By Debbie Gregory.

In this series of articles, we examine the financial options and program available to business owners to fund their business.

In the three previous articles, we have looked at self-funding, venture capital and crowdfunding. In this final installment, we will look at Small Business Loans.

Once you have your business plan together, including your expense sheet and financial projections, contact various banks and credit unions and compare terms they are offering for small business loans.

Loans guaranteed by the U.S. Small Business Administration (SBA) are very popular since they are guaranteed if you meet the qualifications, including meeting the government’s definition of a small business for your industry and already having been turned down for a loan on your own from a bank or other financial institution.

The SBA’s mission is to further the growth and development of small businesses throughout the country. However, the SBA doesn’t lend money directly to small business owners. Instead, it sets guidelines for loans made by its partnering lenders, community development organizations, and micro-lending institutions.

SBA-guaranteed loans generally have rates and fees that are comparable to non-guaranteed loans, lower interest rates, longer repayment terms, as well as manageable fees. And many of the SBA programs come with continued support to help you start and run your business.

There are three different kinds of SBA loan programs, each with their own terms, conditions, and advantages:

• SBA 7(a) loan, which is the most popular loan type, can be for loans as high as $5.5 million in cash with terms up to ten years.
• CDC/504 loans, which are meant specifically for purchases like real estate and machinery with terms up to 25 years.
• SBA microloans for a max of $50,000, which can be repaid for up to six years.

You typically need to have a 680 or higher personal credit score and ability to repay, 1.25 times or better debt-service coverage ratio (DSCR), the measurement of the cash flow available to pay current debt obligations, to get an SBA loan.

Veteran and Military Business Owners Association, VAMBOA,

In this series of articles, we will examine the financial options and programs available to business owners to fund their business.

By Debbie Gregory.

In part 1 of this series, we have looked at the option of using your own money or assets to fund your business. Now we will look at using someone else’s.

If you are willing to take on investors, venture capital might be a good option. This can come from a single person, often referred to as an angel investor, or a venture capital firm. Angel investors are usually affluent individuals who provide capital for a business start-up, and more often than not are looking for convertible debt or ownership equity, as well as an active role in the company.

When you secure venture capital funds, you are not taking out a loan. You are offering a piece of the pie in exchange for funds to be used to drive your business venture down the road to success.

If you want to attract investors, do your homework in advance. Watch a few episodes of Shark Tank to understand how investors evaluate a potential investment. Although this is just a quick introduction, you’ll see how they value a company based on the amount of money requested and percentage of business offered, while inquiring about past performance, future projections, profit margins, the backgrounds of the principals, etc. You will see the importance of coming in with an appropriate valuation. Often times a deal is made based on the quality, passion, commitment, and integrity of the entrepreneurs.

Investors will want to review your business plan to make sure it meets their investing criteria. Most investment funds concentrate on an industry, geographic area, or stage of business development.

After determining the amount of the investment, you will need to settle on the terms and conditions. Venture funds are normally released in predetermined rounds. As the company meets milestones, further rounds of financing are made available, possibly with adjustments in price as the company executes its plan.

Veteran and Military Business Owners Association, VAMBOA,

In this series of articles, we will examine the financial options and programs available to business owners to fund their business.

By Debbie Gregory.

Whether you’re looking for start-up funds, capital to expand, or money to hold in reserve to get you through tough times, how you fund your business is one of the most important decisions you will make.

The term self-funding includes using your own money to invest directly in the company and using your personal assets as collateral for outside funding. If you are in a financial position to fund your business yourself, this option allows you to be independent and retain complete control of your business.

These monies could come from sources such as your savings, equity in your home, credit cards or even your retirement account.

Saving up the money to fund your business ahead of time saves you money since you will not be paying any interest, although it does involve risking your personal savings.

If you have equity in your home, a home equity loan or home equity line of credit (HELOC) is another option. Home equity loans provide a one lump-sum payment, while a HELOC works similarly to a credit card, where you only pay interest on the outstanding balance. But keep in mind that you are at risk by using the family home as collateral, something you wouldn’t want to lose.

One of the most expensive ways to self-finance your business is by using credit cards. Many successful business owners have used this method and made it work, but again, this is very risky, and depending on the interest rate, could be very expensive.

For a short burst of cash, you can withdraw money from your IRA interest and tax free, as long as you replace it within 60 days. However, make sure you pay back the money on time. If you’re just one day late in replacing the money for any reason, you’ll have to pay a 10 percent penalty and taxes on any of the money you haven’t paid back.

You may also be able to get funds from family members and friends. But please consider, each one of these methods does have a potential down-side should your business be slow to show a profit.

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By Debbie Gregory.

By Debbie Gregory.

One of the most important elements to a successful small business is strong financial health. Here are some metrics that every entrepreneur should make sure they consistently focus on:

The Break-Even Point – This is the the dollar amount you need to get to in a given period, generally monthly or quarterly. This amount needs to allow for the company to cover its own costs and sustain itself. Also, take into consideration even if it is not making a profit during a slow time, you will still have outgoing costs. This is sometimes called the margin of safety.

Operating Cash Flow – This lets you know how much cash your business brings in from its normal operations. It is common for businesses just starting out that they may operate at a loss in the beginning. Once established, this number should be positive.

Net Income Ratio/Profit Margin – Your profit, the money left over after operating expenses are subtracted from revenue.  This is a very important metric. You need to make sure your business still makes money overall after you pay your expenses. A business just starting out, or one experiencing a bit of a slowdown may have a bottom line in the red at some points, but you should always set your sights on growing your profit margins. If you are losing money, it’s time to look at ways you can trim expenses or reconfigure your operations.  

Working Capital – This number is determined by taking your current assets (cash, accounts receivables, short-term investments) and subtracting your current liabilities (liabilities due within the next 12 months).

Gross Margins – The gross margin is calculated as a company’s total sales revenue, minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. The higher the percentage, the more the company retains on each dollar of sales to service its other costs and then enjoy as profits. Tracking margins is important for growing companies, since increased volumes should improve efficiency and lower the cost per unit (increase the margin). 

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By Debbie Gregory.

By Debbie Gregory.

Contract financing, often referred to as “factoring” or “invoice financing” is a general term used for asset based lending products that will allow companies to finance slow-paying accounts receivable.

Contract financing differs from loans from a bank in the fact that rather than being based on the borrowing company’s credit record, it’s underwritten based on the creditworthiness of invoiced customer and the terms of the contract that customer has with the borrowing company.

That means that contract financing is a useful tool when the credit history of a small or medium company is such that it would limit or prohibit access to conventional bank loans and commercial lines of credit.

An agreed upon rate and fee amount between the borrowing company and the factoring company is withheld until the factoring company has been paid in full, at which point the factoring company releases any reserves.

This arrangement is beneficial to the borrowing company’s cash flow, which is vital to the success of any company.

Each financing company will have different rates and fee structures. By shopping around, comparing rates and doing due diligence businesses can avoid making a bad deal.  The right financing company will offer transparency, with their rates and fees upfront and clear.

You may be wondering if a company has to factor all of their invoices. The answer depends on the factoring company selected. Some will allow their borrowers to pick and choose which invoices to finance, while others may require the borrower to finance all of their invoices.

Contract financing companies are most often private firms, and you can usually find them online. The general procedure is to leave your contact information and wait for a phone call from the finance company.

Under many circumstances, contract financing can be a powerful financial tool for business owners to take control of their cash flow and use it strategically to work for them.

Veteran and Military Business Owners Association, VAMBOA,