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Start-up Costs and Capital Sources

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									START-UP COSTS and
 CAPITAL SOURCES




                     1
START UP COSTS

   IF YOU DON’T HAVE ENOUGH CASH TO
    START YOUR BUSINESS RIGHT, WAIT UNTIL
    YOU CAN.

   BUSINESS PLAN WILL HELP



                         Gateway Business Bank

                                                 2
START-UP COSTS and CAPITAL
SOURCES
   START-UP CASH INVESTMENT
     FIXED CAPITAL INVESTMENTS
        START UP
        GROWTH
        MAINTENANCE

     WORKING CAPITAL INVESTMENTS
        START UP
        GROWTH
        MAINTENANCE

     CASH OUTLAYS UNTIL BREAKEVEN
                                    3
    START-UP COSTS and CAPITAL
    SOURCES
   FIXED CAPITAL – How do you calculate how much
    your business needs at start-up and to maintain
    growth? Do not confuse the justification with how it
    will be financed. Justify first, then determine how to
    finance the investments.

       SALES FORECAST – 24 to 36 months
     How much “capacity” investment is required?
     How fast will you grow? New products or services?
                                                             4
START-UP COSTS and CAPITAL
SOURCES
   WORKING CAPITAL INVESTMENTS – The excess
    of current assets over current liabilities or the
    amount of cash required to fund the business on
    a day-to-day basis. An indication of short-term
    financial strength. Don’t be under-capitalized.
   No business has ever failed because they had
    too much working capital.

    Working Capital = CURRENT ASSETS minus
    CURRENT LIABILITIES
                                                        5
       START-UP COSTS (INVESTMENTS)

                  FIXED CAPITAL
Office Furniture                  $ 2,000
Vehicles                           20,000
Tenant Improvements                10,000
Printing Machines                  20,000
Total Fixed Capital – start-up    $52,000

Vehicles                          $ 20,000
Printing Machines                   10,000
Total Fixed Capital – Year Two    $ 30,000
                                             6
   START-UP COSTS (INVESTMENTS)

                     WORKING CAPITAL

Start-up
  Operating Cash                         $ 10,000
  Inventories                              15,000
  Prepaid Rent                              5,000
  Prepaid Insurance                         8,000
Total Working Capital – start-up         $ 38,000

Cash losses – first six months           $ 25,000
Total Working Capital – Year One         $ 63,000

Required Working Capital – Year Two      $ 10,000
(Based on a $50,000 increase in sales)          7
      CAPITAL SOURCES
        HOW BUSINESS ARE REALLY FUNDED

Seed Cash – Percentage of Inc 500 CEOs
surveyed (2002) who launched their company with seed
capital (including personal assets) of:
  Less than $1,000                      14%
  $1,000 - $10,000                      27%
  $10,001 - $20,000                     10%
  $20,001 - $50,000                     15%
  $50,001 - $100,000                    12%
  More than $100,000                    22%        8
    CAPITAL SOURCES

       EQUITY FUNDING – Financing your business by
        selling a minority equity interest. This cash is less
        risky but more expensive. Valuation issues must be
        addressed. Initial and target valuation calculations
        must be made.

    43% of founders started the company alone.
    The rest had:      1 partner           12%
                       2-3 partners        36%
                       4+ partners          9%
9
CAPITAL SOURCES
             Private Equity and Venture Capital funding

Angel investors tend to like proprietary products and
non-capital intensive businesses. They anticipate future
rounds of financing. Angel investors look for:
1.   Market niches – potential to dominate or be #1 or #2 in the
     industry
2.   Advanced technology and a disruptive model (going to change
     things)
3.   Compelling and sustainable advantage – not “me too”
4.   Planned exit in 4-6 years
5.   Reasonable valuation
6.   Performance equal to 5 -10 times original investment
7.   ROI equal to 20-40% per year
8.   Sitting on your board but not having control
9.   Higher risk business models
10.  Angels spend, on average, 51 hours on due diligence per
     investment
                                                                   10
      CAPITAL SOURCES
                BANK LOANS or DEBT FINANCING

 1.       Banks will loan 2.5 – 4.0 times Cash Flow – usually
          based on EBITDA
 2.       Banks would like to see a 3-5 year track record or a
          history of business experience
 3.       Debt is less expensive but more risky than equity
 4.       Banks will not lend on pure projections: You must
          have a history of cash flow or a current personal
          guarantee.
 5.       Three sources of repayment:
      •     Cash Flow
      •     Liquidation value of assets
11    •     Personal Guarantees of each 25% equity owner
CAPITAL SOURCES
                        NEGATIVES TO A BANKER

1.        Getting involved with something outside your normal business
          model
2.        Absentee management / ownership
3.        Divorce
4.        Burnout
5.        Growing beyond owner’s capacity to operate the business
6.        Parent turns over business to son or daughter
7.        Computer conversions
8.        Relocation and / or expansion of facility
9.        Companies “hit the wall” at:
     1.      Manufacturing companies at $2 million in sales
     2.      Distribution companies at $4 million in sales
     3.      Retailers at 3 stores and distance
     4.      Service companies at 12 employees
     5.      Contractors at 2 or more big jobs
                                                                         12
CAPITAL SOURCES

 A bank would rather see a 640 FICO score with all
 payments as agreed (no late payments,
 foreclosures, repossessions, charge offs or
 collection accounts) than a 740 FICO score with a
 past foreclosure, and three previously delinquent
 accounts now paid.

 Having a stable source of income to meet personal
 income requirements can be a significant factor in
 reducing business risk for a start-up.

                                                      13
         CAPITAL SOURCES
           QUESTIONS A BANKER WILL ASK YOU

1.    Do you have a Business Plan?
2.    How much experience do you have in this industry?
3.    How is your credit and how much personal debt do you have?
4.    How much is your down payment? Is it at least 25%?
5.    How much collateral do you have?
6.    Who is the competition?
7.    Do you have personal and business insurance?
8.    Do you have services of an accountant and attorney?
9.    Have you ever filed for bankruptcy?
10.   Do you have 2-4 years of tax returns available?
                                                             14
CAPITAL SOURCES
                    SBA ELIGIBILITY
   Cannot be a business in lending, life insurance,
    real estate development or rental property.
   Gambling, promoting religion, pyramid sales plans,
    consumer marketing cooperatives and persons of
    poor character are ineligible.
   Individuals must be lawfully in the U.S.
   Business cannot be located outside the U.S.
   Import businesses may be ineligible

    Go to www.SBA.gov for a complete list of ineligible
    businesses. Also, a good resource for minority and
    micro-loan plans.
                                                          15
      CAPITAL SOURCES
     MISTAKES ENTREPRENEURS MAKE WHEN RAISING
     CAPITAL

1.     Don’t understand share prices or valuations
2.     Confuse broad market with served market
3.     Make unrealistic assumptions about an exit strategy
4.     Don’t understand long term capital needs
5.     Have no clue about competition
6.     Don’t understand that marketing beats technology 9 out of 10 times
7.     Write a poor executive summary
8.     Use “off the wall” numbers or pull numbers from thin air
9.     Lack focus; e.g. many products or niches
10.    Develop too simplistic of a market plan / analysis
11.    Underestimate expenses
12.    Rely on financial plans with major inconsistencies; e.g. numbers don’t
       match or tie                                                         16
13.    Speak in “techno-jargon”. No one understands what they are saying
      CAPITAL SOURCES
           BEST WAYS TO IRRITATE AN INVESTOR

1.    Lying to investors or not being forthright; omission of
      material information
2.    Inability to answer direct questions with direct answers
3.    Surprises; e.g. problem with credit checks, hidden
      liabilities or debts
4.    Over hype or exaggerate upside
5.    Your story always changes
6.    Arguing with investors
7.    Late for meetings
8.    Excessive secrecy or legalese; expect investor to sign
      NDA
9.    Investing capital in fancy facility and furniture
10.   Fail to attract top talent                               17
      QUESTIONS




          SCORE
       JIM CHAMBERLAIN
James.Chamberlain@SCORE114.org
                                 18

								
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