between 50%-85% depending on the program) acting much like a co-signer, and a conventional bank provides the actual loan. This approach allows conventional lenders to work with businesses that might not otherwise meet their loan requirements, such as business start ups, or a borrower with limited collateral.
Specialized versions of the 7(a) program target disadvantaged groups such as minorities or women, or target disadvantaged neighborhoods. A new program was recently announced to help veterans returning from Iraq and Afghanistan.
Visit our SBA Edutorial to learn more.
State and Local Programs
There are many innovative state, regional and local programs that offer financing options for business ventures that are geared to supporting economic development and job creation.
For example, another BUZGate.org user wrote us who needed money to purchase capital equipment for their manufacturing business. We introduced them to a LDC (Local Development Company), which allowed them to leverage federal funds with local funds to pay 100% of the cost of purchasing two large flat-bed routers at $125,000 each. A short time after that, we introduced them to a state-based investment program, which provided them with a royalty-based investment to support R&D costs and the subsequent launch of a new product line.
Check with your state of local office of economic development to learn more. Offices are listed in BUZGate under Free Help: Business Funding.
Other Programs
There may be still other alternatives you may be unfamiliar with.
Commercial Mortgage: For example, if you possess commercial real estate, you can borrow against the value of the property using a Small Business Commercial Loan. You can download a free Guide to Commercial Mortgages. Click here to learn more.
Merchant Advance: If you have been in business two or more years and have a history of accepting credit cards as a form of customer payment, you may be eligible for raising capital against the value of those credit card revenues. This cash advance is satisfied as a percentage of future credit card sales. Click here to learn more.
Factoring: A further innovative approach suited to financing growth without giving up equity is to utilize a process called factoring. Factoring refers to the process of selling your accounts receivable invoices to a third party who then performs the function of collecting the invoice. Called factors, these agents can move quickly to get funds to a business for a fee as a means of providing financing for growth. Click here to learn more.
Finally, what about venture capital and angel investors?
Although you may hear great stories about investments from such parties, the reality is that only a very tiny fraction of a percent of businesses who apply are even seriously considered, much less financed. Visit www.Ace-Net.org to learn more.
As you can see Lucille, there are many alternatives open to those determined enough to really explore the possibilities. Your local SCORE office can help you in this process as well. Visit our SCORE Edutorial to learn more.
Best of luck, stay focused and make conscious choices.
Sincerely,
Captain BUZ
A Business Dashboard???
April 28th, 2008
Jeremy from Louisiana wrote to me with the following question: What type of bookkeeping/accounting system do I need?
Dear Jeremy:
Using a reliable bookkeeping and accounting system in your business is key to supporting profitability as well as remaining compliant with reporting requirements such as those imposed by the IRS along with possible state and local reporting requirements.
Debits / Credits and all else aside, adequate bookkeeping is a matter of keeping track of all business revenues and expenses in an organized and systematic fashion. This can be as simple as using your check book to itemize all activities and simply summarizing these activities periodically - usually monthly. There are many ledger-based systems, some simple and some quite complex, depending on the needs of the organization.
Many of these systems have been automated so that simple entries are grouped into the right categories with a resulting P&L and balance sheet reports available at the push of a button. QuickBooks is a good and very popular example of this type.
Today, such systems have advanced to another level to become true management control systems for the total operation, such as Netbooks. Small businesses may feel that they don't really need these comprehensive systems, but they quickly change their mind as they understand the ease of data entry and reporting. Data is entered where and when the data is created and so removes the need to later have another person enter the data. Further, it is possible to have an up-to-the minute picture of the total organization's performance with the push of a button or use of a comprehensive dashboard feature.
A business dashboard is an ultimate management control tool. In your car, complex systems are continually monitored by onboard sensors and problems are reported to you via "idiot lights" to show low oil or some other problem, or via a message center that tells you that you are out of windshield washer fluid, the ABS system is malfunctioning, or any other problem. You do not have to continually monitor every system of the car to make sure that everything is OK. The same can be true for your business.
To start, the business develops a comprehensive detailed budget (Check out our Breakeven article). The comprehensive accounting system collects data as it is generated and compares the results with the plan. Differences or deviations from the plan are reported on the dashboard on your computer screen. Thus the business does not have to look at all of the operating data of the business - as has been done in the past - and a long and difficult job as well. But instead, needs to only look at those areas that differed from the plan / budget, a far more efficient and effective process. Because this is all happening in real time, the business can take immediate corrective action, rather than waiting until the end of the reporting period - and often long after as the reports are eventually prepared.
We managed to discuss all of this without talking about ERP (Enterprise Resource Planning), MRP (Materials Requirements Planning), CRM (Customer Relationship Management) and Knowledge Management - until now fancy MBA terms that really didn't mean much in a practical sense. But today, these terms equal effective and timely management in any organization of any size, and that translates into increased competitiveness and improved profitability - great goals for any organization.
Sincerely,
Captain BUZ
The Start-up Dilemma
April 22th, 2008
Andrew from New Hampshire wrote to me with the following:
Dear Captain BUZ:
I am a veteran and want to start my own small business, but don't have a clue about where to start - I hope you can help. Thanks...
I wanted to share my reply:
Dear Andrew:
You are not alone in this dilemma. Fortunately, I have a great suggestion. We have developed a free online program to help not just veterans, but anyone who is contemplating launching their own business - The 10 Step Venture eMentoring Program. Here you will find a series of interactive exercises that are designed to help you clarify your purposes and identify the resources you will need. Your answers can be emailed to a SCORE mentor who will give you further advice via return email. To learn more about this program visit the Ten Step Venture eMentoring Program.
While you are in BUZGate, don't forget to check out the Free Help listings for your state - there are thousands of free business development resources available that our tax dollars pay for. You can find the program that will provide the help you need, in your local area.
Good luck Andrew - and please don't hesitate to write me again as you proceed
Sincerely,
Captain BUZ
Stay  ed ~Subscribe
for FREE Resource
Updates
page updated:
May 13 2008
|
South Carolina
Leading Small Business Resource Portal
