Posts Tagged ‘Secure Capital’
Business Finance Considerations For Year End
December 7th, 2009
Business Finance Planning Involves More Than Taxation At Year End
Being that we are now in the first week of December, many business owners with December 31st year ends will be or should be projecting what their financial statements will look by the end of the month in order to have the opportunity to improve the final results in the coming weeks.
Traditionally, a year end planning process is for taxation, and taxation purposes only. While tax planning is definitely something that should be seriously looked at this time of year if you have a December year end, there is another aspect of business finance that is mostly overlooked in the process by both business owners and their accountants.
The year end financial statement that typically gets prepared up to 6 months past the end of the actual year end, is a very important and arguably the most important element of a business financing package for an existing business.
Sometimes in the pursuit of reducing income taxes at any cost, business owners create other problems for themselves in the areas of securing capital or maintaining the capital they now have access to.
For an oversimplified example, business financing problems can be created by income statements that show no or low profitability and balance sheets that show no or low retained earnings.
In many cases, year end tax planning activities will occur to either spend more on future needs to reduce the net tax position at year end or move profits out of the company to optimize both the business and personal income tax positions of the owner(s).
While these types of actions may very well result in considerable taxation savings, they also end up painting a less than flattering financial picture for the business for the period just completed.
Logically, one could argue that lender or investor would be able to understand these actions and take them into consideration when reviewing the financial statements. Unfortunately, logic doesn’t have much to do with it. The financial statements are in almost all cases related to business financing, taken at face value.
As a result, two potentially negative outcomes can occur.
First, for the business that currently has business financing facilities in place that require specific financial covenants to be upheld, the year end tax planning activities can potentially cause a business not to meet some of the covenants which could result in the lender calling in the loans or taking some type of corrective action.
Second, for a business trying to secure incremental capital, the year end financial statements may not show the ability to repay the debt or show a debt to equity position that can support a greater level of borrowing.
Both of the above scenarios can be disastrous to a business, where at the least significant opportunity is forgone, or at the worst, the business cannot cash flow its operations and ends up closing down or going bankrupt.
To avoid both scenarios, the year end planning process, either for a December 31st year end, or for any other year end date, needs to take into account how the final version of the financial statements will impact all business finance aspects of the business (taxation, cash flow management, ability to secure capital, and so on)
To some degree, taxation can actually be looked at as a financing cost, as failure to pay taxes or have taxable earnings, may limit or restrict the business from acquiring and maintaining business capital, especially lower cost debt instruments.
Business FinancingHow To Access Business Financing
November 16th, 2009
How To Do You Locate A Suitable Source Of Business Financing?
Until you’ve actually tried to secure capital for a business, you may not completely be able to relate to my answer to this question. Securing business capital can be complex, frustrating, and difficult at times for the following reasons: 1) borrowers needs don’t fit closely enough to a lender or investor program; 2) lender or investor criteria and/or application of criteria can change suddenly as their portfolio changes; 3) secondary elements like appraisals, environmental assessments, recourse agreements, and other third party requirements can increase cost and time to close.
Taking into consideration the above statement, there are basically three ways to access business financing.
You can contact lenders and investors directly, work through a broker, or work with a financing specialist (basically a value added broker).
If you plan to manage the process yourself, make sure you have sufficient time to devote to the cause. If there is a rule to go by, the smaller the dollar amount, and the simpler the application of capital, the more likely that you can self manage the process yourself.
As deal size goes up, so does complexity due mainly to higher risk assessment and lender requirements.
Depending on what you’re trying to secure capital for, some sources of financing can only be accessed through a broker, so a self administered approach can also result in a smaller market and potentially sub optimal alternatives.
The broker versus financing specialist distinction is a personal characterization of the market. Many business owners and managers start out seeking business financing on their own. If they are unsuccessful, they will try to find an intermediary to assist them.
And like most industries where brokerage is involved, there is the good and bad, the high value added and the no value added. Most brokers (my opinion) do not have the ability or knowledge to work in your best interest and are mostly focused on collecting as much information as they can from you and getting it in front of as many sources of capital as possible in the hope that one of them gives you money.
While its important to qualify a lender or investor to make sure you are focusing your efforts with relevant lenders, the same holds true for brokers and financing consultants.
A capable broker or financing consultant has the ability to determine what sources of capital are relevant to your needs at a specific point in time, has the ability to access said sources, and can assist you in properly applying and closing the deal so you get funded.
If you can project manage the process yourself, by all means do so as it will likely be a very rich learning experience that can benefit you in the long run.
If you get bogged down or realistically don’t have the time to manage the process of securing business financing to completion, then take the time you have and qualify those individuals offering their services to assist you. The right financing specialist can more than save you what they may end up costing you both in terms of dollars and time.
Business FinancingThere Are 4 Reasons To Secure Capital For Your Business
November 13th, 2009
Can You List The Four Reasons Why Someone Would Need To Secure Capital?
There are 4 and only 4 reasons to secure capital for a business. Each reason or purpose for business financing will impact the type of lender or investor to approach as well as the manner in which you approach them.
The 4 reasons for seeking more capital for a business are as follows:
Start Up. At the commencement of a business entity or operation, funds may be required for working capital, fixed assets, intangible assets, leaseholds, inventory, and so on.
Growth. An existing business looking to expand may require capital to increase its capacity as well as the working capital required to fund a larger volume of activity.
Acquisition. When one business acquires another, it must purchase either the shares or the assets of the target business with a combination of cash and external capital from debt or equity sources.
Debt Consolidation and/or Re-organization. In times of business downturn that create financial losses, capital must be injected into the company from debt or equity sources to cover the costs of operation and allow the company to continue. Another scenario would be when the term structure of the debt outstanding does not match up against useful life of the assets securing it. In these cases, a debt restructuring will take place to balance out the balance sheet. A third example would be when outstanding debt exceeds the leverage against equity allowed by the lender, requiring a debt reduction and/or an infusion of investor or shareholder equity.
Each of the reasons to secure capital or apply for business financing have their own lending and investing criteria. A business manager or owner seeking incremental capital would be well advised to gain a greater understanding of what is required for each and work towards identifying lenders and/or investors that are relevant before proceeding too far with any inquires to secure business capital.
We will get into more of the specific for each of these uses of funds in future posts.
Business FinancingHow To Cut To The Chase When Securing Capital – Part II
November 6th, 2009
Here is The Next Installment in How To Increase Your Odds Of Securing Capital From The Outset
In the last installment, we discussed the importance of starting off your initial meeting with a prospective lender or investor by cutting to the chase and quantifying exactly what you’re looking for in terms of financing and what it will be used for.
Once you’ve given the lender or investor enough information to initially qualify their potential interest in the deal, you’re either going to get a quick No, or they’re ready to hear more.
Focusing on the later, you now want to continue your presentation.
The second area the lender or investor wants to understand is your future projected financials (cash flow, income statement, balance sheet) and the related assumptions that drive the numbers.
As an example, virtually everything in the business can be associated with a time frame and cost, so the financial statements become a powerful means to convey the business story you’re trying to tell.
The quantification of market size, competitors, market share, price, margin, operating costs, and so on, all impact the financial statements directly or indirectly.
And lets face it, this whole process is all about money and making more of it, so its important to show your potential source of capital funding how they will get their money back, over what time, and the potential return they can expect.
When you can quickly show how you have quantified all the relevant information into income, balance sheet, and cash flow, it gives the lenders and investors something concrete to wrap their heads around while proactively answering a lot of the questions they will have before they even ask them.
This information can be highly summarized. Its just important that its covered off to maximize the interest level of those involved.
Too often, the business owner or entrepreneur is so completely focused on their sales pitch of what they’re trying to accomplish that the underlying financials are either glossed over, or not really addressed at all.
Remember that the more you can relate what you have to present back to dollars and cents, well quantified and supported assumptions, and realistic time lines, the more seriously you’re likely to be taken.
There is definitely a balance to be had between the marketing side of a presentation and financial projections. Just make sure you know your numbers cold so that where ever the discussion goes, you will have the answer on the tip of your tongue.
Business FinancingWhere To Go To Secure Capital For A Start Up?
October 29th, 2009
How Do You Secure Capital For A Startup?
The first thing to discuss is where not to look when you’re trying to secure capital for startups, which is in the most obvious places.
Unless there is a government sponsored loan program administered by the major banks, the lenders that you see on the television every day have absolutely no intention of lending you any money for a start up business venture.
Yet because of our branded conditioning, it tends to be the first place everyone goes and the first place they get turned down too.
Once you have maximized your personal financing potential and taken full advantage of you family and friends, you have to start thinking outside the box whereby the box being walking into a bank and applying for a loan.
First, focus regionally. Wherever you are, there is going to be local, regional, and national business development programs that are designed to increase the business tax base and maintain or add jobs to the economy. These business development programs are designed largely for businesses that are not yet “bankable” but have a sound basis for commerce and intend to hire employees. And while many of these types of support programs tend to focus on small dollar loans, there are exceptions.
More specifically, I’ve seen some regional development programs that will shell out millions in loans and guarantees for the creation of industry and jobs in certain areas. This of course is area specific, so if you want to get access to the funds, you have to be willing to relocate to the area that has the money.
Second, government grants and loans are out there and can be secured. However, most government grants and loans are in place because there is a lack of some service or product that they are trying to draw business owners towards. So if you want to take advantage of government funding, then you may want to research what they are supporting before you choose your business venture otherwise there may not be anything available for what you choose.
Third, other related businesses that want a certain type of product or service, but can’t readily access it and don’t have the time to create a related business themselves. What could be better than having a major customer right off the bat that also has a financial stake in your business and is therefore motivated to help you succeed?
Fourth, there are equity investors that are on the look out for businesses they can buy into. Just remember that this can be a very demanding form of capital that is typically looking for high profit potential and experienced partners that know what they’re doing and have a track record to prove it.
If you want to start a venture that requires capital, then you need to work backwards from the available capital sources. That may sound counter intuitive but its not if you think about it. From a marketing point of view, you are always taught to work backwards from established market needs and wants instead of forcing something new on the market or guessing at what will make you money.
When business financing for startup capital is involved, you have to work double time and work back from the market and from funding sources.
In reality, there are four scenarios that evolve out of the someone wanting to start a new business. 1) You want to start up a business providing things that not enough people want and there are no sources of financing for that type of business available to you. 2) You want to start up a business providing things that not enough people want, but there is some available sources of financing. 3) You want to start a business that has high customer demand, but no sources of financing. 4) High demand, and money available.
Too many people choose 1, 2, or 3, and get nowhere fast. But even if you do your homework and focus on #4, there is no guarantee of success, but you’ve increased your probability of a profitable outcome just by not swimming against the current.
Bottom line, there is no magical place that provides start up money for any type of start up.
But there is also an infinite sea of money always looking for a home. When you focus on a real market need that you can tap into where there is available money to scale the business, then you’re on the right track.
Securing any type of capital is always about having something to leverage. If you have a great business idea that the market is hungry for or just needs more of what you want to deliver, and you have a solid plan to move forward with, that’s a great start. But take a hard look at potential sources of capital as well that are motivated in some way by what you’re trying to do.
If you can put market demand and money availability together, then you’ve got something to secure capital with.
If you’re looking for more specifics, I don’t have any. Each scenario has its own set of variables (market, individual skills, geography, economy, competition, industry, etc, etc, etc.)
Where to look for start up capital has everything to do with understanding the relevant variables which will help point you in the right direction.
Business FinancingWhen’s The Best Time To Secure Business Financing?
October 15th, 2009
When Exactly Should You Apply For Business Financing?
Typically, a need for business financing is triggered by some event or string of events. So the timing of when its actually required is not always readily determinable.
Then there’s the classic line you hear from frustrated business owners or managers that the only time they can get a business loan is when they don’t need it.
Combine these first two points with my own observation that 80% of all of business financing requests are unplanned events, and you have a lot of business owners and managers scratching their heads regarding how and when to secure capital.
So here’s a couple of things to keep in mind to increase your odds.
First, because financial statements tend to play a very important role in most types of business financing applications, you need to factor in when and how they are prepared.
In terms of when, financial statements need to filed within 6 months of your year end. If you don’t file until the six month mark, then the results are already 6 months old. And, depending on the lender and how much money you’re after, most lenders will require the last recently completed financial period to be less than 6 months ago. So if your year end is in December and you’re applying for financing in July, many times the lender will require you to get an accountant prepared interim statement for the first 6 months of the current year, or put off further consideration of your financing request until the financial statements are completed for the next year end.
All that being said, one of the takeaways here is to plan as best as you can to apply for business financing in the first 6 months of the year and make sure your accountant is on pace to get them completed well before the 6 month mark. Oh and by the way, the lender will also like an interim financial statement for whatever period is not covered off from the last completed statements to the time of application, but in most cases the interim can be prepared by the business.
In terms of how the statements are prepared, financial statements are done under an accountant statement indicating how much work was preformed to verify the accuracy of the records provided by the business to the accountant. The lowest level of review is a notice to reader, then review engagement, and finally an audit.
If you’re looking for $200,000 or less in business financing, then you may get away with a notice of assessment. Better odds with a review engagement. If you’re looking for financing over $1,000,000, then an audit will eventually come into play.
The higher levels of review cost more money, but without the verification it can be tough to secure business financing, especially lower cost financing.
Bottom line, your completed financial statements are a definite asset that is important to your financing efforts and they have a freshness date that comes into play to some extent.
So when planning out your business over the next year, make sure you take the above into consideration.
To further emphasize this point, say you have a seasonal business that has a year end of December and a peak season of August. If you’re having an off year, which can happen with any business, you may need financing in December or January to carry you though to the next peak. Good luck trying to secure financing with 12 to 13 month old financial statements and an interim statement that may be bleeding red.
Especially for seasonal businesses, you have to apply for business financing after a good year so you can leverage that result. Therefore, if you want some cushion in your available capital going into a season you’re not sure of, you’d better apply for financing before hand.
Business FinancingHow To Secure Business Capital
September 28th, 2009
The question of how to secure capital for your business is commonly asked and pondered by most small and medium sized business owners and managers at one time or another.
When you search the internet for the answer, you tend to get the same lame regurgitation of things like new businesses should look to friends, family, and fools for capital; existing businesses should look to banks; and that you need to consider debt financing versus equity financing that gets into the whole venture capital versus angel investor rhetoric.
Wow. Really revolutionary and informative information. Some even go so far as to say these are secrets if you can believe it.
Now I’m not implying that these various terms I just threw out don’t need to be explained or are not important. No sir/madam. I’m merely saying that all these terms with some amount of abbreviated explanation are thrown at you like a bucket of water in some weak attempt to answer the question.
Perhaps its because the generic answer set I’ve outlined is pretty basic and safe and even friendly.
But useful?
Instead of starting at the beginning, lets start at the end. A bad ending. Depending on whose stats you read, over 50% of businesses will fail, fold, go kaput in less than 5 years of existence. Whether its 43.7% or 71.2% that fail in 5 years doesn’t really matter. The point here is that its a lot and its alarmingly high.
So, why is it so high and what that got to do with securing capital? Answer, it has everything to do with securing capital.
The internet for one is awash with people looking for money to finance their business ventures, either start up or existing, and most of the solutions that they come across are geared towards lending them money based on nothing to do with their business.
Business financing in large part, is not based on business. Its based on personal credit, personal net worth, liquidatable (new word) assets, third party guarantees, government grants and guarantees, etc. This applies not just for start ups, but for existing businesses as well.
The point (yes I do have a point) here is that if you try hard enough, you can probably find someone to give you some money for what you’re trying to accomplish that you say requires capital.
But your ability to be successful is dependent on 1) having a tested business model; 2) having a tested marketing approach and position; 3) having enough necessary experience, or access to the necessary experience for the venture, and finally 4) accurately estimating the capital required to become cash flow positive (business can generate enough cash to pay bills and generate a return on the capital you secured) including a substantial contingency plan for all the things that may go wrong along the way.
If you don’t complete the above 4 points, my first question to you would be, how do you know how much capital you really need? My second question would be, if you don’t secure capital sufficient to complete whatever you’re starting (your estimate was out and now you’re short), what are you going to do?
So how to secure capital for your business starts with how much capital do you need and is that much capital going to be able to generate a return based on your plan of attack.
In most business failures, if they did the exercise first (honestly and objectively at the very beginning), they wouldn’t need to secure capital because they’d find so many holes in their own logic and planning that they’d stop and revise things until they made more sense.
I’m not saying planning is perfect, because its not. And no amount of basic planning and analysis will stop business failure. But I’m telling you, its not going to be anywhere near 50% either.
The final point today is that when you make the effort and figure out what business approach should work (and I do say should as planning is imperfect) and clearly outline the capital you need to secure, you will not only have an easier time securing business capital (well thought out plans have a higher probability of getting funded), but you’re also more likely to meet or exceed your profit expectations (well thought out plans have a higher probability of making money).
We’ll get into a lot more on how to secure business capital as there can be a lot to it, depending on what you’re trying to do.
But the starting point is not “where do I apply?”, or “what tricky things can I do to get an application approved?”
If you that’s where you want to start, you’re looking to become another statistic.
Business Financing