What Kind of Financing is Right for Your Business?
Most businesses need financing. Unless you won the lottery or inherited a fortune most people start a business with either their own funds or a combination of their funds and financing. Even an established business needs financing at one time or another.
Cash flow is different than profits and profits do not guarantee money in the bank. Entrepreneurs need financing for inventory, payroll, expansion, develop and market new products, to enter new markets, marketing, or moving to a new location.
Defining and selecting the right financing for your business can be a complicated and daunting task. Making the wrong deal can lead to a host of problems. Understand that the path to getting financed is neither clear nor predictable. The financing strategy should be driven by corporate and personal goals, by financial needs, and ultimately by the available alternatives. However, it is the entrepreneur’s relative bargaining power with investors and skills in managing and orchestrating the finance drill process that actually governs the final outcome. So be prepared to negotiate with a financing strategy and complete financials.
Here’s a brief rundown on selected types of financing for commercial ventures.
Asset-Based Lending
Loans secured by inventory or accounts receivable and sometimes by hard assets such as property, plant and equipment.
Bank Loans
A loan that is repaid with interest over time. The business will need strong cash flow, solid management, and an absence of things that could throw the loan into default.
Bridge Financing
A short-term loan to get a company over a financial hump such as reaching a next round of venture financing or filling out other financing to complete an acquisition.
Equipment Leasing
Financing to lease equipment instead of buying. It is provided by banks, subsidiaries of equipment manufacturers and leasing companies. In some cases, investment bankers and brokers will bring the parties of a lease together.
Factoring
This is when a company sells its accounts receivable a a discount. The buyer then assumes the risk of collecting on those debts.
Mezzanine Debt
Debt with equity-based options, such as warrants, which entitle the holders to buy specified amounts of securities at a selected price over a period of time. Mezzanine debt generally is either unsecured or has a lower priority, meaning the lender stands further back in the line in the event of bankruptcy. This debt fills the gap between senior lenders, like banks, and equity investors.
Real Estate Loans
Loans on new properties-which are short term construction loans-or on existing, improved properties. The latter typically involves buildings, retail and multi-family complexes that are at least 2 years old and 85% leased.
Sales/Leaseback Financing
Selling an asset, such as a building, and leasing it back for a specific period of time. The asset is generally sold at market value.
Start-Up Financing
Loans for businesses at their earliest stage of development.
Working Capital Loan
A short-term loan for buying assets that provides income. Working capital is used to run day-to-day operations, and is defined as current assets minus current liabilities.
It’s always better to get by without taking on debt. But on the other hand, most businesses need to acquire financing at one point or another. A home office is less likely to require financing than a business location that you rent. A one person operation is less likely to need financing than one with employees.
When you do need the financing, remember to examine all avenues of financing open to you and scrutinize the terms of all the proposals.
Free Business Plan Outline
My opinion is that the owner of any business, along with the employees, should develop an annual business plan. Another one of my blogs explains that in most cases, if you are applying for a loan, you will need to present a business plan to the banker.
Completing a business plan can seem overwhelming. I have many clients who tell me the operations of the business are in their head and yet cannot develop a logical, cohesive formula to put on paper. More often than not, unless you purchase a business plan template, you are going to be overwhelmed by the sources of business plan outlines on the web. All of them are good because like every business, each business plan is unique. There is no right or wrong way to do a business plan. There is no ”standard” length of a business plan. But all plans should contain the same basic information.
Here is an outline that I find most useful and one that I hope can help you. Please understand that it can be used for about any business in any industry. However, you should tailor it to your needs. For instance, if you are a start up, the plan does not need a section for Age, Size, and Past Performance. Here are some useful hints:
- Include a Table of Contents.
- Number the pages.
- Write for your audience. If the plan is going to a loan officer assume the person knows nothing about your industry. Do not use technical language or if you must, explain it. Do not use industry acronyms unless they are spelled out the first time you use them in the plan.
- In the Executive Summary the plan should state what the purpose of the plan is. Is it for a SBA loan, is it to be presented to investors, or is it an annual plan for the team?
I. EXECUTIVE SUMMARY
A. What the organization is and does
B. Who will purchase the product or service
C. Why am I uniquely qualified and skilled in managing the business
D. What are the financial results expected
E. How much capital is required, what will it be used for, and the sources of capital
F. Assessment of risks
II. BUSINESS CONCEPT
A. Describe the unique qualities and value to customer of product or service provided
B. Age, size and past performance of business
C. Vision, along with short and long-term objectives with milestones
III. PRODUCTS AND SERVICES
A. Description
B. Product life cycle
C. Intellectual property
D. R & D activities
IV. MARKET ANALYSIS
A. Industry Analysis
1. Future outlook and trends
2. Current business conditions – national, regional, specific market
B. Identify target market
C. Analysis of competitors
D. Market test results
E. Regulatory environment
V. MARKETING PLAN
A. Marketing philosophy/organization
B. Advertising and promotion
C. Product price and sales terms
D. Production capacity
E. Distribution
VI. OPERATIONS
A. Location of business and special facility equipment needs
B. Steps involved in producing product or service
C. Suppliers
D. Costs to produce product or service
E. Personnel requirements
F. Licenses and permits needed
VII. OWNERSHIP, MANAGEMENT AND ORGANIZATIONAL PLAN
A. Organizational structure
B. Key managers, functions and qualifications
C. Legal form of ownership
VIII. FINANCIAL DATA
Include a narrative of Financial Assumptions. How did you come up with the sales numbers, are there any extraordinary expenses, etc.?
A. History, if applicable
B. Income statements (projected)
C. Cash flow forecasts (if you are going to present this to a lender or investor the cash flow forecast is most critical)
D. Balance sheets (pro forma)
E. Breakeven analysis
F. Working capital analysis
G. Source and applications of capital
IX. CRITICAL RISKS
A. Potential problems that could arise and their likelihood
B. Plans to manage problems
X. EXHIBITS
Once again, this is not the “right” outline, but rather, one that I find useful. I hope it helps you.
Can a Restaurant Benefit From Leasing Its Equipment?
In the restaurant industry trying to find a lender to provide capital funding is difficult at best; for a start up it is nearly impossible. To keep capital requirements at a minimum, a restaurant owner should consider equipment leasing as a viable alternative to buying.
For food establishments, restaurant equipment leasing is often the single determining factor between success and failure. While other industries may be able to work things in different ways to get away from increasing their capital investment, companies in the food industry often need good restaurant equipment financing options to keep them afloat so they can overcome their competition.
Here are just six of the ways these businesses use this option:
Seasonal Business
Establishments, such as ice cream shops, summer camps, and those in resorts and tourist areas, are only operating during certain times of the year. Restaurant equipment financing is ideal option for these types of companies, mainly because of their flexibility. They can keep the costs associated with the business low when they are not making an income and increase the payments when they are making the most to ease the financial burden.
Start Up Costs
Leasing options are ideal for those who are starting a new business. They can lease all the equipment they need without spending their much-needed cash and can get significantly smaller payments. As an added benefit, a return on the payments through the taxation system is generally available, giving new places the boost they need to succeed.
Product Changes
Changing the meals offered is a great way to keep customers coming back and attracting a wide range of new customers. Unfortunately, this can sometimes be a costly mistake. The items needed to make the switch can be acquired through restaurant equipment financing. If the changes flop, there is very little cost to the establishment.
Special Food Items
It is common for a business to serve food produced by another company. In some instances, this may include special equipment that an establishment wouldn’t normally have on hand. These items often have a high price tag that comes along with them as well. Restaurant equipment leasing puts these items directly into the hands of the establishment, giving them every chance at success.
Expansion
When a company decides to expand their operations, it will either improve or kill an establishment. One of the biggest reasons for this is the high amount of capital investment this requires. Financial options spread out the expense over time and provide flexible solutions to help ease a difficult transition.
The Worse Possible Scenario
One thing businesses in the food industry are often in danger of is going under. The number of businesses that simply can’t make it beyond the first year is staggering. When this occurs, owners are often forced to liquidate their equipment to help recoup some of their losses and pay their creditors. This doesn’t happen with restaurant equipment leasing.
The benefits of restaurant equipment financing give the food industry the advantages they need to be successful and minimize losses. Restaurant equipment leasing can become as important as the perfect menu.
What Do You Need to Get a Small Business Loan?
Getting a loan for a small business is quite difficult these days. This goes from a start up to an existing business wanting to expand or get some cash flow to add sales people and generate income.
The same criteria have always been in place with lenders when they consider sourcing a loan. You will need a business plan that tells the lender:
- How you plan to use the funds and what results will be forthcoming.
- Do you have a record of a good personal credit history?
- Do you have experience in the industry your business will operate?
- How will your business operate? Who are the suppliers?
- How will you let people know about your business and how will you sell the products or services?
- What will make your business unique?
- How do you know there is a demand for your business model?
- Will you have enough cash at the end of each month to open the doors the next month? What is your debt to equity ratio?
- What does the profit forecast look like at the end of 12 months?
- How will the loan be repaid if the business fails?
The last question deals with collateral. It is probably the most important question a lender will ask since in today’s economic climate, lenders do not want to take any chance of a loan default and not getting the cash to cover the balance. So the question “How can you repay the loan?”, or in simple terms, where can the bank go to get their money if your business goes under, is of paramount importance.
As in the stock market, lenders do not like uncertainty. Lenders want to trust their customers. So your plan should be realistic, optimistic, and pessimistic. What I mean is that the plan should contain financial forecasts that are based on real data. Any optimistic spurts or growth opportunities should be fully explained and detailed to tell the lender how the growth will happen. Yet it should also show the lender you have thought of ways the business could potentially fail. List five challenges and how you would overcome them. This will limit any questions from the loan committee and show them you fully understand the nature of the business.
Do not ignore the biggest risk to your business: key-person risk. If you or your business partners are incapacitated or die tomorrow, could the business repay the loan? A substantial life insurance policy might be morbid and expensive, but it shows the lender that you are helping reduce their exposure to risk.
Here is one last, important item to consider when applying for a business loan: Do the business plan by yourself! This is a link to an article that explains why this concept is so important: The Business Plan As a Thought Process.
So in the end all the pieces must fall together. Put together a solid relationship with the lender, a convincing business plan, a business management forecast that minimizes the risk for the lender, and a rational business model that shows upside potential for the lender and you might, just might, be ready to negotiate for a loan package.
