Where's the Money? : Sure Fire Financing Solutions for Your Small Business

by Beroff, Art

• ISBN13: 9781891984037
• ISBN10: 1891984039
• Edition: 1st
• Format: Paperback
• Copyright: 1999-05-01
• Publisher: NATIONAL BOOK NETWORK

Summary

Discusses how to get the financing you need. Presents expert advice and secrets for writing financial statements that appeal to different audiences, filling out loan applications that get results, anticipating investor questions and how to best answer them, and grow your business. Softcover. DLC: Small business finance.

Author Biography

Art Beroff is an investment banker specializing in mergers and acquisitions, initial public offerings and improving businesses through innovative cost savings. He also serves on the National Advisory Council to the Small Business Administration. Dwayne Moyers is the founder of Cummer Moyer Securities investment brokerage and management company. He has advised numerous emerging companies on financing strategies and options.

Table of Contents

Introduction	ix
PART 1 Sources	1	(226)
Start-up Financing	3	(10)
The Way It Is	4	(1)
Sell Assets	5	(1)
Borrow Against Your Home	6	(1)
Borrow Against Insurance Policies	7	(1)
Friends And Family	7	(2)
Borrow Against Your Investments	9	(1)
Credit Cards	10	(3)
Equipment Leasing	13	(12)
A Case In Point	15	(1)
Advantages Of Leasing	16	(1)
Not A Bank	17	(2)
Improving Your Chances Of Getting A Lease	19	(2)
Scoring The Lease	21	(1)
Let's Make A Deal	21	(4)
Community Development Financial Institutions	25	(8)
The Power Of The People	27	(2)
Real Businesses, Please	29	(1)
5 Steps To CDFI Financing	30	(3)
Microloans	33	(10)
Small Is Beautiful	35	(1)
When Small Isn't Beautiful	36	(1)
The Microloan Application Process	37	(6)
Asset-based Loans	43	(10)
Asset-based Lending--What Is It	45	(1)
Estimating Your Borrowing Capacity	46	(3)
Asset-based Loans--How They Work	49	(1)
Requirements And Scenarios	50	(3)
Bank Term Loans	53	(14)
Term Loans Are Still The Cheapest Vehicle	55	(1)
How Do You Qualify?	56	(1)
Be Prepared	57	(1)
Financial Statements	58	(1)
Red Flags	59	(1)
The Great Divide	60	(1)
You Know You Should Look Elsewhere When	61	(1)
What Else You Need To Know	62	(1)
Choosing A Bank	63	(4)
SBA-guaranteed Loans	67	(16)
The SBA Bridges The Gap	69	(1)
. . .And Lowers The Cash Flow Hurdle	70	(1)
A Word On Posture	71	(1)
How To Find An SBA Lender	72	(2)
Onerous But Unavoidable Features	74	(5)
SBA-guarantee Fees	79	(4)
Private Loan Guarantees	83	(10)
Why Loan Guarantees Work	85	(3)
Silver Linings	88	(1)
End Game	89	(4)
504 Loans	93	(10)
Pros And Cons	95	(1)
Certified Development Companies	96	(1)
Who's Involved, And What's Qualified?	96	(2)
Applying For A CDC Loan	98	(5)
Royalty Financing	103	(8)
Royalty Financing: The Secret Weapon	105	(1)
A Case In Point	105	(2)
It's A Good Thing	107	(1)
Not For Everyone	108	(3)
Federal Government Venture Capital	111	(8)
Is This Option Right For Me?	113	(1)
More Verve Than A Lender	114	(1)
Making Debt Behave Like Equity	115	(4)
Angel Investors	119	(12)
Why Angels?	121	(1)
Stalking Angels	121	(3)
Dealing With Federal Securities Laws	124	(2)
Types Of Angels	126	(5)
Electronic Matching Services	131	(12)
The Dawning Of A New Era	133	(1)
The Network Revolution	134	(1)
How It Works	134	(6)
How To Get Started	140	(1)
The Limitations Of Cyberspace	140	(3)
Business Incubators	143	(8)
A Case In Point	145	(1)
Deep Roots, Lots Of Services	146	(1)
Why Incubators Attract Investors	147	(1)
Only The Lonely	148	(3)
401(k) Financing	151	(8)
A Case In Point	153	(2)
Pros And Cons	155	(1)
Assembling The Team	156	(3)
Direct Public Offerings	159	(18)
The DPO Orientation	161	(1)
A Case In Point	162	(1)
DPO Limitations	163	(2)
Characteristics Of DPO Candidates	165	(2)
Regulatory Filings For A DPO	167	(2)
Planning A Trading Market	169	(1)
How To Get Started With A DPO	170	(7)
Reverse Mergers	177	(14)
The Reality Of The Situation	179	(1)
A Case In Point	180	(1)
The Benefits Of Going In Reverse	181	(2)
The Drawbacks Of A Reverse Merger	183	(3)
Next Steps For A Reverse Merger	186	(5)
Initial Public Offerings	191	(20)
Why Go Public?	193	(2)
Broad Brush: Finding The Investment Banker	195	(2)
Fine-Tooth Comb: Finding Your Investment Banker	197	(2)
Getting Introductions	199	(3)
Selling The Underwriter	202	(2)
Common Deal Breakers	204	(1)
Evaluating Investment Bankers	205	(6)
Institutional Venture Capital	211	(16)
Take This Test	212	(4)
Using A Shotgun Approach	216	(4)
The Rifle Approach	220	(7)
PART 2 Techniques	227	(84)
Preparing A Loan Request	229	(12)
More Than Just Numbers	231	(1)
Doing The Legwork	232	(2)
What Do Banks Really Want?	234	(3)
Loan Proposals	237	(4)
How Investors Use Your Financial Statements	241	(18)
Lenders Vs. Equity Investors	242	(1)
How Lenders Analyze Financial Statements	243	(1)
Determining Sources Of Repayment	244	(4)
Margin Analysis	244	(2)
Net Flow Of Funds Calculation	246	(2)
Balance Sheet Analysis	248	(4)
Calculating Working-capital Needs	248	(3)
Determining The Secondary Source Of Repayment	251	(1)
How Equity Investors Analyze Financial Statements	252	(7)
Equity Investor Balance Sheet Analysis	253	(2)
Income Statement Analysis For The Equity Investor	255	(1)
Cash Flow Analysis For The Equity Investor	256	(3)
Raising Equity Capital	259	(14)
Business Planning	260	(5)
Lead Generation	265	(1)
Making Contact And Following Up	266	(4)
Closing The Deal	270	(3)
Writing A Business Plan	273	(38)
Business Plan Structures	274	(7)
The Company And Its Business	276	(5)
Market Analysis	281	(3)
Marketing Operations	284	(4)
Marketing Operations For Established Companies	285	(1)
Marketing Operations For Start-up Companies	286	(2)
Key Personnel	288	(18)
Getting The Right Spin On Biographies	289	(1)
Overcoming A Thin Management Team	290	(4)
Financial Analysis	294	(1)
Valuation Analysis	295	(1)
Use Of Proceeds	295	(1)
Summary Projected And Historical Financial Statements	296	(1)
Historical And Projected Financial Statements	297	(6)
Assumptions To The Financial Projections	303	(3)
Appendices	306	(1)
Executive Summary	307	(4)
Glossary	311	(8)
Appendix A Financial Resources	319	(8)
Appendix B Government Listings	327	(16)
Appendix C Small-business-friendly Banks	343	(10)
Index	353

Excerpts

Chapter One

The Way It Is

    If you are starting a business, it's your baby. This idea may leave you feeling simultaneously liberated and inspired. But it also has an edge. Specifically, if it's your baby, it's also your obligation to finance it beyond the "I've got an idea" stage.

    How about the entrepreneur who wants to raise $25,000 from outside investors to start a restaurant? It's unlikely he will succeed in getting people to reach for their checkbooks.

    Why not? First, if the would-be restaurateur can't scratch together $25,000 out of his own resources or credit, it's highly unlikely that an investor would view him or her as having the kind of chutzpah needed to make a go of it in the restaurant business.

    Second, and more to the point, if this entrepreneur can raise these funds from his own resources but did not want to for fear of losing them, then any investor is sure to ask, "If you won't take a chance on this, why should I?"

    The fact is, if you're not willing to take the maximum amount of risk your circumstances will allow, then no one else will be willing to, either.

    According to entrepreneur Jim Young of Long Beach, California, who has started more than 10 businesses, it's sort of like a plate of ham and eggs. "The chicken makes a contribution," he says. "But the pig makes a commitment." When starting a new business, the investor is the chicken. The entrepreneur must take the other role.

    So the question is, How do you get that first dollop of funds that will either advance your idea to the point where it can attract outside capital, or perhaps jump-start you into profitable operations?

Sell Assets

    If you own things, you can sell them. It's that simple. Jewelry, rugs, pool tables, boats, time-shares, second properties. For most people their largest assets are their homes and cars. Homes are covered later. Here's what you can do with automobiles.

    If you drive a nice, late-model car, you can sell it and lease a cheap one without a down payment. If your car is nice, this might net you $15,000 to $20,000 and leave you with a small monthly lease payment.

    Even if you lease your car, a variation on this theme applies. Suppose you lease a brand-new sport utility vehicle for $449 per month. Get rid of it and lease an economy car for $99 per month. Granted, the savings of $350 each month isn't much to start a business on. However, this new monthly cash flow should allow you to secure a personal loan. With that much, you would be able to borrow as much as $12,000.

Borrow Against Your Home

    This is the oldest trick in the book. It's also one of the best because you can exert almost total control over the process. Here's how it works: Say you need $50,000, your home is worth $250,000 and you owe the bank $100,000 on your mortgage. You can borrow against the equity, in this case $150,000.

    Most banks and mortgage companies will lend up to 70 percent of the equity in your home. So in our hypothetical example, the $150,000 of equity would allow the homeowner/entrepreneur to borrow up to $105,000.

    Of course, once the loan kicks in, you'll have monthly payments. If you're starting a new business, it's a wise idea to set aside some of the proceeds from the home equity loan to help make these payments until the business can pay you a steady salary.

    Another way to get money out of your home but maintain a lower monthly payment is to refinance the mortgage with a new one.

    Using the above hypothetical example, rather than borrowing against the equity, our homeowner/entrepreneur would get a new 30-year mortgage for $150,000 and with the proceeds pay off the $100,000 mortgage. The difference, $50,000, can be used for any purpose the borrower wants, including investing in a new business.

    The refinancing option is less expensive because payments on the $50,000 are spread across 30 years instead of perhaps 10 years for a home equity loan. In the long run, the lower payments prove to be more expensive, since the borrower is paying interest on the outstanding balance for perhaps as long as 30 years.

Borrow Against Insurance Policies

    If you want to know where all your money is, look at your insurance payments. Each month you probably pay for health insurance, life insurance, disability insurance, auto insurance and perhaps homeowner's insurance.

    Unfortunately, you can only borrow against whole life policies, but most have some cash value after three years. Simply write your agent or insurance company, saying you want a policy loan. Most companies will lend up to 90 percent of the cash value, and your policy stays intact, as long as you keep paying the premiums as they come due. Unfortunately, if you die with a policy loan outstanding, the benefits might be diminished, although that varies by policy. But the good news is that loans against your insurance policy are fairly reasonable, since the rates charged are tied to the key moneymarket rate.

Friends And Family

    They believe in you the most. Therefore, they should be one of the first outside sources of capital you try to tap.

    Friends and family present a formidable source of capital. Your typical friend or family investor is male, has been successful in his own business and wants to invest because he wishes someone had done it for him, according to Kirk Neiswander, director of entrepreneurial programs at Case Western Reserve University's Weatherhead School of Management. "They are not reckless investors, and they have shallow pockets," he says. "They will invest once but not a second or a third time and generally in an industry they know that is close to home. Typically, friends and family will invest up to $100,000."

    However, investments with friends and family can turn out bad when things don't go as planned. The situation can be even worse than with professional investors because friends and family react to bad news as much with emotion as with logic. Take the following steps to protect everyone from each other:

• Get an agreement in writing, which will eliminate all conversations that start with, "You never said that."

• Emphasize debt (loans) rather than equity (ownership). You don't want friends and family in your company forever. Before you know it, they start telling you how to run the place, and long-buried emotions emerge. Make it a loan, and pay it back as fast as you can.

• Put some cash flow on their investment. If Dad says, "Here's $50,000 -- try not to lose it, and pay it back as soon as you can," that's great. But consider paying some nominal interest at regular intervals so that you and he have a reality check. And it's better to pay this quarterly rather than monthly. This way, when things are teetering, your lender won't immediately know it.

Borrow Against Your Investments

    So-called margin loans are cheap and easy. They can also be dangerous.

    Margin loans are easy because any brokerage firm with which you have an account will lend you money against the value of your holdings. For instance, you can borrow up to 90 percent of the value of federal government bills, bonds and notes. For municipal bonds the advance rate is 75 percent, for government agencies it's 65 percent, and for stocks and mutual funds the advance rate is 50 percent. Margin loans are cheap because the underlying collateral is accessible (it's in your account) and it's liquid (it can be sold and quickly turned into cash).

    Assuming you have $50,000 worth of blue-chip stocks in your portfolio and you have applied for margin privileges, one phone call to your broker will get you $25,000. It's that easy.

    Margin loans are great when stock prices are steady or rising, but they aren't the best choice when they are falling. Suppose your marginable common stocks are worth $50,000 and you borrow the maximum amount, $25,000. If the value of those stocks falls to $40,000 it can cause a problem. Specifically, to keep the loan amount ($25,000) in the proper proportion (50 percent) to the value of the collateral, it must be $50,000 or more at all times. When it dips to $40,000 your broker will ask you to deposit $10,000 into your account to set everything straight again.

    If you don't deposit the cash into the account, the broker simply liquidates stocks in your portfolio to pay back the loan. This unplanned sale of securities can provoke serious tax consequences in the form of capital gains taxes.

    Margin loans are not for everyone. In fact, they might even be a last resort. But if they are, then you've got to do what you've got to do.

    If you're starting your business part time while keeping your full-time job, another more potentially stable investment is borrowing against your employer's 401(k) retirement plan. It's common for such plans to let you borrow a percentage of your money that doesn't exceed $50,000. The interest rate is usually about 6 percent, with a specified repayment schedule. The downside of borrowing from your 401(k) is that if you lose your job, the loan must be repaid quickly, often within 30 days. To see if this is an option, consult your plan's documentation.

    You may also want to consider using the funds in your IRA. Within the laws governing IRAs, you can actually withdraw money from an IRA as long as you replace it within 60 days. This is not a loan, so you don't pay interest; rather, this is a withdrawal that you're allowed to keep for 60 days. A highly organized person could possibly juggle funds among several IRAs. But if you're one day late -- for any reason -- you'll be hit with a 10 percent premature withdrawal fee, and the money you haven't returned will become taxable.

(Continues...)

Excerpted from Where's the Money? by Art Beroff and Dwayne Moyers. Copyright © 1999 by Entrepreneur Media Inc.. Excerpted by permission. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.