How to Start a Small Business - Getting Capital - 19 Dec 2008

How to Start a Small Business - Getting Capital

How to Start a Small Business - Getting Capital

http://www.georgesmayblog.com/how-to-start-a-small-business-getting-capital/

Starting your own business can be a very intimidating project. Here
is some small business advice to help make the process less daunting:

Writing a Business Plan

Writing your business plan is basically developing a document that
will explicitly exhibit how your small business system can sell enough
of its product (or service) to make a profit. This will not only
streamline your goal, but if worded correctly, may prove helpful in
finding potential backers. In effect, writing a business plan will
double as both a thesis for your company and a selling slogan of sorts.
While writing out a business plan, it is imperative that the end goal
is to have both you and others who read it sold on your idea. That way
you, and your investors, will have full confidence in your small
business system every step of the way.

But I have read articles about Fortune 500 companies that did not start by writing a business plan.

Sure, the seat-of-the-pants approach has worked in the past. Think
of it this way, you could stand at half-court with your back to the
basket, chucking basketballs at the rim all day and it is likely that,
eventually, one will go in. But if you studied how to correctly shoot
the ball and practiced going through the motions before you shot it,
you probably would make the shot much quicker. AT&T did a study
where they asked entrepreneurs to rate their overall success. 42% who
had taken part in writing out a business plan rated themselves more
successful than the 58% who hadn’t. It is basic, planning ahead pays
off.

It should be noted, that if you are going to approach an investor
with your small business system, you should definitely know your
business plan inside out, including the numbers.

I am not an accountant. I have never financially planned for starting a business.

That is fine. Forecast to the best of your ability. If you need
help, look at other business’ startup models. There are financial
statements for hundreds of publicly traded companies circling the
internet. The point is to be completely prepared when you go to
investors with your small business idea so they won’t have a choice but
to buy in. Don’t skip the numbers.

Once you are done writing out a business plan and you feel your
small business idea is solid, now it’s time to go out and raise
capital. This can be a very tough, frustrating process, especially in
these tight economic times. However, luckily the odds are in your
favor. There are tons of ways to raise money for your company.

Part 1 - Loans

Small Business Administration-backed loan (SBA Express)
Bank-qualified business owners can borrow up to $150,000 without going
through the standard SBA application process and are guaranteed a loan
decision within 36 hours. To track down active lenders in your area,
contact your SBA district office, or visit the agency’s Web site.

Community banks - While the small banks may have
fewer options than the giants do, their advantage to entrepreneurs is
their flexibility. To locate possible lenders in your region, contact
the Independent Bankers Association of America, which can provide leads
to more than 5,000 community banks. You can visit the association’s Web site, call the group at 800-422-8439, or reach it by E-mail for further small business advice.

There are certain national banks that do more than
just talk about their interest in backing start-up companies. Banks
like Silicon Valley Bank actually have loan officers out pushing new
products and approving deals.

Asset-backed borrowing may be the only choice for
your company. An asset-backed loan can be anything from a home-equity
line of credit or an SBA deal backed up by your kids’ college-savings
account.

Microloans - If only a small amount of money (100’s
to low six-figures) is needed to get you going, then I recommend this
soundly. However, I must also say that reports suggest that
microlending activity is slowing down. Many lenders see that loans of
that size not worth the effort.

Third-party loan guarantees - Can’t get approved on
your own? Get a close friend or a relative to cosign for you. Also,
there are companies who will cosign for you. Usually, you pay either a
fixed fee or a percentage of the loan and in turn they will cosign your
corporate credit line.

Venture leasing has become quite popular among
fast-growth companies. It can be really nice, as you do not have to pay
out of your loan for equipment. However, it can be expensive. Jill
Fraser, financial advisor and author for 20 Tips for Finding Money Now
puts it in perspective nicely:

Venture leasing deals typically require payments of 100% of
principal, plus 8% to 12% in interest charges over a 24-month to
60-month lease horizon (plus the lessor gets the equipment when the
lease period ends). Prediction: if demand stays up, expect rates to
increase. Still, venture leasing is cheaper than giving away more
equity, particularly in today’s tight capital market.

Credit cards - Especially right now, if you want my
small business advice, I can’t say that I recommend them. But if every
banker gives you the boot, the upside to credit cards is that you have
options. A good thing to look for when you contact all, and
you should contact all of them just to see what is out there, of the
credit card companies is the opportunity to increase your borrowing
limit after establishing good standing on your account.

Ask a friend or family member - I will make one recommendation
however. Should you have the opportunity and decide to choose this
path, hire a lawyer to help you follow professional standards when it
comes to documenting and structuring the loan for your small business
system. Otherwise, later when you approach a lender for a larger
amount, their lawyers will be all over your corporate structure. Any
inconsistencies might be a deal breaker.

Part 2 - Equity

Don’t be afraid of performance based terms -While
these generally will scare small business owners seeking investments,
think of it this way: If you have to give away a fair share of stock to
enable business startup, so what? As long as you are in control then
that is what matters. What I mean is, if you work into the deal that
you will get a good portion back based on your own performance, then
who cares how much you gave away originally?

Redeemable preferred stock is another way to ease
the minds of an investor and get a deal done. For instance, you can
structure the preferred stock in a manner that if the payoff takes say
four years instead of two from business startup, the lender will get
their investment as well as stock on exit. Now, the investor feels like
they have a safety net and you get your small business get up and
running.

Public Equity - Dealing with an investment-banking
firm that is affiliated with a commercial bank (Salomon Smith Barney +
Citibank = Citigroup) will let you and your advisers plan an either-or
scenario. If the markets oblige, go public. If investor interest starts
to look unstable, then get your banker to use their influence to help
your small business get a small loan/line of credit to hold you over.

International Finance -This method works for U.S.
companies who want to protect their cash flow from volatility abroad.
Remember though, given the severity of economic problems in some
regions you definitely want to rely on your international accounting or
legal experts for their small business advice. What can be nice is how
some overseas financing institutions will guarantee your company
payment quickly while giving your customers the chance to put off their
payments for several months or longer. Again, ask your international
advisers for leads to reliable financing institutions.

International strategic partnerships -When small business owners decide
they want to go abroad, sometimes their bankers tend to squirm. Just
because U.S. lenders tend to be a bit cautious does not mean that
international bankers or private-equity firms will. In fact, if you are
aiming for a market they are in that looks to be emerging, they will be
nine times out of ten be more open to the conversation.