admin posted on September 03, 2009 09:53
Financing Types and How to Qualify
► Lines of Credit
A business line of credit is like a credit card. It’s a loan that is designed to provide short-term funds to a company in order to maintain a positive cash flow. In most cases, you don’t need to provide collateral, as long as you can show that you are profitable and capable of repaying its debt. Then, as funds are generated later in the business cycle, the loan is repaid. How the line of credit is structured when you get it will determine the repayment terms. In most cases, you can repay both principle and interest each month, the same way you would pay off a loan.
► Conventional Business Loans
Traditional loans are often popular initial financing venues for businesses competing in a proven field. Lenders often include: government-sponsored lending programs, commercial banks, and small business investment companies. To obtain a loan for starting a new business or improving an existing one, a Financial Plan and Marketing Strategy Report (FPMS) is needed to present to the bank. It may be written by the person seeking the loan, or a professional writer may be hired to draft or review it. A well-written FPMS Report will aid the applicant in her attempt to get a business loan. Included in the FPMS report are: statement of collateral, use of funds statement, 12 month forecast, personal balance sheet, personal history statement, and a business plan. (Loan Packaging | Business Plans)
► Business Alliances
A strategic business alliance occurs when two or more companies agree to join their funds for mutual investment. Together, they pursue a common business objective such as a joint venture, merger, or cost-sharing plan. In many cases, alliances between companies can involve two or more categories or types of alliances—a sales alliance, a solution-specific alliance, and a geographic-specific alliance.
► Angel Investors
Traditionally, angel investors have been business owners or independently wealthy individuals that finance businesses in exchange for equity. Many are successful entrepreneurs who want to help other entrepreneurs get their business off the ground. There are also groups, such as the Utah Angels and Promontory Angels, that can help you find an angel investor. Funding estimates vary, but usually range from $25,000 to $1.5 million. Each investor has their own criteria for qualification. Almost all want a board position, a consulting role, and/or quarterly or weekly updates. Most are looking for anything from a five to 25 percent stake in the business, securities, convertible debt, and/or redeemable preferred stock. To prepare to solicit to an angel investor, several critical factors will aid in making the approach successful. First, assemble an advisory board that includes an accountant and an attorney. Next, create a business plan with an FPMS Report to present to the angel investor.
► Asset-Based Financing
Popular with new companies that are growing faster than they can make money, asset-based financing is a system in which lenders accept the assets of a company as collateral in exchange for a loan. Most asset-based loans are financed against accounts receivable, inventory, machinery, equipment, and/or real estate. This type of funding is great for startup companies, refinancing existing loans, financing growth, mergers and acquisitions, and management buy-outs and buy-ins.
► Venture Capital (VC)
While most banks use past performance as the primary criteria for deciding whether or not to lend money to businesses, VC firms make investments based on projected future potential. Investors generally expect a substantial portion of the business’s equity and/or profits. Venture Capital typically comes from institutional investors and high net worth individuals—the money is then pooled together by dedicated investment firms. Make sure you have a qualified lawyer negotiate any investment deal between VCs and your company.
► Investing In Someone Else's Business
Investing in someone else’s business can be a great opportunity. You may be interested in the business as a good investment, as a way of helping a family member, or a way to develop a potential customer. Here are some rules when picking an investment:
1. Don't be "sold" investments--Don't blindly accept a friend's or family member's pitch. If you haven't established your
own investment goals, do not invest in anything until you do so. You leave yourself vulnerable to the sales pitch that
sounds good if you don’t. Only get into investments that meet your criteria.
2. Require a business plan--Insist on seeing the business plan of anyone proposing that you invest in his or her business—
even family and friends. The business plan should provide enough detail for you to determine whether the business is
feasible and is likely to succeed. If you don’t know what to look for, ask someone for help.
3. Consider tax consequences--What are the tax consequences of this investment? Can this investment be structured to
provide a tax benefit to you if it fails? Is the entity an S corporation, LLC, or other pass-through entity? If so,
remember that the tax consequences will be passed through to you. These tax consequences can be profits, losses,
capital gains, etc. Make sure you can deal with these tax consequences.
4. Use your influence--Get what is best for you. Have the investment structured the way you want it, or don't invest. If
you are just one of several investors, what power will you have to influence the management of the business? If your
investment is an equity investment, make sure you have the voting power you need, and protection from dilution of
voting power. Don't fall for the idea that the founder should have complete control of the business.
5. Do it right--Make sure your paperwork is in order, even if you are investing in the business of a friend. Check to see if
any of your rights as an investor must be covered in the articles of incorporation in order to be valid. If necessary, have
the articles of incorporation amended. If you are providing significant funding for a business, you should insist on other
rights which go beyond collateral. Make sure you get everything in writing and keep copies.
6. Plan to get money out--How will you get money out of the business? Will you be an employee? Will you spend enough
time on the business to justify the income you want? Will you be paid consulting fees? Will you want dividends paid?
Find out how your loan is going to be repaid.
► Small Company Offering Registration (SCOR)
A SCOR is the sale of common stock to the public without the hassle of an Initial Public Offering (IPO). Unlike formal IPO’s, most companies involved in a SCOR deal directly with shareholders which create many advantages. First, the SCOR registration was designed to minimize costs for a small business seeking to raise capital through a securities offering. Second, "Merit" standards used by the Securities Division to review these registrations are more relaxed than those applied to larger public offerings. Third, SCOR offerings are designed to be exempt from registration under federal securities laws by Securities and Exchange Commission (SEC). Finally, companies may use commissioned selling agents or sell the securities to the public themselves through classified ads or other means of mass solicitation.
► Initial Public Offerings
An initial public stock offering (IPO) referred to simply as an "offering" or "flotation," is when a company issues common stock or shares to the public for the first time. They are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded. All offerings of stock and other securities are subject to the federal securities laws as well as to the securities laws of any state where the securities are being offered or sold. An IPO can be a risky investment. For the individual investor, it is tough to predict what the stock or shares will do on its initial day of trading and in the near future.