Financing Your Business

How to Finance a Business?: 

How to Finance a Business?

Overview: 

Overview The Basics The Business Lifecycle Identify funding needs, use & timing Types of Financing Equity Debt What documents are needed How do you find the right banker or investor What can you expect from the banker/investor When can you expect the check

The Basics: 

The Basics Why is funding so hard to find? RISK!! Because most new businesses fail, the odds of an investor seeing a return on their investment is slim… Once found, why is startup funding so expensive? RISK!! The higher the risk, the higher the return demanded by the investor. Investors need to be compensated for accepting the risk.

Business Life Cycle: 

Business Life Cycle Concept Stage Seed Stage Early Stage Growth Stage Mature Stage Decline Stage Entrepreneur gets idea, pursues it quietly on the side. Idea pursued more intensively, small team built to pursue product/idea. First customers and beta tests. Company generates a customer base and refines its sales/marketing strategy. Outside professional management may be recruited. Company continues to grow customer base, develops new products/ applications. Company may be acquired or go public. Company’s growth slows, and is dependent on management and product innovation to survive. Could stay in this stage for decades. Company declines due to changing technology, tastes, inability to adapt, and/or poor management. Costlier – more risky Cheaper – less risky Key Point: As the risk of the investment increases, so does the cost of financing.

Identify funding Needs: 

Identify funding Needs How much do I need? What will it be used for? When will I need the funds?

Slide6: 

If you don't know where you are going, you might wind up someplace else. Yogi Berra

Which type of funding do I use?: 

Which type of funding do I use? Debt vs. Equity Debt Must be repaid but retain control Difficult for startups to obtain Equity Are you willing to give up some ownership Loss of control but potential to gain a mentor How much growth potential is there?

Business Life Cycle: 

Business Life Cycle Concept Stage Seed Stage Early Stage Growth Stage Mature Stage Decline Stage Equity Founder Family Friends Partners Debt Personal loan Credit cards Other Grant Equity Founder Family Friends Partners Angel Investor Seed Stage Investor Debt Personal loan Other Grant Equity Venture Capital Angel Investors Debt SBA guarantee USDA guarantee Bank loans Subordinated debt Public markets IPO Equity Founder Family Friends Partners Angel Investor Venture Capital Debt Personal loan SBA guarantee USDA guarantee Other Grant Debt Bank loans Subordinated debt Public markets IPO/Follow-on Bond issuance Debt Bank loans Public markets Follow-on public offering Bond issuance Public subsidy/ bail-out

Loan Documentation for Banker for existing Company: 

Loan Documentation for Banker for existing Company Introductory letter and use of funds statement 3 to 5 years historical financial information (includes balance sheet, income statement and statement of cash flow) Interim financial statements within past 90 days 3 years of previous tax returns 3 to 5 year financial projections A/R & A/P Aging Schedule Schedule of Inventory & Fixed Assets Business Plan Legal Documents (incorporation, L.L.C. or partnership info) Resumes of Key Managers

Loan Documentation for Banker Principal Owners: 

Loan Documentation for Banker Principal Owners 3 Years of Personal Tax Returns (including all schedules) Personal financial statement (including all schedules) Owners’ resume to determine industry & management experience Personal Credit Information

Investor DocumentationStart Up: 

Investor Documentation Start Up 1 Page Executive Summary Complete Business Plan Financial Model 2 minute elevator pitch 20 to 30 minute oral presentation Information on Intellectual property

Slide12: 

You never get a second change to make a first impression Author Unknown

How do I find the right banker/investor?: 

How do I find the right banker/investor? Friends & Family Business Networking Your CPA Attorney Business Incubators SBDC’s Chamber of Commerce

What can I expect from the banker/investor in a fund offering?: 

What can I expect from the banker/investor in a fund offering?

Slide15: 

He who has the gold makes the rules Author Unknown

Debt Financing: A Banker’s Decision Strategy: 

Debt Financing: A Banker’s Decision Strategy

Debt Financing:Banker’s Decision Process: 

Debt Financing: Banker’s Decision Process No No Yes Yes

Debt Financing:Banker’s Key Areas of Interest: 

Debt Financing: Banker’s Key Areas of Interest Management Experience Company’s Liquidity Company’s Leverage Position Profitability Debt Service Coverage Collateral Coverage Quality of Financial Statements

10 Rules of Negotiating Financing: 

10 Rules of Negotiating Financing Prepare a comprehensive business plan Be prepared to explain loan uses. Speak to the appropriate person. Be Realistic. Do not overstate finances. Give complete information. Seek a lender you are comfortable with. Negotiate interest rates and fees. Give an impression of confidence and competence. Carefully check all terms. Dress conservatively (bankers are more comfortable around people like themselves)

When can I expect the check?: 

When can I expect the check?

A Few Final Thoughts: 

A Few Final Thoughts Know the basic financial lingo Know your business plan Know the basics about deal structure Know how to value your business Know the exit – what, when, how much Know what you don’t know Find a venture coach Accept feedback, don’t take it personally

Slide22: 

Success is not final, failure is not fatal: it is the courage to continue that counts. Winston Churchill