Archive for the ‘Financial Management’ Category:
One of the most common reasons people give for not starting their own business is a lack of funding. The problem with this argument is that 99% of the time, these same folks have not completed a thorough business plan in order to determine exactly how much capital they need!
Planning
It is impossible to decide whether a startup is too expensive, or even viable, without digging into the details of the business idea and creating a virtual roadmap of how the venture will operate. Entrepreneurship at its finest is akin to the classic construction adage – Plan the Work, Work the Plan. Once a complete sketch of a startup is developed, it is far easier to find ways to modify the idea for cost, identify opportunities to reduce, eliminate, or delay expenses, and clarify exactly how much will be needed and when. In addition, a well-thought-out business plan will open doors to accessing cash, as the entrepreneur will be in the best position to convince potential investors of the virtues of their particular startup.
Working through the details of a business idea requires researching and considering all the options available for handling every aspect of the startup. Whatever vision of the business is already established, the process of looking at the alternatives is likely to drastically change the ultimate creation. From location (commercial property or homebased) to product line to target market, it is rare for an entrepreneur’s initial assumptions to be spot on. And, depending on their flexibility and urgency of desire to launch their own business, researching the industry, market, and logistics will provide a wide price range of opportunities to get off the ground. That is, a big idea can almost always be broken down into smaller starting blocks that will fit with the time, effort, and cash available for launch.
Informal Investors
Once a definitive startup budget is established and justifiable, securing funding is far easier than most entrepreneurs expect. In most cases, self-funding is a viable option, at least to some extent. Under pressure, most people can scrape together 5K or 10K, especially if the payoff is the freedom and opportunity to work for oneself. If not, a thorough plan provides the tools needed to convince family and friends to chip in, especially if a professional approach is taken in the process. Formal, written requests for funding should include details on the terms sought – a range of loan amounts, reasonable interest rate, realistic repayment plan. It can be a good idea to offer ranges for each term to provide the investor a sense of control. Once the deal is made, all terms should be formalized in writing and each party given a copy. Handling the process in such a manner will convince your potential investors that the proposal is well thought out and thus is more likely to be legitimate.
Formal Investors
For some businesses, the capital needs will far exceed what can reasonably be raised through self, friends, and family resources. In these cases it is critical that the owners’ personal financial affairs are in order. Specifically, the credit score must be excellent with limited debt and the owners must be prepared to personally guarantee every investment. Then, there are two routes to financing – through private investors or a bank.
Private investors will typically require a significant portion of ownership (very often more than half). Thus, owners seeking significant funding (over 100k) should expect that they will not be in charge once the financing is secured. Venture capitalists and private investors put money in to businesses that they believe will have a high payoff relatively quickly and are not afraid to put proven executives in place to make sure that happens. And, in case the business fails, these investors will have first rights to any assets, usually up to or three times their original investment.
Bank loans are just about impossible to land for a startup. An SBA guarantee can definitely help, though they are not particularly easy to secure either. However, if a business idea requires an unusually high amount of capital AND the owners have nearly perfect personal credit, the SBA is an excellent way to go. Without an SBA guarantee, most entrepreneurs end up with a personal loan secured by personal assets – not the greatest option if risk is a heavy concern. If the SBA programs are an option, it is important to check into the requirements before planning the business. Be sure all owners meet the minimum requirements and that the venture’s plan fits with any limitations on how the loan is used.
So…
The first priority is still to plan the work. Without a clear vision of the company and a detailed accounting of what it will take to get there, concerns about how to finance a startup are completely moot. Good ideas should be developed through planning without regard for where the capital will come from. A convincing, justifiable plan will be easy enough to finance through one route or another when the time comes.
Start here. Go far. LaunchX.com.
Most first-time entrepreneurs are under the impression that SBA loans are an easy, viable route to funding any startup. While the SBA is an excellent government program to assist American small business, keep in mind that it is a government program, with all that distinction means – the process is slow, the restrictions are strict, and the hurdles to approval are high. Before you commit countless hours and effort to pursuing an SBA approval, be sure you understand the realities of the programs as well as your alternative opportunities for financing your startup.The SBA is well-organized with distinctive programs to cover various sizes of businesses at various stages. The most common SBA program for entrepreneurs is the 7a Regular, which provides loan guarantees to approved businesses for startup or expansion needs including working capital, equipment purchases and the like. These guarantees are not actual loans but are intended to improve the chances of obtaining a formal bank loan. After all, if the federal government is promising to repay 75% or more of the loan if the borrower defaults then the banks should be clamoring to provide the loans, right? Not so much. In fact, banks are less and less inclined to service SBA-backed loans because of the requirements (read paperwork) set forth in the SBA guarantee regulations and the higher risk of helping out small business. Finding a bank to service an SBA loan is even more difficult if you are trying to fund a startup. The SBA requires a good personal credit score to even have a chance at a 7a guarantee, and the banks will require excellent credit plus your personal guarantee and collateral before they even think about lending the cash.
The 504 program provides cash directly to Certified Development Corporations, local area Not-For-Profits that are concerned with business development in disadvantaged communities. This program is intended to provide up to 40% of the needed capital for land and buildings for small businesses. The 504 money is borrowed from the CDC, and the rest must be secured through a formal bank loan. The requirements vary, but generally the company accepting the loan commits to job creation at a certain level, such as one new job for every 50k in SBA dollars or other specific economic development or public policy goal, such as minority business ownership. Again, good personal credit, collateral (usually the long-term assets purchased with the money), and the owners’ personal guarantee are required. The Microloan Direct program is probably the most viable option for most startups. The SBA distributes around 20M per year to intermediaries such as economic development NFPs throughout the country so they can provide loans up to 35k to businesses in their areas. The NFPs set their own approval processes with some guidance from the SBA. The average microloan is around 13k and most intermediaries also require collateral and a personal guarantee.
The recent Stimulus Plan includes incentives for banks to make more SBA-backed loans including reduced fees and increased guarantees to 90% of the total loan amount. Still, reports indicate that the banks aren’t particularly swayed by these incentives and loans to small businesses, and especially startups, remain limited. The primary reasons are the high risk (one report indicates a failure rate of nearly 12% in 2008), the high cost of servicing SBA loans (even with the Stimulus Plan discount), and the little known fact that the SBA can back out of the guarantees even after the loan has been made.
The reality of securing an SBA loan is not as rosy as many startup gurus would have you believe, nor is it necessarily an entrepreneur’s best bet. At best, these loans should be a backup plan if startup cash cannot be found elsewhere. SBA deals are expensive – even the microloan interest rates are between at least 8% and 13% – it is time-consuming and tedious to qualify, and you will be required to support your application with your personal guarantee anyway. This means that your assets become fair game for the bank if the business doesn’t work out for any reason. In addition, the chances of approval are much slimmer than most people think. Last year, just under 70,000 SBA 7a loans were funded, most of which were likely for established companies. The Microloan program distributed over $20M last year, but with an average loan value of $13,000, only around 1500 small businesses (not all startups) enjoyed the fruits of this program. In considering these numbers, keep in mind that over 600,000 new businesses with employees are started each year. There are no reliable numbers on the number of solo businesses that are also launched, but the estimates are that the total is significantly over 1,000,000 startups each year. Add to that the number of businesses seeking capital to grow and expand and the odds that any one startup will be funded through an SBA program are pretty low.
If you are looking to start your own business, don’t make the SBA loan your first choice for startup financing. Determine how much you can get done out-of-pocket and look to family and friends investors to round out the funding. Financing your business yourself and through people who know you and want you to succeed provides you far more control and can be a stronger incentive to watch the pennies throughout the life of your venture. However you decide to fund your business, the first step is to develop a detailed plan, including financials.
Start Here. Go Far. LaunchX.com
Congratulations! You have eliminated all the usual excuses for not getting started on your new business…..now what? Figuring out where to start in developing your business idea is a major stumbling block for most first-time entrepreneurs. The available advice is all over the place and often lists “business requirements” without telling you how, when, or why to do them. Simply registering your business and posting a website is not enough, and the available fill-in-the-blank business plan templates do not tell you how to dig into the details of your startup or what you should be looking for.
For every business idea, the first order of business is to actually plan your business. Merely writing down your business idea and throwing together unjustified numbers for projected financials is not a plan. Rather, you need to thoroughly define your product, identify your target market and how to reach them, determine all legal requirements, and develop solid, justifiable financial projections before you can decide whether your business idea is viable. In addition, you need to develop a complete marketing plan, from the role, design, and SEO of your website (yes, your business must have a website!) to the best routes for reaching your market through paid advertising to the role of networking in developing your business.
Quite a bit of effort goes in to a well-developed plan, but the experience will leave you completely prepared for managing your business once it is up, running, and making money. Your well-developed plan will provide you a roadmap for where your business is going and how to get there. In addition, if you will need outside investment to launch your startup, all of this research will easily develop into your formal business plan and will clearly show that you have done your homework and know your business inside and out.
With your completed plan, you will know whether you can finance the startup yourself or will need outside investment. If you can fund it yourself, the next steps are to execute the plan and open for business! Then, your responsibilities shift to the actual operations, managing employees, overseeing the financials, and planning for growth.
There is a lot to starting your own business, but the independence and flexibility that comes with entrepreneurship is well worth the effort. The process is not as complex as it seems, and the keys to success are easy to remember – Planning, Marketing and Financial Management. If you begin your business with these factors in mind, you will greatly reduce your risk and greatly increase your odds of success.
The LaunchX System is the only complete startup program on the market and includes everything you need to take your business idea through startup to a successful company. The program is designed to address every startup stumbling block entrepreneurs experience as well as the tools every small business needs to grow and succeed. The tools included in the LaunchX System are there to help you minimize your risk and decrease the time it takes to get your business off the ground. If you are serious about turning your business idea into a successful company, check out the LaunchX System.
Start here. Go far. LaunchX.com
Lack of money is, by far, the most common argument for not starting a business. Obviously, business ideas vary in the amount of capital required to successfully launch, but most can be modified and bootstrapped into manageable startup costs. Most first-time entrepreneurs develop an “order of magnitude” estimate of how much they need to start their business, based on nothing more than general ideas of what the big things should cost. Without detailed research and planning of your business idea, there is no way to gauge whether the cost of startup is too much. In addition, it is far easier to raise the capital you do need once you have thoroughly planned all aspects of your idea. A well-thought out idea and accurate financial projections will convince potential family and friend investors, and perhaps the SBA, that you are serious about succeeding.
Even if you work through your idea and find that you are unable to finance the full startup, you will find it much easier to modify and bootstrap your idea into smaller, less costly niches that you can ultimately grow into the company you imagine. You can start out part-time, barter with other small business owners for needed goods and services, or pick up side consulting gigs to increase income during the early stages. The internet provides significant opportunities for free marketing – it takes a little more time and effort than paid advertising, but can be extremely effective over the long run in building your brand and customer base. Once you know where you need to spend money to get your business off the ground, it is far easier to find the places to bootstrap.
Of the companies included in the 2008 Inc. 5000, 87% were funded, at least in part, by the owners themselves. The median amount of capital spent to launch these companies was $25,000 – that means half of those 5000 successful companies were started with less than 25K. A bootstrapped startup of $5,000 or less is very common, and most people can raise 5K with a little motivation. Cut your spending, sell some stuff on eBay, do some side jobs, whatever it takes, there is always a way to get started without a major outside investment. By starting your business with an eye toward conserving cash, you will develop a culture of financial responsibility that will ensure your business’s long-term growth and success.
Friends and family are the second most popular source of funding for startups (after self-funding). In order to protect and separate the business and personal relationship, it is important to follow basic business principles in making deals with those close to you. Negotiate all the terms, set a clear repayment schedule, and memorialize your agreement in writing. There are companies available who will service your family and friends loans, for a fee, which can be a great option if you and your lender would prefer an intermediary to handle any potential problems or disputes regarding the investment.
Another new avenue to raising capital for your startup is through social lending websites. These sites allow you to post your request for loans along with a description of the purpose and the interest rate you are willing to pay. Interested users pledge their own funds toward your loan in increments from $50 to your full requested amount. You repay these lenders through the website. This can be a great option if you have limited access to your own capital. Peer-to-peer lending is gaining in popularity, which also means there are some kinks to work out. Be sure to check into any lending site you consider before you commit.
Bank loans are very difficult to secure for startups. Generally, the only way to use the bank’s cash for startup is to personally guarantee the loan, usually with collateral. The SBA offers a number of excellent startup financing programs which require a full formal business plan and good personal credit. Of course, these loans take a significant amount of time and effort to secure, so if your startup expenses are relatively low, you may be better off scraping together your own cash and looking to friends and family for the rest.
Angel investors and venture capitalists are often touted as the ideal route to funding a startup. The reality is that very few companies are funded at startup through either Angels or VCs, the competition is very stiff, and you must be willing to give up significant control and ownership, in most cases. Generally, both Angels and VCs are looking for quick and enormous returns on their investments and are far more inclined to be second round investors – on board after the R&D and grunt work is complete, and all that is needed is cash to send the company to the stars. The process for most VCs is long and tedious, and very few of those seeking capital actually get funded. If you are selected, you will give up most of your ownership stake in your business and be expected to heed the advice of the professionals that come with the money. However, if your idea is one that fits the VC profile, destined for overwhelming success, you will likely be willing to make those trade-offs for the cash your company needs to succeed.
Whatever your startup plans, there is a way to get started, with or without outside financing. It is critically important that you work through your business idea in detail, including all planning and financial projections, before you reject your idea because of lack of money. The more you plan, the better able you are to see ways to bootstrap by starting smaller, cutting expenses, and exploiting opportunities that will allow your business to get off the ground.
Start Here. Go Far. LaunchX.com
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