Where to Find Financing
In order to develop your great idea into an operating business, you’ll need money —
not just at the beginning, but also at more advanced stages of your company’s
growth. Where can you get it? There are many sources of capital to consider when
starting out your business. It is important to consider all options before committing
to any one of them.
Common Sources:
Personal Savings: The primary source of capital for most new businesses
comes from savings and other forms of personal resources. While credit cards
are often used to finance business needs, this can be a risky form of
financing. There may be better options available, even for very small loans.
Family and Friends: Many entrepreneurs look to friends and family when
starting out in a business venture. Often, money is loaned interest free or at a
low interest rate, which can make things a lot easier when getting started.
Angel Investors: Angels not only provide capital, but also may offer their
own entrepreneurial or managerial expertise to growing businesses.
Government Assistance: Small Business Administration loans can help
fledgling companies open their doors for business.
Bank Lenders and Credit Unions: The most common source of funding,
banks and credit unions, will provide a loan if you can show that your
business proposal is sound.
Venture Capital Firms: Venture capital firms provide emerging enterprises
with capital, in return for equity or partial ownership.
What are other sources of capital?
Venture capital can be both difficult to find and expensive to use. It is expensive in
terms of the equity stake expected in return for capital provided by most venture
capital firms. There is no rule that says start-ups have to rely only on venture
capital. In fact, there are many other financing alternatives available for growing
companies. Some popular options include bank debt, venture leasing, corporate
partners and revenues.
http://www.vfinance.com/
Raising Start-Up Capital
It isn’t easy to start a business. You have to decide what you want to do, then build
your business, hire employees and find office space. While there are many
difficulties, the one that entrepreneurs usually find most challenging is raising start-
up capital. Fortunately, there are many options available to raise capital. Finding and
securing this start-up capital takes careful analysis, good negotiating skills, and,
above all, an unwavering commitment to launching your new business.
Your search for capital should begin with a thorough business plan that highlights
your company’s market niche and potential to investors and lenders. Follow that up
with a complete knowledge of the resources available and a determination to make
your business a reality, and you should be on your way to uncovering a source to
supply your business with capital.
Venture-capital firms usually invest between $5 million and $20 million in emerging
companies. Since their investments are considered high-risk, the high risk/high
return principal applies. They look for high rates of return over a relatively short time
frame. Venture Capitalists typically do not provide seed money, which comes instead
from company insiders or angel investors. On the other hand, investment bankers
look at successful, relatively mature companies with sales of approximately $100
million annually and that are on course for an initial public offering.
It is important to know what you are looking for when you start the search for
funding. Do you want money only, or marketing help too? Perhaps you really need
management help? Do you have legal support in-house? What stage of your business
plan have you reached? More importantly, which upcoming stages of your business
plan do you need venture capital support to help you accomplish?
http://www.vfinance.com/
What Is an Angel Investor?
Angels are wealthy individuals and families who invest in early-stage deals offered by
entrepreneurs and companies in need of capital. Angel investing is one of the better-
known forms of private equity. Angel Investors typically provide funding for start-up
businesses in return for an equity stake. Traditional venture capitalists normally
invest relatively large sums; however, Angels contribute smaller amounts to
businesses, often at the beginning of the start-up cycle. Angels also are able to add
non-monetary value to a start-up. Angels often take an active interest in the
operations of a venture, perhaps drawing on their own entrepreneurial or
management experience.
Angels tend to be financially sophisticated private Investors who provide early-stage
capital to businesses. Angels typically provide investments in the $10,000 to
$500,000 range to companies in their formative years. Angels generally take a
strong interest in the company in which they are investing. They usually look for a
return of 5 to 10 times their original investment in 5 to 7 years and are more liberal
in their lending criteria than venture capitalists or banks.
http://www.vfinance.com/
What is Venture Capital and Where Did it
Come From?
What is Venture Capital and Where Did it Come From?
Venture capital is money provided by professionals who invest alongside
management in young, rapidly growing companies that have the potential to develop
into larger, more stable enterprises. Venture capital is an important source of equity
for start-up companies.
Professionally managed venture capital firms generally are private partnerships or
closely held corporations funded by private and public pension funds, endowment
funds, foundations, corporations, wealthy individuals, foreign investors, and the
venture capitalists themselves.
History of Venture Capital
The modern venture capital industry began taking shape in the post-World War II
years. In the mid 1950s, the US government recognized the need for risk capital and
created the Small Business Investment Company (SBIC) program within the Small
Business Administration. The legislation allowed SBA-licensed SBICs to leverage their
private capital up to three-to-one (and, starting in 1976, up to four-to-one) by
borrowing from the federal government at below-market interest rates.
Around the same time, a number of venture capital firms started forming private
partnerships outside the SBIC format. These partnerships offered a degree of
flexibility that SBICs lacked. For instance, private funds are not subject to limitations
on the sizes of portfolio companies, as are SBICs. Within ten years, private venture
capital partnerships passed SBICs in total capital under management.
Before the venture capital markets reached critical mass in the late seventies and
early eighties, only large, established companies could afford to fund the
development of new products. This led to product advances occurring almost entirely
within well-known companies with their own research and development budgets. This
stifled creativity and innovation from many companies. But, when venture capital
became mainstream, smaller companies and start-ups were given opportunities for
innovation as well.
Venture Capital Today
Since the late 1990s, the venture capital industry in US has enjoyed tremendous
growth. There has been a significant evolution in the way that companies are built,
and this has had a ripple effect on the economy as a whole.
In the Internet economy of 1999, more than two-thirds of venture-backed activity
involved Internet companies. With the focus on building companies faster than ever
before so that venture capitalists can exit their investments, venture capital-backed
companies are often forced to go public, merge or be acquired before they are ready.
http://www.vfinance.com/
What Do VC Firms Look For?
What Do VC Firms Look For?
Venture capitalists target high growth companies with potential in three to seven
years of exponential growth. Venture capitalists look at the expertise of the
management team, the thoroughness of the business plan, management's ability to
execute the business plan and the growth potential of the product or service.
What's the best way to approach a venture capital firm? Get an introduction from a
source the fund manager knows and trusts, have a quality management team in
place, have a clear idea of what market you're entering and how you plan to grow
the business.
Strength of Product or Service
Since a VC usually looks to exit from an investment within three to seven years by
means of a sale or IPO they must invest in companies that have potential market
leading products or services. These companies must also have the potential to obtain
a significant and sustainable market share by targeting an under-utilized or fast
growing market segment. A significant market position can also be achieved in
mature markets through the introduction of a revolutionary product.
Proven Companies
Venture capitalists typically look for a strong management team, stability of
revenues and adequate cash flow to quickly reduce the level of debt. Ideally, there
should be expectation for operational improvements and cost reductions as well as
the potential to increase the size and/or profitability of the business through merger
or acquisition with a competitor.
Strong Management Team
Venture capitalists do not normally want to operate a business, they just want to
help it along. They are value added investors that provide management with access
to their expertise and contacts as well as their investment capital. As a result, they
look to invest in companies that have strength and depth of management to achieve
its targets. This does not necessarily mean that a complete team must be in place at
the start, but if it is not in place, management should have a clear idea of how to
assemble this team. Often a VC will help management build up a complete team
once an investment has been made.
Exit Route
Management should have a clear plan of how and when they expect to provide the
exit route for their investors. An exit route is equally valuable to management as it
provides them with the vehicle for capital accumulation and investment liquidity.
There will also need to be a clear understanding of the exit route and exit timetable.
If management does not expect the business to be sufficiently profitable, go public or
be acquired within three to seven years, it may be difficult to convince a VC that they
should become involved.
An exit will usually occur when a company goes public or is bought by another
company. However, it is not uncommon for management to buy-out the venture
capital investor, and continue to run the company as a private and independent
operation.
http://www.vfinance.com/
What Opportunities Do VCs Find
Interesting?
Most venture capital firms are interested in investment projects requiring an
investment of $5 million and $20 million. Smaller projects are of limited interest
because of the high cost of investigation and administration; however, some venture
capital firms will consider smaller proposals if the investment is unique and
promising.
The typical venture capital firm receives hundreds of proposals each year. Probably
90% of these will be rejected quickly because they don't fit the firm's geographical,
industrial or technical policies of the firm, or because the business plans have been
poorly prepared.
The remaining 10% are carefully investigated, which is both time-consuming and
expensive. Firms may hire consultants to evaluate the product, particularly when it is
new in the industry or is technologically complex. The market size and competitive
position of the company are analyzed by contacts with present and potential
customers, suppliers, and others. Production costs are reviewed. An auditor reviews
the financial situation of the company. Most importantly, the venture capital firm
evaluates the character and competence of the management, often with a thorough
background check.
These preliminary investigations may cost a venture firm several thousands of
dollars per company investigated. They result in perhaps ten to fifteen proposals of
interest. Then, second investigations, more thorough and more expensive than the
first, reduce the number of proposals under consideration to only three or four.
Eventually, the firm invests in one or two of these.
This is a two way process: you should be evaluating venture firms and how well they
understand your market and business plan at the same time they are evaluating you.
Unless you have previously known and worked with a venture firm, you should
expect to have a number of intensive meetings with the firm's principals to develop a
personal relationship. Remember, the venture firm is backing you and your team as
individuals. This is a relationship - both parties must get to know one another well.
Trends in venture capital
The leading recipients of venture capital in the U.S. tend to be computer technology
businesses-those engaged in hardware or software production, including computer-
related services. Medical/health-care-related companies have also attracted large
amounts of venture capital, as have telecommunications companies. That does not
mean that other industries are not good candidates for venture capital funding.
http://www.vfinance.com/
How Do I Find Cash When My Credit Is Bad?
Author: Jill Andresky Fraser
Q--"I started my company in June 1998 to provide answering services, bookkeeping,
transcriptions, and other services to business and government clients. Sales have
been increasing by 150% each month. But our problem is cash flow. My customers
take from 45 to 90 days to pay. My personal credit is worse than awful after a
divorce. I don't own anything to offer as collateral, and the banks won't talk to me
because I haven't been in business for three years. Bottom line, we need money for
cash flow, payroll, advertising, etc. Any suggestions?" --Janie Montgomery, general
manager, ASAP Answering & Personnel, Soldotna, Alaska
A.--It's sad but true: Montgomery's problem is far from unique. Start-up
entrepreneurs have traditionally been forced to rely on their personal resources--
savings, credit cards, homeequity loans, help from family or friends--when it comes
to raising early-stage financing. But with growing numbers of people experiencing
some type of personal financial problems (which run the gamut from high debt loads
to personal bankruptcies), that's a strategy that sometimes won't work. Combine
that with today's volatile capital markets and many business owners are finding
themselves in a real bind.
But that's not to say that cash-strapped entrepreneurs like Montgomery have no
options. Jesus Arguelles, a financial consultant based in La Quinta, Calif., suggests a
two-pronged approach to raising capital: solve the immediate cash crunch while
taking concrete steps to improve the long-term personal financial picture. "The first
stage is, What does she need to support her cash flow for the next three to six
months?" asks Arguelles. "If she needs, say, $30,000, and she has work orders or
contracts in place from her existing customers, she should be able to raise it through
a method called contract financing."
Contract financing allows you to borrow money from a financing company against a
percentage of your outstanding contracts. It's one of three costly--but effective--
ways to raise cash when your company is too young (or your personal financial
records are too spotty) to help you qualify elsewhere. In Montgomery's case,
Arguelles expects that contract-financing costs will run about 3% to 5% per month--
pricey but preferable to closing up shop if there's no other way to support current
operations at a fast-growth clip.
The other two methods, which are slightly cheaper than contract financing, involve
accounts receivable rather than contracts. They include factoring, in which a
company sells receivables for a discounted price to bring in cash sooner rather than
later; and accounts-receivable financing, in which the company uses receivables as
collateral for a short-term loan from a bank or other financier.
The main point to keep in mind is that these three options should be viewed strictly
as short-term, last-ditch financing methods, since they can eat a big hole in your
profit margin. "The reason to do this is to give your company a chance to build up a
slightly longer track record, which will then hopefully allow you to move to other,
somewhat cheaper financing options," notes Arguelles.
Two cheaper options worth trying: the Small Business Administration's SBA Express
program, and microloans, which are offered on a regional basis by some banks and
other financial institutions, according to Hedy M. Ratner, copresident of the Women's
Business Development Center, in Chicago. "What's possible is to qualify for loans of
up to $25,000, providing you've got a strong business plan and good business
fundamentals," she explains. The way to find out what's offered in your region is by
contacting your state department of commerce, as well as regional SBA offices and
local economic-development agencies. In some regions, nonprofit groups like
Ratner's will work with entrepreneurs to improve their applications and chances of
financing success.
Of course, in cases like ASAP's, it can only help to pursue all possible lending
sources. That includes vendor financing if you're doing enough business with any
company to make it worthwhile for it to support your business's growth activities;
customer financing, so long as you position your request as one that will support
expansion efforts (rather than simple survival); and cosigned loans. While the way
this third option tends to work involves family members or friends, Arguelles notes
that entrepreneurs can sometimes pay independent outsiders to cosign loans,
typically for a onetime, up-front fee of 3% to 5% of the loan's face value. "In some
cases, assuming that the outsider has enough confidence in the business venture,
you can expect him or her to make the introduction to a willing banker," he says.
For business owners in Montgomery's bind, it's important to remember that there are
two sets of financial goals that must be pursued simultaneously: raising short-term
capital for the company (for roughly six months to a year) and improving the
personal financial picture. "Until she, or any business owner, builds up a personal
credit history that looks good, she won't be able to convince most bankers or other
investors that she truly understands financial controls--and that will hamper her
ability to raise capital," says Gayle Ehrlich, a partner at the Boston law firm Sullivan
& Worcester. "The problem is, that's not something she can achieve in three
months."
The best way to start is by working with a local credit-counseling service to set up a
plan to pay off credit-card debts and clean up any other outstanding personal
financial problems. It won't be easy at first. As Montgomery herself explains, she
doesn't even pay herself a salary yet, since, like many start-up entrepreneurs, she is
reinvesting all her company's spare cash in supporting its growth.
But Steven Enright, a financial planner and investment adviser in River Vale, N.J.,
warns that such a strategy can be risky for business owners in Montgomery's
position. "She has to balance the growth of her company against the potential for
getting squeezed out of the business by that growth when she doesn't have the
capital to support it," he says. Enright urges her to start paying herself a modest
salary, with the goal of directing as much of that money as possible to cleaning up
her past credit problems.
"The irony that most people overlook," Enright says, "is that if you've got credit-card
bills you can't pay, your debt load is probably growing a good bit faster than your
company is--which means it will be tough to ever get out from under it." It's hard to
predict how long it should take a business owner to repair past personal-credit
problems. (The key variables for any entrepreneur are the size of his or her
outstanding debt as well as the monthly paycheck a company can support.) But
Montgomery needs to be able to achieve real improvements on the personal, as well
as corporate, front with the close of each quarter.
Over the long term, Ratner urges, Montgomery--and entrepreneurs like her--should
invest time in seminars that will teach her financial strategies as well as cash-flow
and other business-management techniques. "You don't want to wind up in a
situation where you grow so fast, and are so unprepared, that you push yourself
right out of the box," Ratner says.
http://www.vfinance.com/