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 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? 

 

Funding Is Not Magic

Here is the conversation:

Me: Hello this is Michael Bowers. How can I help you?

Caller: I need to speak to someone about my business.  I am having someone write my business plan and I should have it in the next week or so.  I need to discuss how to get funding.

Me: How much do you need?

Caller: $1.2 million.

Me: What are your thoughts on getting the funding?

Caller: I was wondering what was out there in the way of grants, loans or investors. 

Now is when the caller expected me to put on a magic show and pull $1.2 million out of my hat.  As much as I want to help I don't see it happening. 

It is critical that when you know funding will be needed you make the capital access plan a major part of your business planning process.  To many people see the business plan as the path to capital.  However, if you have not thought through how and from whom you are likely to get funding the plan won't be sufficient. 

Thinking through the "Uses" of funds without a strategy around the appropriate "Sources" of funds is a recipe for disaster.   Just like marketing, staffing and sales your capital raising plan needs to be thought through strategically.  Here are key points to address as you are building out your plan.

• Understand where you are in the funding process. Early stage, high risk opportunities don't appeal to banks so you either need to find other sources or figure out how to reduce the level of risk to the bank.
• What is your equity position and how does that relate to your current or prospective debt position.  The more money you need the more equity you need to have in the business.
• Develop your plan including the fund raising strategy.  This should not only include what you need but who provides that kind of funding and how do they evaluate opportunities.
• Be advised...There is no 100% funding. I don't care if you are approaching banks or investors you need to put some of your own cash into the opportunity.
• Not qualifying for loans does not mean you should be approaching investors. 
• Don't expect to find grants to fund your business start-up.  Depending on your business you might find grant dollars to provide services (usually only available to non-profits) but grants don't provide dollars to set up the business.  You need to have the business set-up and successfully operating before you can access most grants.
• Revenue is the best financing! Focus on customers and driving revenue.  This will make getting financing easier when the time is right.
• Push the need for financing out as long as you can.  The more operating history you have the better banks will like you and the higher your valuation will be if you are seeking equity investment.
• Remember the Golden Rule ~ He who has the gold makes the rules.  Don't expect banks or investors  to change the way they do things for you.  You will need to build a plan that works within their systems.
• Don't wait until the last minute.  That is the whole point of this to be prepared to seek financing.  By doing this kind of planning you should be able to avoid an urgent need for cash that is not taken care of you will be out of business.
• Realize that everything will take longer than you expect.  Think ahead and leave plenty of time to get financing arranged.
• If you don't have enough experience to justify getting financing you can build expertise into your team by adding people to your team or through an Advisory Board.

If you are seeking financing know that you need to be thinking several steps ahead.  The more you know about your needs, who can provide the financing and what they need to provide the financing the better your chances of success.