Accessing Capital for Your Business
“I would say raising capital is one of the weakest things for most entrepreneurs“.
Kickfannie GetMoney - access the information you need, and learn about raising capital for your business.
Capital raises not only occur in the initial startup phase of the business, but through growth and expansion cycles too. Get Money walks you through the traditional and non-traditional mainstream funding sources, then takes a look at alternative methods of funding too. Look for the weekly articles related to capital from those in the know, resource links, recommended reading, and the Kickfannie ToolBox. Visit GetMoney often.
BUILD YOUR PROFESSIONAL MONEY TEAM
An early word of caution…it is understood that you may be at the infant stage with your business, and the idea of paying an attorney or other professional in excess of $400+ a hour may seem crazy. Our suggestion is to surround yourself with the best professionals you can afford to take you through the process of raising capital. Build your professional team. Select experienced team members, which can include corporate attorneys, CPAs, a controller or an in-house or outsource CFO, an investment banker. These team members are in addition to your relationships with a good business banker, insurance professional, or financial advisor. You don’t want to innocently find yourself in a pickle, when raising capital, nor do you want to take your business under in the attempt to fund future growth.
Whether you are up and running full speed, or beginning the process, you have a million and one details to attend to, and in most cases navigating a capital raise is not what you do on a daily basis…so, don’t. Avoid SGRS Syndrome - Smartest Guy in the Room Syndrome – hire professionals in three words, money well spent.
RAISING CAPITAL FOR YOUR BUSINESS
One of the primary reasons small businesses experience an unhealthy 50% failure rate within the first five years is due to inadequate capitalization. The time will come, when a capital raise is necessary to grow into the "next phase" for your company's evolution. Start by identifying available sources of capital. Capital surrounds you...it is everywhere; however, determining which source is best for your circumstances may not be the snap you would think. Undoubtedly, there will be hoops to jump through! There are many traditional and non-traditional sources. You can choose to borrow from a number of resources, including banks, credit unions, private investors, co-workers, the state, civic organizations, family and friends, go for a round of crowdfunding, angel investors, or venture capital. Whatever the funding avenue know there are a couple of basic steps to follow, which will get you there.
Creating a rock solid business plan with a well executed presentation, and the ability to communicate effectively will serve you well. Be prepared to discuss your management and business model extensively. Your business model is represented by your financial model. The presentation must address the business income and cash flow models. Assumptions should always be clear, concise, and easy to understand. It is most important for a business owner to know they amount of capital, which will be needed, and be able to make a case for "the why" and how capital will be utilized. These two determinations are critical in your presentation. Also be prepared to discuss repayment timelines. Know the interest rate you can afford to pay for the use of borrowed funds.
Next, determine your options. Check your credit. If your credit is very good, then it may be feasible to secure a loan based solely on past credit history. However, if your credit history is rocky lenders will require additional sources of cash flow for repayment. Additional sources for cash flow or “cushions of protection” can be inventory or equipment that could be sold or liquidated. Stocks, real estate, or other securities may also be used. The value of these assets cannot be tied to the value of the business. Additionally the lender may offer smaller loan amounts than requested, high interest rates, shorter terms, or any combination to mitigate risk to the lender. Note: Higher than acceptable interest rates must be evaluated thoroughly before pulling the trigger. Is the cost reasonable to the business in the end, or an additional obstacle standing in the way of your ultimate success.
First steps include, making contact with the organization or a specific person with capital to lend. The loan process can be jumpstarted by simply requesting an interview. At the interview, you will need to be prepared to start the application process.
A key component to success is planning capitalization well. The bottom-line here, running out of money is the death of many businesses.
TRADITIONAL FUNDING CHOICES
Banks are officially chartered institutions given the power to provide services; like checking and savings accounts. Banks can take deposits, loans applications, and approve those loans. No shock to our Kickfannie followers: banks do this all for profit. Banks are not "out, to get" the businessman. If you have ever been declined for a loan or listened to a business owner the bank turned down…it may feel like the bank is against you; when, in fact, banks are encouraged by regulation to invest in communities through lending to businesses. However, lending risks must be mitigated with all eyes on profitability; otherwise, our banking system would be worthless. When bank loans go south, it hurts the lending process, tightens lending requirements, raises interest rates, and hurts our economy at large and everyone across the board.
We break banking institutions into two categories: commercial/retail, and investment.
Commercial/Retail - Traditionally retail banks only worked with individuals; however, banking has evolved over the years. Commercial/retail banks now assist clients with deposits, credit card processing, personal and small business loans, savings, and investments.
Investment - Investment banking is a specific division dedicated to capital creation for other companies. This is done by underwriting new debt and equity securities for all types of business entities.
Find a good banker, and utilize their expertise to help you be a great candidate, when you have the need to access additional capital.
PREPARING YOUR CASE FOR THE BANK
What You Bring to the Table
If you do not have a business plan, now is the time to write one. Your business plan is among the first things the bank examines in the approval process. Consider the plan you present to the financial institution as your company’s resume. The plan must include fundamental components like a financial analysis, a sound goal and definition. Careful strategic planning before approaching a prospective financier will increase your odds of a positive outcome.
Check out the Kickfannie Toolkit (insert click link) for resources to help with the business plan process.
As a borrower, remember the Big Cs, when applying for a bank loan.
- Character - Not only is your credit history important, banks also look at the applicant's criminal records, home ownership, and whether the applicant has ties to family and the community.
- Collateral - Prepare a detailed list of cash in hand, records of funds borrowed, and business equity to guarantee the loan.
- Cash Flow - have a comprehensive record of financial statements for the bank to review.
SMALL BUSINESS ADMINISTRATION LOANS
If your plans are to start a business or expand an existing business, you may consider obtaining financial help from the Small Business Administration. The SBA participates in loan programs designed for business owners who may have trouble qualifying for traditional bank loans.
Three of the most utilized loan programs are:
Basic 7 (a) Loan Program, which gives loans to eligible borrowers for starting, acquiring, and expanding small businesses. Borrowers must apply through a participating lender institution.
The Certified Development Company (CDC 504 Loan Program,) providing growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings, and
The Microloan Program, which offers small loans to start-up, newly established or growing small businesses.
Microlenders—are nonprofit economic development organizations approved by the SBA for those who may not qualify for a conventional bank loan. Most microlenders; unlike banks, provide a simplified application process with less stringent underwriting criteria. Microlenders also tend to be community based lenders. Typically microlenders have been focused on neighborhood, or Main Street type businesses. Not always, but typically they can charge higher interest rates for the capital they lend. However, they will consider borrowers whose poor credit history or lack of collateral makes them off-limits for regular banks.
Yet another big advantage to microlenders is they often provide training and mentoring within the communities they serve, along with loans of up to $50,000. If your start up needs are modest, a microlender may be the ideal source for funding.
For additional information on SBA Loan programs visit http://www.sba.gov and click on Loan Programs for the latest information.
For the most current list of Mircolender Intermediaries, visit: http://www.sba.gov/sites/default/files/Intermediary-List.pdf
THE SMALL BUSINESS INVESTMENT COMPANY PROGRAM
The Small Business Investment Company (SBIC) Program works with private investment funds licensed as SBICs to provide growth capital to U.S. small businesses. SBICS are private investment companies, seeking a profit, and although regulated by SBA they make independent investment decisions. The SBA/SBIC directory will provide you with the contact information needed to learn more about the SBIC Licensees in each state.
Grants.gov provides a common website for federal agencies to post discretionary funding opportunities and for grantees to find and make application. Managed by the Department of Health and Human Services, Grants.gov is an E-Government initiative operating under the governance of the Office of Management and Budget. According to the website, the program centralizes more than 1,000 different grant programs across all 26 federal grant-making agencies and awards more than $500 billion annually. The site streamlines the federal grants process, standardizing grant information, application packages and search processes for finding and applying for federal grants.
THE NON-TRADITIONAL MAINSTREAM PROCESS
So, you are not going for the traditional bank loan. These are your funding sources in the normal progression of a capital raise. Let us begin exploring the funding forms with the six levels of raising capital you can expect to encounter, and the definition of an accredited investor.
A word of caution…it is understood that you may be at the infant stage with your business, and the idea of paying an attorney or other professional in excess of $400+ a hour may seem crazy. Our suggestion is to hire professionals to take you through the process. You don’t want to innocently get yourself in a pickle, when raising capital, nor do you want to take your business under in the attempt to fund future growth. Whether you are up and running full speed, or beginning the process, you have a million and one details to attend to, and in most cases navigating a capital raise is not what you do on a daily basis…so, don’t. In three words, money well spent.
-6- STAGES OF A VENTURE RAISE
Funding an Initial Idea – Low Level Financing
Bridging the Gap between Seed and Startup
Out the Gate Early Stage Financing for Expenses
Marketing and Development of Product
Series A Round, Growth or First Round
Building Early Sales and Funds for Manufacturing
B Series, Second Round
Early Stage Working Capital for Product Sales
No Profit Yet
Growth, Expansion for Profitable Companies
4th Round or Bridge Financing
THE ACCREDITED INVESTOR
Typically an accredited investor is defined as those investors permitted to invest in certain types of higher risk investments, including seed money, limited partnerships, hedge funds, and private placements. The term accredited investor includes wealthy individuals and organizations like banks, insurance companies, retirement plans, some corporations, larger charities, and endowments. Also, included under accredited investors are angel investor groups and networks.
Currently, in the United States for an individual to be considered an accredited investor, he or she must have a net worth of at least one million US dollars, not to include the value of their personal primary residence or have income of at least $200,000 each year for the last two years (or $300,000 together with his or her spouse if married) and expect to have the same in the current year.
The non-accredited investor is one that does not meet the Securities & Exchange Commission’s requirements under Regulation D. An accredited investor meets those SEC requirements under Regulation D.
Read more about SEC Regulation D by visiting www.sec.gov
BOOTSTRAP FUNDING/BORROWING FROM YOURSELF
It is not usual for founders to jump in with both feet, using their own savings or loans from family and friends. The idea of starting a business can be exhilarating, if not downright intoxicating for some individuals. Make certain you know what you are getting into, the costs, along with the risks involved should everything not fall into place as planned. Many a 401k, home equity line, or child’s college fund has been raided and lost betting large on a start-up venture. Understand the risks involved with this dice roll, especially when others are involved…immediate family husbands and wives, and other close relative you decide to drag into the fray. Everyone with skin in the game should be aware of the risk being taken.
If this isn’t your first experience launching a business, a founder may also bootstrap off an existing business, funneling capital into the new venture to get it up and running. As cash flow stabilizes, the faucet can be turned off and repaid. Again know the risks being taken. You certainly do not want to bleed a successful business dry for a bad startup. Occasionally this occurs, when an owner is helping.
Borrowing from the FFF – Friends, Family and Fools
Humor aside the FFF are your friends, family and the fools out there willing to give you their hard earned cash. You’ve either given them the best sales pitch ever, or they mistakenly believe in your genius, or more often than not…they love you! Family feuds over borrowed money are uncountable. What seemed like a good idea can quickly turn to ruin, if not executed properly. The borrowing of capital is about business, so be sure to sign a contract with the loan terms clearly defined. Have your ducks in a row. Friends and family will be more likely to help, if you are not flying by the seat of your pants, when requesting capital. Treat them as you would any lender or investor, providing capital to your company. Be prepared to answer their questions, as you would any other lender.
In April 2012, President Obama opened the floodgate for domain registration, with his signing of the JOBS Act into law. After signing the JOBS Act, a significant spike in domain name registration occurred, along with the creation of hundreds of crowdfunding sites. The law has opened equity-based crowdfunding for unaccredited investors, where accredited investors ruled the start-up field. An accredited investor is one with a net worth of one million or more in assets. Proposed rules were voted on by The U.S. Securities and Exchange under the JOBS Act; that permitted startup companies the ability to offer and sell securities through crowdfunding. Unaccredited investors will be allowed to buy stock in privately-held firms through crowdfunding sites registered with the SEC. Welcome new territory for business.
Popular crowdfunding sites include Kickstarter, Indigogo, RocketHub, FundRazr, GoGetFunding, CrowdFunder, and StartSomeGood.
Most typical banking and financing options are not readily open to start-up companies for initial seed funding, so where do they turn for financing before earning their wings. Many will seek the assistance of angel funding. Angels are affluent individuals who provide capital for business start-ups. Increasingly angel investors are pooling their capital and research, working in groups or networks. The angel groups will also provide advice to the companies they’ve invested in.
Whether a group or individual angels expect a lot of return on the capital invested. These investors are taking great risk. Often expecting a return in the 20-30xs on their capital. Although there are many failures, it is believed companies who nab angel capital have a better chance of making it, than without.
VENTURE CAPITAL or VC FUNDING
The two words that can cause fear to run through an entrepreneur, or send them excited beyond all comprehension--Venture Capital. VC funding has to be approached as a win-win proposition on both sides of the fence. VCs are looking for the proper marriage of viable opportunity, money, and entrepreneur ready to catapult a business. VCs are traditionally not looking to fund early start-up or seed funding. Venture groups want to invest in companies that have feet planted, and positioned for growth. And they will want a significant chunk of equity for their position.
CORPORATE GRANT PROGRAMS AND BUSINESS COMPETITIONS
Not entirely new to the arena, yet popping up more frequently and for larger dollar amounts are corporate grant programs geared to help small business owners. Corporations who want to “give back” are stepping forward with some significant grants. Sometimes these are smaller in design for start-ups, but many have been for sums as large as $250,000. This type of grant garners positive visibility for corporations. Often these types of grants are offered by the banking or financial services companies. Frankly, we feel it’s a great give back to business owners. Requirements can include being in business for at least two years or more, statements of what the grant proceeds will fund, and a lot about your business model. Remember they are looking for a great story to tell.
KICKFANNIE RECOMMENDED READING
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
The Small Business Start-up Kit: A Step-by-Step Legal Guide by Peri Pakroo J.D.,
th Edition, NOLO
School for Startups: The Breakthrough Course by Jim Beach, Chris Hanks, McGraw Hill
StrengthsFinder 2.0 by Tom Rath, Gallup Press – Find Your Strengths
Small Business Investor Alliance
The Small Business Investor Alliance (SBIA) is the premier organization of lower middle market funds and investors – forming the growth engine for the American economy. Members of the SBIA provide capital to small businesses, to help them reach the next level of growth. These critical investments grow our economy and create jobs. SBIA members invest where few others are investing – bread and butter American businesses, which want to grow but need access to capital to be successful.
225+ members, 88% of the memberships are Funds or Limited Partnerships Fund Strategies Include: Buyout, Mezzanine/Credit, Growth Equity, Venture Capital, and Multi-Strategy Investors Include: Banks, Family Offices, Fund of Funds, Insurance Companies and Pensions
Members include: 747 Capital, Access National Ban, BNY Mellon, Dixon, Hughes, Goodman, LLP, Main Street Capital, Stonehedge Partners, and Wells Fargo. A full list of current member firms, including site links can be found at www.sbia.org.