FUNDING OPTIONS FOR AN EXISTING BUSINESS
OR
PURCHASING A NEW BUSINESS
You are about to ask a stranger to lend you money. To be successful, you will need to convince this person that their money will be repaid. The absolute best way to do this is to create a business plan.
A business plan functions as a vehicle to organize all the information lenders will need to make their decision. It allows you to present this information in the best possible light; unlike a verbal presentation, a written plan gives you the time and opportunity to put your best ideas forward. It is also a document that the person who receives it can pass on to others. Decision-makers can read the business plan to understand your ideas without needing to hear about them second- or third-hand.
The business plan is your blueprint for what you are going to do with the money and how you are going to pay it back. If you can’t or won’t put a business plan together, you are already in big trouble.
Creating a Business Plan
A number of software programs can aid you in creating your business plan. These are the general elements:
Executive Summary: A two-page summary of your ideas. If you don’t get them with the executive summary, you won’t get them.
Company Summary: A history of the company, ownership, plans, etc.
Product or Service: What products or services do you offer, and what makes them different from the competition’s?
Market Analysis: Who are the customers and competitors? What is the market size? What are the growth options?
Strategy: How will you sell your product or service? Who are the targets, and how long will it take to reach each target?
Pro Forma: What are the projected financial results as each target is reached?
Management: Who are you? What are your experiences? Why can you do the job?
You should either obtain a software program or hire a consultant to help prepare the business plan. Either way, the final plan should have these characteristics:
Well-thought-out
Clear and concise in presentation
Logical
Well-written
All projections supported
Shows how and why you will be profitable and when
Include these supporting documents with the business plan:
Tax returns of principals for last three years
Personal financial statement (all banks have these forms)
For franchised businesses, a copy of the franchise contract and all
supporting documents provided by the franchiser
Copy of proposed lease or purchase agreement for building space
Copies of licenses and other legal documents
Copies of resumes of all principals
Copies of letters of intent from suppliers, etc.
Now you have your business plan. Where do you take it?
Bank
SBA
Regulation D offering
Venture capitalist
Summary
Remember, a business plan does not create the proper structure to take in money from multiple investors. To accept money from multiple investors, you will need to do a Regulation D offering, covered later on in this document.
Each week, I receive business plans that are written by individuals with no experience or apparent resources.
A software program that shows you what questions need to be answered and answering those questions properly are two completely different issues.
If you want to know how to write a good plan start by reading a couple hundred and you will begin to understand what you need to do to write a good plan.
The Plan you submit to raise Venture Capital is not just about the details of a business proposal. It’s also a reflection of your good business judgment. Failing to recognize when to seek outside help and advice when preparing your Business Plan indicates to the reader a lapse in good business judgment. You are asking the reader to trust your ability to make good judgment calls. What is the message you send to the reader if your own Business Plan is not well conceived and well written?
Using good judgment does not begin after you get the money. It is a prerequisite to getting the money.
There is nothing worse than having your attempt to raise capital fail because your business plan was poorly conceived and written. It is a condition you could easily have avoided.
In other sections of the website, we speak of how thousands of individuals successful Raise Venture Capital each and every day. They all started where you are right now.
Take this statement to heart. At each step of your development toward raising venture capital you need to decide to either go forward or stop. Always the answer comes from the quality of your Plan.
Time, careful planning and effort will be the key to your Plan and ultimately your success.
Bank
Generally, banks will not lend money unsecured. Unless you have collateral for a loan, you probably won’t succeed with a bank.
However, if you are purchasing inventory, receivables, or real estate for the business, you can approach the bank with the idea that even if they don’t want to fund your purchase, they may be willing to fund your cash flow. Remember that after you have spent your money buying the business, you still need cash to run the business for payroll, suppliers, rent, etc. If you have receivables, you will need cash to fund your receivables. The bank may be interested in this, and it will put you a step closer to raising the money.
Banks will try to grab all the collateral possible. It is not unusual for a bank to try to collateralize a loan with assets two to three times the loan amount (e.g., a $200,000 loan with $600,000 in collateral). Say no. Banks are in business to make loans. The collateral should be reasonable and fair. Remember, if you need more money, you will not be able to use assets if they are locked up.
No matter where you get the money, the loan documents may contain restrictions on what money you can borrow from other sources. These restrictions can kill you if you have a problem, because a violation usually renders the loan due and payable. Make sure you understand these restrictions; don’t accept them if they are too rigid.
When approaching a bank, go to the right person. Talk to the person in the commercial loan group who has sufficient authority to grant you the loan amount you want. Ask about the bank’s guidelines and policies, and don’t try to apply for a type of loan they don’t offer. If they don’t factor receivables, what makes you think they will do it for you?
In many cases, you can determine beforehand whether you have a chance to be approved for a loan. Don’t apply if you have no chance. It will negatively affect your credit and hurt you later.
Small Business Administration (SBA)
Federal appropriations are available to the SBA to provide guarantees on loans structured under the agency's requirements. With a loan guaranty, the actual funds are provided by independent lenders who receive the full faith and credit backing of the federal government on a portion of the loan they make to a small business.
The loan guaranty that SBA provides transfers the risk of borrower non-payment, up to the amount of the guaranty, from the lender to SBA. Therefore, when a business applies for an SBA loan, they are actually applying for a commercial loan, structured according to SBA requirements, which receives an SBA guaranty.
It is a good idea to check your personal credit situation. Too often, entrepreneurs think that their business credit and personal credit are separate. A business’s credit is built upon the owner’s personal credit. Because you have not established a business credit history, lenders and suppliers will use your personal credit history to determine your terms of credit.
Your credit report determines how potential lenders and suppliers will perceive you. You should know what appears on your credit report, because you may find errors that you will want to have corrected. To get a copy of your credit report, contact one of the three major credit bureaus.
When applying for a loan, you must prepare a written loan proposal. Make your best presentation in the initial loan proposal and application; you may not get a second opportunity. The loan proposal is also known as a business plan.
Collateral
List real property and other assets to be held as collateral. Few financial institutions will provide non-collateral-based loans. All loans should have at least two identifiable sources of repayment: the first source is usually cash flow generated from profitable operations of the business, and the second source is collateral pledged to secure the loan.
Other documents you should submit along with the business plan and loan application:
Lease (copies of proposal)
Franchise Agreement
Purchase Agreement
Articles of Incorporation
Plans, Specifications
Copies of Licenses
Letters of Reference
Letters of Intent
Contracts
Partnership Agreement
When a bank lends money, it wants to ensure that it will be paid back. The bank must consider the following each time it makes a loan:
Capacity to repay is the most critical of the five factors. The prospective lender will want to know exactly how you intend to repay the loan. The lender will consider the cash flow from the business, the timing of the repayment, and the probability of successful repayment of the loan. Payment history on existing credit relationships—personal and commercial—is considered an indicator of future payment performance. Prospective lenders will also want to know about your contingent sources of repayment.
Capital is the money you personally have invested in the business and is an indication of how much you will lose should the business fail. Prospective lenders and investors will expect you to contribute your own assets and to undertake personal financial risk to establish the business before asking them to commit any funding. If you have a significant personal investment in the business, you are more likely to do everything in your power to make the business successful.
Collateral or guarantees are additional forms of security you can provide the lender. If the business cannot repay its loan, the bank wants to know there is a second source of repayment. Assets such as equipment, buildings, accounts receivable, and in some cases inventory are considered possible sources of repayment if they are sold by the bank for cash. Both business and personal assets can be sources of collateral for a loan. A guarantee, on the other hand, is just that—someone else signs a guarantee document promising to repay the loan if you can't. Some lenders may require such a guarantee in addition to collateral as security for a loan.
Conditions focus on the intended purpose of the loan. Will the money be used for working capital, additional equipment, or inventory? The lender will also consider the local economic climate and conditions both within your industry and in other industries that could affect your business.
Character is the personal impression you make on the potential lender or investor. The lender decides subjectively whether or not you are sufficiently trustworthy to repay the loan or generate a return on funds invested in your company. Your educational background and experience in business and in your industry will be reviewed. The quality of your references and the background and experience of your employees will also be considered.
Credit
Your ability to purchase or grow your business is directly tied to your creditworthiness. All too often, we make unnecessary mistakes that hurt our credit, such as applying for loans when we don’t have a chance in hell of being approved. Every application and every rejection hits your credit report. Ideally, you want a credit report showing that all of your loan requests have been approved.
Be practical; be realistic; be honest. The quickest way to lose your credibility is to exaggerate or be overly optimistic. Once you lose your credibility, the answer will be NO.
Small Business Lenders
Almost all national banks are SBA-certified lenders. You should call the local branch in your area and speak with the commercial loan officer; if the officer can’t assist you, he or she will direct you to someone who can.
In deciding to provide the loan guaranty, the SBA will take into account whether the borrower is a minority. However, borrowers must generally meet a very high threshold before they get an SBA loan guaranty, and it can take a very long time. The most common reason for delay is the applicant’s failure to provide all the relevant information. It may be worthwhile to hire a consultant to help you through the process in order to obtain a timely answer from the SBA.
Regulation D Offering
You have just purchased a new business or decided to expand your current business, and now you need to raise some money to pay for it. If you are going to raise money through the sale of equity (shares) or debt, you need to read this section very carefully. You may think that selling shares to a few friends or associates will allow you to skip these rules: it doesn’t. You may also think that if you say “Gosh, I didn’t know,” it will get you a pass: it doesn’t. This is a federal law—ignore it at your own peril.
Why a Regulation D Offering?
A Regulation D offering allows you to legally solicit investor money, either equity or debt, from multiple sources. In principle, it is much easier to raise $20,000 each from 50 people than $1,000,000 from one person.
The basic structure for a Regulation D offering is debt and equity. There is no minimum limit, so you can raise as little as $20,000 or more than $5,000,000.
Elements of a Regulation D Offering
Determine the amount of money to be raised (offering amount)
Equity and or debt
Shares or bonds to be sold
Maturity date/interest return
Create a private placement memorandum
Create a subscription agreement
Create a promissory note if it is a debt offering
Create the proper documents and file them with the SEC
Once this is accomplished, you can approach potential investors and sell them shares or notes in your venture. The great thing about the Regulation D filing is that it allows you to continue raising money without needing to re-file the documents for a fairly long time. The process sounds much more complex and expensive than it actually is.
Issues That Need to Be Considered Carefully
Angel Investors
Question: Do you not think it is easier to find 20 people with $25,000 to invest than one “angel investor” with $500,000? Even if you locate a potential “angel” will they listen to your story or read your business plan? In almost all cases, these “angel investors” receive hundreds of business plans each month. What is going to distinguish your plan from being just one more on the pile?
*Investor Group*
This is ultimately the key factor in raising money. Most of us know quite a few people, who also know quite a few people with $10,000-$25,000. If you called someone, even if you didn’t know them well, and said that you had an investment idea you believe they would find interesting, a majority of these people would read and evaluate your investment request. Also, we warn you that most internet and broker lists are a waste of time and money. There are strategies for developing a good prospect list specifically targeted to your business. This is your potential investor group. Remember, for $500,000 you only need to find 20 investors with $25,000 each.
Business Plan v. Private Placement Memorandum
A business plan does not create a proper legal structure to take in money from multiple investors. Even if you provide potential investors with a business plan, a Private Placement Memorandum and Signature Agreement Packet will ultimately still be required for filing with the appropriate state and federal authorities before you can take any investor money.
The Private Placement Memorandum and Signature Agreement Packet should be capable of being used by you in lieu of the business plan.
You need to gather the appropriate information, prepare the documents and tell your story in a compelling manner to accurately reflect your business and your anticipated use of the investment proceeds
Summary
Generally, It is impractical and a waste of time to attempt to raise less than $10 million from Angel Investors and Venture Capitalist. The reason is the “Due Diligence” that is required before investing money is cost prohibited in deals less than $10,000,000. Yet, every day thousands of individuals successfully raise much less capital. Though this sounds like a contradiction the ability to be successful is completely dependent upon the process you follow. Raising capital is an incremental process. You will find many websites, including ours, that have good generic resources but ultimately you are going to have to speak directly with someone about the specifics of your needs. It is only at that point will you begin to learn what it will take to successfully reach your goal. I am sure the question you need answered is:
"How can I raise capital without first committing to spending a great deal of money?”
The first step is realizing that a Private Placement is your single best option for Raising Capital.
How to Proceed
If you are not yet convinced, bookmark this site and continue your research efforts. Eventually you will come back and see that speaking to us or someone like us is your next step and best option for understanding the process to raising Venture Capital.
We offer a Free Initial Consultation which in itself will likely save you thousands in legal and accounting fees.
You will also see that in our Fees and Services section our fees are only due if you are successful in raising capital.
It would appear you have little to lose in speaking with us.
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