Common Sources of Financing for Small Business
The choice of financing is an important determinant of whether a product reaches the market, or whether an existing business can survive. The choice of financing is an important part of being an entrepreneur and business owner, and the ability to raise cash when you have no or limited history takes skill and creativity. There are a number of sources of financing. The suitability of the alternatives depends on what stage you are at, and will change as the company matures from stage to stage. The following outlines the most typical forms available.
Yourself, Family and Friends
The most obvious and common start is for people to self finance. That means they either draw down on their savings or they use personal debt such as credit cards, credit lines or equity mortgages to finance their business. Family and friends are often used as a source of financing. Although they are not always in a position to properly evaluate the business venture, family and friends have long-time relationships and experience with the entrepreneur and are knowledgeable about his/her reliability and ability.
Strategic partners can not only provide a source of financing, but often they can provide an area of expertise that the entrepreneur does not bring to the table, such as operational or marketing skills. Naturally, the pitfall of a partner is that you do not maintain full control over the company and that sometimes there is a falling out between the partners. So it is important that you do your homework and choose your partner carefully.
Angles tend to be freelance financers interested in loaning smaller amounts of money, say between $50,000 -$500,000. They can often provide the seed capital required to develop an idea to get to the point where a firm can obtain formal financing. Angel investors will also invest in growing companies that may have a strong revenue base, but are not yet established enough to get bank or other financing. Another benefit of Angels is that they can bring a lot of experience and industry contacts to the table.
When firms approach venture capitalists, they are generally developed to the point where a venture capitalist can add value. The venture capitalists will generally sit on the board of directors, provide expertise and provide funding based on the attainment of milestones. They are generally interested in firms that can generate rapid growth ? and returns - over a few short years; your time horizon is generally 3-8 years.
One of the largest sources of short-tem financing, trade credit occurs whenever you purchase from a supplier but do not need to pay for the merchandise for 30 days (or whatever the terms are). Trade credit can be expensive if you are foregoing discounts, but a new firm may not have much of a choice.
Factoring is also a popular source of financing for growing firms. When you generate a receivable you may sell it to a factor who will then collect the receivable for you. Typically, you will get between 75%-90% upfront for the receivable and the remainder when the factor collects, less a fee.
Asset Based Lending
Asset based lenders will lend to businesses that lack sufficient cash flow to support unsecured financing, but have sufficient assets that can serve as collateral. Typically, the assets are accounts receivable and inventory, but can be equipment or other similar assets. The lender relies on the assets to repay the loan, not the cash flow of the firm. Fast growing firms who cannot get sufficient financing from a financial institution will be a typical client of an asset based lender.
Mezzanine financing is subordinated debt, a type of hybrid between senior debt and equity. As Mezzanine financing is typically high risk, it can be expensive. A typical target company generally has been in business for a number of years and has an established revenue base and positive cash flow stream. Often, a company may have reached its maximum level of financing from a lending institution and will obtain mezzanine financing to bridge the gap and finance their growth. The Mezzanine financer will subordinate its debt to the main lender.
By the time a firm can approach a bank they usually have been in business for a couple of years, have developed solid revenue, are earning profits and have a reasonable balance sheet. The bank will provide daily operational financing as well as long-term financing. Generally the cheapest form of financing, it can also be the hardest to get.
About The Author
Jeff Schein is a CGA and offers advisory services in the areas of business planning, business modeling, strategic planning, business analysis and financial management for new ventures and growing small businesses. Visit www.companyworkshop.com or mailto:email@example.com.
13 Steps to Protect Yourself from Your Bank
The success of your business is critically dependent on how well you negotiate and manage your financial partners. Banks, investors, credit cards and financial services companies work for you. Therefore, you need to be sure you are working together, understand the plans of each and have the best idea of what and how things will happen when times get tough.
The Wrap on Ag Plastic
While driving through Pennsylvania farmland, you have probably noticed an increased amount of white plastic bundles stacked in lines or piles along farm buildings or edges of farm fields. Sometimes referred to as "marshmallows" or "long white tubes", etc. these objects are increasing in farmer popularity and represent a changing trend in harvesting of farm livestock feeds.
Is Your Business Legally Prepared?
It is imperative to have your business legally prepared. How you ask? You need to have a business license, a home occupation license, if running your business from home, a city or county license, (depending on what State you live) plus you need to register your business as fictious if you are not using your name as a business. For instance, If John Doe has a businessname as John Doe's Grooming Parlor, a fictious name isn't necessary.
Pressure Washing Companies; Pricing Dock and Deck Cleaning
If you own a Pressure Washing Company and wish to get business at the local Marina there are a few things you should know. You need to be careful in bidding these types of jobs.
Low Cost or Highly Funded Start Up
Many new ventures are preoccupied with all the money they are going to make, rather than how they are going to the about making it. Set realistic goals by setting realistic steps-discreet 'doable' actions, each of which connects to the next one in some logical progression.
How to Use Graphs and Charts in Your Business Plan
Many people ask how many graphs or charts they should have in their business plans. As with most other business planning questions, the answer is "it depends." This article discusses the key factors influencing the number of graphs and charts to include in your business plan.
Freelance Tips: How to Cope with Spring Fever When Theres Work to Be Done
We all know how glorious those first warm days of spring feel. The trees are blooming, the birds are singing... boy, it's sure hard to keep your head out of the clouds when the skies are blue and the sun's shining brightly.
Profits are within 6 Degrees of Freedom
How far away is the person you need to meet?
Measuring Your Way to Success
Are you a motivational speaker who consistently gets rave reviews yet your ratio of speaking to return rate is not where you would like it to be? Perhaps you are a trainer whose delivery is complimented time and again, and yet you are only being asked by 10 to 20% of the clients you see for a repeat performance?
Secrets of Cleaning Truck Trailers in Your Fleet from a Veteran Truck Washer
Cleaning the trailers towed by big trucks is not easy, those big forty-foot to fifty-three foot boxes are quite intimidating up close when you are holding nothing more than a brush and pressure washer gun, looking at a soap bucket. The hardest thing to do is to clean the back doors of trailers because they get really greasy from all the debris and stuff the truck has driven through. When they run through bad weather areas, they get even dirtier. Pay special attention to rear doors on trailers. Sometimes you'll have to brush them twice. You may even have to do them three times until you get them right. Use a harsh soap or degreaser and watch for left over dirt around the tubular bars that act as the door locks and sealing mechanism. Now on the top of the sides of the trailer you'll have lots of soot if you have a tractor that's been leaking or maybe has a small oil leak or an exhaust problem. This leaves this big exhaust stain down the side of the trailer from the exhaust stack on the tractor. This is a problem because it is hard to clean and you need to clean it. So sometimes you will have to stand on top of the tractor and brush downward. This is done because you cannot get enough leverage from the ground. You may need to pour cleaner directly on your brush or you may need to put cleaner directly on the sides of the trailer. You may need to do both. Make sure the brush is really wet and then set the nozzle on the spray bottle for a steady stream. Spray with the wind and shoot the spray up to the top of the trailer and kind of saturate it a little bit. Then brush it. Now it should be able to come clean. Make sure you rinse really well; otherwise you'll have soap streaks running down the sides. These will be black soap streaks because they will have some of the exhaust mixed in with the soap.
When to Say NO!
When is it a good thing to say no to a request?
Should I Franchise or Not?
A reader of one of my online sessions asked should he franchise his business or not. He had set up a service business and was getting ready to expand and wanted to know if franchising was a good potential strategy for this. How do I franchise my business? There are many criteria for franchising and if you have ever thought you might wish to franchise your business then this advice could be of value to you:
5 GREAT WAYS to Gain New Contacts
What are the 5 best ways to gain new contacts?
What Is YOUR Value Proposition?
Every company has a value proposition. That is a statement of their perceived value to their clients. Often a company will have one perception at the executive level, another at the sales level, and even a third one at the client level.
The Key to Small Business Growth? Buyer Alignment
Unfortunately for all buyers, each selling organization and their individual sales professionals are unique and often require immense amounts of energy to build a relationship with. This keeps buyers guessing, which in turn keeps the sales organization guessing. It's a constant game being played out across offices across the country.
Why Internet Shopping is the New Mall of the Future
Last year, trillions of dollars transferred hands on the internet with regard to sales, or as the internet wishes to call it, eCommerce. The internet is becoming an increasingly complex manipulation of do's and don'ts. However, one thing I am sure of is, what are you doing? The cliche says, "Either get in the game, or sit and watch from the sidelines." I've been sitting around long enough and recently took bold steps to leap into eCommerce.
Too Many Lawyers in Franchising Today
Attorneys and Lawyers are ruining the franchise industry. It is too bad too, because franchising represents over 400,000 businesses in our country and accounts for just over one-third of every consumer dollar spent in this country. By over regulating and over lawyering the industry we are weakening our free markets and suffocating our up and coming entrepreneurs.
Three Ways to Add Leverage to Your Small Business
Remember those drawings from science class of how a lever works?
Starting A Concrete Cleaning Pressure Washer Business
Concrete cleaning can be a lucrative business to start. Here are some tips which will help you do it right.
Business Owner--Educate Thyself!
Remember the training programs, seminars, and workshops you had to attend when you were on the corporate side of the table? You were expected to complete course after course for professional development and skill enhancement. Well, where do you get your training now that you are on your own? Do you learn from your clients? Are they the best teachers? What about your competitors?
|© Athifea Distribution LLC - 2013|