Ideas To Deals

Quick Tips For Getting Small Business Financing

I get questions from all over the country asking for tips and tricks to get financing for small businesses. To be honest I don't know any shortcuts but there are a few things I would recommend to anyone building a business looking for money.

Bootstrap as long as possible 

Try to bootstrap as long as possible before seeking funding. This allows you to build more value for yourself before selling equity or saddling yourself with a debt payment. It also creates operating history that banks like to see. The most valuable reason is that bootstrapping teaches you about your business. You have to be creative and really understand cashflow, customers, and all the little things that are important to success. Sometimes if you have money to soon you miss those little things which could be the difference between success and failure.

Understand the ROI of the funding

I would look at funding needs in comparison to the return on what you are going to do with the money. The ROI is critical. For example if you going to buy equipment, what will that do for your revenue/profitability/cashflow? If the return on the investment is significant and covers the cost of the money you had to borrow then you should consider it. There is a similar consideration with investors. If you bring in an Angel investor you need to be yielding results with the money that will more than offset the percentage of ownership that you are selling.

Get the right type of loan

It is important to understand what the various funding vehicles are before you ask for a loan. It is really about the life of the asset. Long-term assets (real estate) need long-term finacing, short-term assets (equipment) need short-term finaincing and working capital needs a line of credit. A line will allow you to smooth out timing differences between putting out funds and getting paid. 

If you are in need of marketing money early in your business' life that needs to come from you own equity and/or from friends or family. The challenge when it comes to outside investors is that if you are predominately a service business it will be difficult to scale to a level that will generate sufficient return for investors.

Get the right investors

Trust me, you don't know everything. When seeking investors look beyond the money. Investors can be a great asset to the growth of your business.  A good investor should be on board with your vision. They should be good advisors and help you open doors. The biggest mistake you can make is focusing on only the money and bringing someone into your organization that does not make you better and possibly will hurt the company. I like this post on investors to avoid.

Don't go it alone. Get some help

Bankers and investors have specific ways they do things. If you are not familier with how to play the game you are at a disadvantage. You may have a great business but if you present your request wrong you will probably not get anything. Trust me investors and bankers are looking for a reason to say "NO" and structural issues provide those reasons. What I recommend is that you find and visit your nearest SBDC. Full disclosure...I work for an SBDC and I can assure you that there is a wealth of experience there that can help you. They provide business advising services, at no cost, to assist you build you business and if financing is appropriate they can certainly assist. Here is a link to the ASBDC to find a center close to you. 

If you have questions on financing leave a comment here or drop me an email.

What Do I Need To Get Funding?

When I first started working with businesses people would show up asking where to get funding. It didn't matter if their business was prepared to attract funding or not they were convinced that they just needed money. When the recession hit a few years ago banks and investors slowed the flow of capital so people were much more interested in how to build their business through customers and revenue. Sure they still asked for money but given the media coverage of the "credit crunch" entrepreneurs knew that they would need to get creative to build their business. Lately I have been getting a lot more "Where do I get money" calls. The question should not be "where" but rather "how" do I get money? It is all about building a real business. The key point to be able to articulate is how you are getting customers. If you haven't figured that out don't waste your time looking for money. You have to build out your idea into a business before you can get funding.

Here are a few items to focus on before you ask for money:

• Do you have an idea or a real product? Ideas are great but without structure you don't have a business.
• Who is out there to buy it? Understanding your market is critical. Really doing some market research will allow you to better target your marketing and get customers. 
• How are you going to get them to buy it? OK, now you know your customers and where they are how are you going to get them to buy?
• Transition Marketing to Sales. Marketing gets potential customers to the door, how are you going to convert them in to paying customers?
• Get a customer. Even if it is a beta customer get somebody using some version of the product. 
• The closer to market you are the easier it is to get funding. People invest in businesses not ideas.
• The closer to market you are the less expensive the capital will be when you get it. The closer you are to market the less risky the investment is. The less risky the less return the financing source will require. 
• How much money do you REALLY need? Have a funding roadmap that shows what you need and when. Don't ask for $5 million to fund the total project when you really $20,000 to get to the next step of your business.
• Understand the rules of the game. Once you have built out your business it is important to know how the system works and to get inside the minds of bankers and investors so you can address the specific items that they need to see. A couple of weeks ago I posted a presentation I did on funding and I would encourage you to check that out for the mechanical parts of getting funding (Small Business Financing and Funding). 

Getting financing is all about the business and if you can't clearly articulate how you are going to make money you won't get other people's money. Build your business as far as you can before you consider funding and you'll be surprised how much easier it is to get funding.

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Be sure to check out our new Ideas2Deals Facebook page. This will be a great resource to share experiences and have discussion designed to help the small business owner be more successful. I hope to see you there soon.

 

What does FF&F mean in business?

Have you ever had someone tell you that you should consider FF&F for financing your business start-up and you thought to yourself, "What the hell are they talking about"? Basically FF&F stands for Friends, Family and Founder. These are sources of early funding/equity for your business. 

Founder ~ You are the first source of funding for your business. Whether you are bringing your own cash or have tapped other sources such as a home equity loan you need to bring something the table. Some people call it "having skin in the game". You really need to self fund the initial start-up. Let me be clear...I am talking about cash not sweat equity. If you have funded a prototype or intellectual property activity or something like that out of your own pocket that counts but thinking about the business and writing a plan won't cut it.

Family ~ Family is another source of early funding. Family is usually great at this stage because you probably haven't gotten the business far enough along to discuss funding with strangers. Family usually invests in you because of you not the details of the business. Be careful here though. If you are swapping equity for family funding and you give uncle Joe 10% expect that amount to be reduced at future funding events. While that doesn't make Thanksgiving dinner as uncomfortable as if you lose all of uncle Joe's money it is still a little tense.

Friends ~ Again, similar to family, friends may not be into heavy due diligence on the company before they invest. It is still about you more than the business. They will probably need more of an explanation of what you are planning to do but they won't need to have their lawyer write out a term sheet to present. Go out get a couple of beers and pitch your buddy. Remember, however, that nothing changes a friendship like money.

Sometimes you also see it as FFF&F but we will leave the discussion of the fourth F ~ FOOLS until another post.

What are your thoughts on this form of early stage capital? 

 

Let's Talk About Money Baby...

Let's talk about financing.  I get asked daily about financing options.  People want to know what is out there for their business.  Here is a quick list of types of financing that is "out there" for your business.

• Your Money ~ Yes your money is the first step, it's called owner's equity.  Founders need to bring something to the party besides your idea and sparkling personality.
• Friends and Family ~ Along with point one this makes up the FF&F type of financing (I left out the fourth F - Fools).  Friends and family are sources of early capital because they typically don't ask for very harsh repayment terms and they are pretty lenient when it comes to due diligence.  They invest/loan more because of their relationship with you than the business. This is helpful when you don't have much of the business built yet.
• Grants ~ Before you get all excited I am not talking about the late night infomercial grants I'm talking about REAL grants, the kind you probably can't get.  Free money from the government doesn't exist!  Grants are very specific in what they can be used for, how they can be used and what kind of reporting that is required.  Grants typically go to non-profits that are filling a need in the market that is not economically feasible to be done in the private sector. That means that you can't make any money out of working in that space.  They also go to companies doing science and research that the government wants done and the technology is not yet at a point where it can go to market.  Again, not ready to make money.  
• Investors and Private Equity ~ If you go this way you better hold on to your wallet. This is the most expensive money you can get.  It works for some businesses but not for most.  You also really need to be able to make A LOT of money on your business or you won't be able to repay this.  When I say a lot, take whatever you think is a lot, quadruple it and you may be close.  There are all kinds of posts on this blog about private equity.  Check those out then ping me at if you have any questions.
• Factoring ~ This is probably the second most expensive financing.  This is where you sell your accounts receivables at a discount for immediate cash.  When you get paid on the accounts receivables the payment goes straight to the Factor as repayment on the loan.  The key with this is you have to have solid invoices that you know will be paid and you really need to know when these will be paid.  Where you get in trouble is when the receivable extends past the payment date and you get interest added per day.
• Banks ~ Not horribly expensive but a challenge to get if you are not in their sweet spot. Banks are conservative by nature.  They do not take risks and they are not investing in your company.  They make loans for "Stuff" based on "cash flow" secured by "inventory, equipment and/or real estate".  Again, there are a lot of posts about bank financing on this blog to help bring you up to speed. 
• Small Business Administration (SBA) ~ The SBA is the smartest federal agency in Washington because they fund the SBDC program so I can have a job.  Beyond that it is important to know that the SBA is a guarantee lender not a direct lender.  You will not deal directly with the SBA but rather with your bank.  Make sure you have a bank that knows how the SBA works and your journey will be much smoother.

Now the BEST financing available to your business ~ SALES!!!  Revenue that you generate from your business is the most flexible and least expensive type of financing you can get.  You can spend it on whatever you want, there is no interest rate and you don't have to pay it back.  This sounds like what you want.

So did I miss anything?  Leave a comment and give me your thoughts.