|
What Kind of Financing is Right for You?
A buffet of options, but definitely a matter of individual taste.
One man's sushi is another's dead fish. Start by chewing over some
of the issues that can affect your choice of financing. Here you
can figure out which sources can satisfy your appetite for size
and speed.
Educate yourself on the various flavors of financing available,
and the pros and cons of each: debt, equity, asset and other sources.
And be sure to test your own attitudes toward
the consequences of using various funding sources. Venture capital
sounds glamorous and exciting. But ask yourself if you'll be happy
with the loss of control that giving up a sizable chunk of equity
entails. And how you'll like sitting on the sidelines while others
rush to take your baby public -- or sell it off -- in three or five
years, making a killing in the process. On the other hand, owning
30% of a $100 million business may be a whole lot better than owning
100% of a $100,000 business stunted by lack of capital.
1. Financing Issues
2. Where to go for Financing:
3. Which flavor of money tastes right
to you? Find out with our fun Self-Exam!
4. Idea Cafe Tips
5. Web Links
6. Resources
1. Financing issues to chew over
Leverage
How much debt are you comfortable taking on? A highly-leveraged
company is one with a high proportion of long-term debt, relative
to the amount of owners' equity. One time-honored rule of thumb
is that each dollar of early-stage equity can support a dollar of
debt, assuming the debt is anchored by collateral. When you leverage
equity with debt, your business can expand more quickly. Some financial
advisers recommend a 1-to-1 ratio, while others can stomach a 2-to-1
ratio.
Control
How much are you willing to give up? Interest charges on loans can
increase your costs and shackle you to years of monthly payments.
But equity investors chip away at your control over the company.
They will want to know what's going on, give advice, and in some
rare cases, can even remove you from running the company.
Company structure
Are you an "S" corporation, a "C" Corporation or an LLC? (Check
"Words You Need to Know" if you don't know what these are.) These
corporate structures place limits on the number and type of investors
you may have. Institutional investors, such as venture capital firms,
will usually need you to change to a "C" Corporation.
Taxes
Was that a loan or an investment? If the amount of your owner's
equity isn't enough to support your level of debt, the IRS may reclassify
it as an equity investment. That means your interest payments won't
be tax-deductible, since they'll be considered dividends to shareholders.
For example, raising $1 million from investors who "lend'' you $950,000
and give you $50,000 will be frowned upon. The IRS generally accepts
a 3-1 debt-to-equity ratio at face value. Between 3-1 and 7-1 makes
them nervous, while above 7-1 can set off their alarm bells.
2. Where to go for financing???
How much money do you need?
If You Need less than $20,000, look close to home:
- Your wallet (personal savings accounts you can tap)
- Home equity loans
- Credit cards
- Loans from personal sources
- SBA Microloan
- Equipment leasing
- Loans from Friends and family
- Asset financing
- Customers
- Suppliers
If You Need $20,000 to $100,000, go for:
- Bank loans
- Bank Lines of Credit
- Home equity loans
- SBA Low-Doc loan program
- Equipment leasing
- Factors and suppliers
- Loans from Personal Sources
- Strategic Partners
- Friends and Family
- Customers and Suppliers
- Asset Financing
If You Need Over $100,000, but less than $1 million, look into:
- Bank loans
- Bank Lines of Credit
- SBA 7a loan program
- SBIC
- Equipment leasing (for large equipment)
- Angels
- Strategic Partners
- Private placement
If You Need at least $1 million, consider:
- Venture capital
- Private placement
- Strategic partners
If You Need at least $5 million, your likely options are:
- IPO (Public Offering)
- Venture capital
How much time do you have?
"None! I need the money now!" You've gotta act quick, so
try:
- Credit cards (but beware high cash advance fees)
- Existing line of credit (if you didn't already set this up,
it's too late)
- Friends and family
"Don't need it today, but will in a couple of weeks" Go
for:
- Bank line of credit
- Bank loan
- SBA Low-Doc bank loan
- SBA Microloan
- Credit card "checks"
- Loans from friends and family
- Home equity loans
- Equipment Leasing
- Loans from personal sources
- Customer or supplier financing
- Asset/Receivables financing
"I'll definitely need money this quarter" Crank out that
biz plan and shop:
- Strategic Partners
- SBA Loan
- Investments from Friends and Family
- Equipment Leasing
- Loans from personal sources
- Customer or supplier financing
- Asset/Receivables financing
"I've got Months" Good planning! You have time to reel
these in:
- Venture Capital
- Strategic Partners
- SBICs
- IPO (Public Offering)
- Private Placements
3. Self Exam: Which recipe for getting money
tastes right to you?
1. A venture capital firm buys a majority stake in your
business. Within a few months, they bring in a professional managerwho
replaces you as CEO, allowing you to remain as "Executive Vice President."
The new chief modifies your product, and sells the firm -- whose
value has increased greatly -- to a Fortune 500 company a year later.
Your share of the sale is 3%.
A. You're delighted. At last, your product will win the
wide distribution it deserves. Isn't our free enterprise system
wonderful! God bless America.
B. Where's the nearest window so you can jump out?
2. You're opening a computer cafe serving gourmet coffees.
Hey, why not cash in on two trends at once? Your wife's parents
offer to lend you $2 million.
A. Great. No reason to go to a bank when your in-laws can
afford to be so generous.
B. This disaster-in-the-making smells worse than burnt
coffee. Nothing kills your appetite for money quicker than the thought
of having your creditors (or your spouse) eyeing you over the dinner
table, asking why you missed the last few payments -- or hearing
advice on how you should turn the cafe into a karoke bar.
3. You have 10 credit cards. You decide to charge all the supplies
and equipment for your graphic design business, and get cash advances
up to the $5,000 credit limit on each for cash flow. You're $50,000
in debt in no time.
A. So what? It's tough to get a regular bank loan. You'll
work it off soon.
B. Now you know where the expression "rob Peter to pay
Paul" came from. Every month as you look at your statement, you
feel yourself sinking deeper into the hole of no return. All you
can make is the minimum payment, since you need the rest of the
money to keep your biz afloat.
4. Your older brother and uncle, excited by the success
of your start-up catering business, buy in as equity investors.
A. Terrific. You welcome the extra helping hands, money
and advice. there's more than enough work to go around.
B. Lousy. In a flare-up of sibling rivalry (which you thought
had been outgrown) your brother keeps reminding you the business
was his idea, and starts telling you what you're doing wrong. Your
uncle, unfamiliar with the catering industry, becomes the loudest
silent partner you've ever seen.
5. A favorite client, a computer manufacturer, likes
your software so much they decide to become an equity investor.
Then they demand so much of your time, you really have to scramble
to find time for other clients, each grumbling more than the next
.
A. It's only fair. After all, your client is now part-owner.
B. You feel like Faust after he sold his soul to the devil.
Money isn't everything you tell yourself, but now wonder how you'll
ever get out of this hell.
6. You've taken out a bank loan for your public relations business,
requiring a hefty monthly payment. The trouble is, some of your
clients are slow payers, and you often face a cash flow crunch.
A. You welcome an equity investor as a silent or active
partner the way others welcome a $50 million lottery ticket. Banks
are overrated and unfeeling, you're convinced.
B. You're doing the prudent thing others would kill for.
Your loan is at prime rate, you haven't maxed your credit cards
to the limit, and you cherish your independence.
7. After that experience with your family in your catering
firm (which dissolved, fortunately), you vow never again get in
business with family. But recently, a long-time friend joins you
as 50-50 partner in your new gourmet food shop. Unfortunately, your
friend seems to have undergone a major personality change, expecting
to be treated like queen for a day every day and making bizarre
demands.
A. Anything is better than dealing with those family tensions.
Your partner is just a little insecure and trying to prove herself.
Both of you will soon get along because you've been friends a long
time.
B. Other people dream of vacations in Tahiti. You dream
of sole proprietorships.
How do you score?
There's no cut and dried "score" but from observing your own responses
to these scenarios, you can steer clear of heartburn. Keep in mind
that no matter what happens with the financing/success of your business,
or what you have to do to get it, you still have to be able to live
with yourself and the situation you've created. Go with your gut,
or it'll get back at you later.
4.
Idea Cafe Tips
Frankly, a lot of entrepreneurs do not have a full plate of options
when it comes to getting money for their biz. The options are out
there -- but not for them.
Many businesses are too new to get a bank loan because they haven't
been around long enough to have a track record yet.
Many businesses will never be considered for venture capital because
they don't have the right biz genes for explosive growth.
Many businesses don't have the option to borrow from friends or
family because nobody they know has spare money.
And many businesses can't squeeze the necessary funds from credit
cards because their owners didn't acquire enough cards when they
still had the income to qualify.
So the real truth may be bitter, not to mention unfair. But it's
also true that where there's a will, there's a way. Study our descriptions
of the various financing options. When one clearly does not fit
you, don't dwell on it, move on to the next. Or, follow our tips
to do what's necessary to reshape your biz body so you'll qualify
to get the flavor of money you want.
Think out of the box. Think small -- see if there's anything you
can do to get started on less (like hiring your mother to answer
your company's email -- for free). Think big -- reinvestigate private
placements. Or think sideways -- get your current employer to become
your first client -- you'll hang out your own shingle and build
other clientele, they'll save the cost of benefits they used to
pay.
5. Web Links
Edge Online Entrepreneurs'
roundtable, matchmaking service between small businesses who need
money and money people, extensive resource list and expert advice,
sponsored by quarterly Entrepreneurial Edge magazine, the
official publication of the Edward Lowe Foundation.
The Money Page A
guide to banking and financing sources.
Finance Hub Primarily
a venture capital source, but includes links to more than 200 banks
in the United States, Canada, Europe and Asia.
Bank Rate Monitor
Lots of frequently updated information on which banks and credit
card companies are offering the best rates. Also breaks information
down by city, and offers advice on cleaning up your credit and how
to choose the right credit card.
The Small Business
Administration's Site The SBA's site, replete with small
business resources and guidance for applying for SBA-backed loans.
Advance Capital A
factoring company.
America's Business
Funding Director Some 13,063 funding sources, including
listings of angels and other would-be investors.
Venture Capital Resource
Library Links to everything from locating a venture capital
firm to details of security law and text of articles, all related
to getting investors.
Venture Associates Ltd.
A Denver financial consulting firm run by James Arkebauer. Information
on private placements and public offerings as well as finding angels,
venture capital, investment bankers, management consultants and
more.
Securities and Exchange Commission
Rules, regs, offerings, filings of public companies.
MoneyHunter Articles,
lists of consultants, matchmatchmaking service for angels, investors
and growth companies.
6. Resources
For the SBA:
Small Business Administration
409 3rd Street SW
Washington, D.C.
800-827-5722
For a nonprofit matching service:
Angel Networks
Technology Capital Network
MIT Enterprise Forum
201 Vassar Street West, #59
Cambridge, MA 02139
617-253-2337
For seed capital:
Seed Capital Network Inc.
8905 Kingston Pike, Suite 12
Knoxville, TN 37923
615-693-2091
For a listing of venture capital firms, mostly SBIC's:
National Association of Investment Companies
1111 14th Street NW, Suite 700
Washington, DC 20005
202-289-4336
For a directory of more than 800 venture capitalists:
Pratt's Guide to Venture Capital Sources
40 West 57th Street, Suite 802
New York, NY 10019
212-765-5311
For an IBM-compatible database of venture capital firms and
contacts:
AI Research Corporation
2003 St. Julien Court
Mountain View, CA 94043
415-852-9140
For the SBA's directory of SBIC's:
Small Business Administration
Investment Division
409 3rd Street SW
Washington, DC 20416
202-205-6600
For information on accountants:
American Accounting Association
5717 Bessie Drive
Sarasota, FL 34233
813-921-7747
For a legal referral service:
American Bar Association
750 Lake Shore Drive
Chicago, IL 60611
312-988-5000
For information on financial analysts:
Institute of Chartered Financial Analysts
P.O. Box 3668
Charlottesville, VA 22908
804-977-6600
|
Ask Questions 
Share Tips 
List Your Business 
Coffee Talk with Experts 
Biz Planning | Sample Plans 
Idea 
Name 
$ 
Do It! 
Promotional Merchandise
Managing | Operations
Work @ Home 
Yoga @ Your Desk 
