Archive for

The Evolution of Financing a Small Business

For years I have read the popular business magazines, all having so called experts write articles for entrepreneurs on how to finance their business. “The top 10 strategies for financing your start-up”, “How the SBA can help your small business”, “Personal credit is the key for entrepreneurs” and so on. In most cases I’m willing to bet those writing these articles are journalists that have never had a successful start-up. How can I come to that conclusion you may ask? Because of the bad advice they give.

Going to the SBA for a loan, using your retirement funds, tapping all your personal credit cards or giving up 75% of your idea to an investor are all ideas I have read from the popular magazines. The thing is, in every one of these cases you are using your personal credit and not separating you from your business. You are putting 100% of your credit and assets at risk.

I have worked with thousands of small business owners who have been very successful without the need to use their personal credit cards, retirement funds or fill out stacks of paperwork and wait months for a response from SBA backed banks. In fact I have seen entrepreneurs with access to hundreds of thousands of dollars without giving up a percentage of their company or having any of the money show up on a personal credit report. Sounds good right? Well, there is one catch. You will need to go through the evolution of financing your business. You can’t start at the end. This is the problem with most entrepreneurs. They want fast results and aren’t willing to wait. By taking the quick fix they give up ownership and put their personal credit at risk.

The evolution of business financing starts with a solid foundation for your business. A solid foundation is comprised of several parts. The first of which is structuring your business entity appropriately. I recommend to every entrepreneur that you use a Sub Chapter S-Corporation, C-Corporation or Limited Liability Company to operate the business. This is the first step in separating the business owner from the business. The next phase of building the solid foundation is to ensure the business is in compliance with the lending markets. Several business owners are surprised when I tell them most lenders we work with when reviewing a credit application will first call directory assistance to see if your phone number is listed. It’s a simple check, but it’s the first flag that will be raised for them if the business isn’t listed. Why would a lender finance a company that doesn’t want anyone to find them?

There are hundreds of other due diligence phases that a company must go through in order to ensure the owner and business are not considered “high-risk” for obtaining credit and financing. The more a business has in place to show that it is a real business the more likely a lender will grant credit to that company.

The second step in the evolution of small business financing is to define what the business does, what makes it unique and why it will be successful. The business owner must create a one-page “sales pitch” for the business, also referred to as an executive summary. The executive summary can be used when applying for credit, seeking investors and developing marketing campaigns.

Business owners need to keep in mind when seeking financing that the most important thing for a business is to produce a profit. Without revenue there will be no profit. Marketing the business will help produce the revenue and the executive summary will help create the marketing.

Third, a company must build a business credit report separate from the owner’s personal credit. By working with trade credit, the single largest source of lending in the entire world, a small business can tap into limitless leverage for buying goods and services they need to start, run and grow the company. The beautiful thing about trade credit is in many cases it’s free money. If a vendor grants terms of net 30, a business owner has the ability to use the vendors goods or services for 30 days without interest before they need to pay the vendor. The other wonderful part of trade credit is that there are companies offering products and services small business owners need who will report the credit to a business credit bureau. The reporting of the trade line will create a business credit profile separate from the personal credit of the business owner. Eventually the business will be able to access more and more credit under the business name only if it maintains a positive business credit score.

The more credit received under the business name the more likely other companies will grant that business credit. No one wants to be the first in line to grant a business $50,000 in credit, but if others already have they will be more inclined.

Fourth, is to use the owner’s positive personal credit score in combination with a positive business credit score as leverage for obtaining hundreds of thousands of dollars in unsecured lines of credit for the business. The key is to do this with lenders that don’t report the accounts to the personal credit bureaus but rather the business credit bureaus. Many banks offer business lines of credit and loans, however finding the right type of product from these banks can be tricky. A business owner needs to make sure the loan or credit line they apply for reports only to the business bureau.

By keeping business debt separated from the personal credit report, a business owner has the ability to keep their personal credit score high. The more a business owner uses their personal credit in the business, the lower the score will drop. Credit scores determine the ability to buy homes, rates on car insurance, and several other factors. Keeping a personal credit score above 720 is extremely helpful in the business owner’s personal and business life.

The fifth stage of the business financing evolution is to look at other alternative financing the business may be able to obtain. Leasing is one key area. Why use precious cash reserves to buy equipment or software when you can make a small monthly payment? In addition 100% of the payment on the lease is expensed.

The final stage deals with investors. The majority of investors don’t want to look at companies unless they have already progressed through the business evolution stages outlined above. Keep in mind that an investor is not just investing in a business they are investing in the business owner as well. If the business owner has tapped every available resource for credit and cash personally and never taken the time to establish business credit, financing or lease arrangements an investor will toss that company’s proposal in the garbage quickly.

Not every business owner will find themselves at the stage they need an investor. They may have a combination of enough cash-flow, credit and financing in place from the early stages that they won’t need additional capital. However, if a business needs to grow with the help of additional capital or financing there are two typical ways an investor will look at the deal.

The first is through debt financing and the second equity financing. Debt financing with an investor is where they provide a loan to the business in exchange for a pre-determined amount of interest. Equity financing is where an investor puts money into a business in exchange for ownership. There can also be a combination of debt and equity.

The majority of small business owners believe this is where they should start, with the investor. In reality this is the last place a business owner should look. Investors want to use their money to grow a business by having the money spent on revenue generating activities. The typical small business owner that goes to an investor says “I need a million dollars to start my business.” When asked what they’re going to use the money for they say, “start-up costs and payroll”. This is where the investor walks away. No investor wants to fund a project so the business owner can make payroll, buy office furniture, equipment or office supplies.

This is the perfect example of the evolution of business financing. The company starts out as an idea, then structure is put in place. Next, the business becomes real with licenses and a sign outside the building. Next, the business creates an identity with the right message. Then the business obtains trade credit that separates the personal and business credit in order to obtain larger lines of unsecured credit. All of which is used to build the infrastructure of the business without maxing out all the available credit for the business or business owner. Last, the business has the ability to seek investors because it has done everything required to create the solid foundation.

The Wrong Reasons For Starting An Online Business

Why you start a business is very important. Your reason for starting this business will be your primary reason for making it a success. There are more people every day who want to start their own business. The problem most times is that they don’ know what to do to start or what they want to do online for their internet business. The first thing you need to do before you choose which business you want to do is to figure out why you want to start it.

Most people want to start a business in order to earn more money, to be able to fire their boss, or to stay at home and raise their kids. These are only a few of the reasons why people want a business from home. Everyone has their own reason but you have to know what this is before you start. One thing that most people don’t realize is that when you don’t have a clearly defined reason for starting a business, you are setting yourself up for failure from the start. Otherwise, what is going to keep you motivated to help you make your business a success?

What type of business should you start?

Most people feel lost when they get online to find a business they can do. There are so many types of businesses that you can choose from. You will need to do some research to find out which business would be right for you. There are some things that you need to consider before you choose the business for you. How are you supposed to find the business that you want?

Do something you love -

This is very important when you are choosing your business. Most people don’t realize how much this can affect whether their business is a success or not. You need to think about what it is that you like to do such as a hobby, or you can even do something that you have always wanted to do but never got around to. The more that you like what you do the easier it will be for you to do the work that needs to be done in order to start making money with your business.

Here are some business ideas that you can start with to help you figure out what it is that you want to do.

- Internet Marketing

This is a very popular business that a lot of people are starting. There are so many ways that you can start your business with this type of business. (This is the business that this book is going to concentrate on)

- eBay Store

This one is also popular because you can set up a store on eBay and sell whatever products you want. You just have to figure out where you are going to get the products to sell.

- Affiliate Marketing

With this business you will be able to start it almost immediately. You will have to find an affiliate program to sign up with, than start selling their product.

- Jewelry Business

With this business you can either find Jewelry to sell or you can make your own and then sell it.
- Website Design Business

You would start a business where you would build websites for clients. You will need to have experience building websites in order to do this business.

- Gift Basket Business

There are so many different types of gift baskets that you could decide to sell them all or just a certain type. Again you will need to find the products that you can sell for someone else or you can make your own gift baskets.

- Article Writing Business

When you write articles or eBooks you can start a business where you write for other people. There are so many website owners out there that need to the content or the eBook but they don’t have time to write it themselves. So they are more than happy to outsource to you if you know how to write.

You now have a few ideas for starting your own business!

Value Drivers for a Small Business

Hire more sales people. Spend more on marketing and advertising. Downsize operations and service. Sell more to existing customers. Fire middle management.

As a small business owner, you have heard, considered, or even taken some of above measures in an attempt to make your business more profitable. While these measures can have a positive impact on the bottom line, can they really have a positive impact on your company’s business valuation? Will they maximize your company’s purchase price when you decide to sell your business? Let’s take a look at some of the key value drivers that can influence a business valuation, above and beyond financials.

Product Differentiation

Does your company have a unique recipe, one-of-a-kind formula, proprietary process, or other brand characteristics that differentiate your products from its competition, thus differentiating your company? How do you stand out from the noise in your industry to differentiate from the competition? A competitive small business that is highly marketable to business buyers should have at least one of the following characteristics when compared to its competitors: faster, cheaper, better quality. These traits are value drivers and when properly positioned, can positively impact a business valuation and perceived value from a prospective buyer.

Market Defensibility

Have you secured customers or partnerships that are loyal to you, regardless of competitive threats? Such scenarios can significantly drive the value of a business because you all but eliminate the competition and maintain a stable, predictive presence. A defensible position is something that is very difficult to replicate. This could be a product or service you have developed that is beyond the reach of your competitors due to the costs, time, and resources required to ‘catch up’.

Proprietary Technology

Has your company developed a unique application, tool or technology as part of its ongoing operations? Does it give you a competitive advantage? If so, this proprietary innovation or intellectual property can be positioned as a key value driver for your business. Technologies or processes do not have to be patented to carry value but privacy and confidentiality must be maintained. It is critical that non-compete and confidentiality agreements be strictly adhered to and enforced by the company, before and after a transfer of ownership. The benefits, application and purpose of your proprietary technology should be explained to a business valuation consultant.

Strong Market Share

Is your company head-and-shoulders ahead of its immediate competition? Has your company executed a roll-up strategy to buyout the competition? If your company has been and continues to be a high-profile leader in its market, a major value driver in a business valuation is dominant market share. In addition, you may not be the leader in your space, but if your brand recognition, service/product reliability and customer satisfaction are very high, this can be very attractive to a strategic buyer. This driver of goodwill should be adequately presented to an expert when conducting a business valuation.

Repeat Customers

Is your business successful due to repeat business, year after year? Do you have long-term contracts that exceed 12-months? A value driver in contract or service-based operations is loyal customers who continually require the company’s offerings due to their levels of satisfaction and consequent brand loyalty. It is important that your business not be too reliant on a handful of major clients where if they left, your business would be significantly damaged. A good rule of thumb is 25% of your revenues should not be from less than 5-10% of your clients. Should the majority of your company’s revenues come from a few customers, a discount will be applied to a business valuation due lack of uncertainty and stability.

Loyal Employees

What is the average length of employment amongst your staff? A responsible business buyer will be looking for opportunities where the current staff, especially management, will remain in place, following the current owner’s exit from the business. Having key employee contracts, non-competes, but more importantly a loyal, dedicated staff that is committed to the companies success regardless of ownership change will be highly valuable to a prospective buyer and thus reflected in a business valuation.

Production Advantages

Has your company found a way to be a low-cost producer or its products or services? Businesses that can effectively bring their product to market below the market average do have a cost advantage value driver. This can be achieved through key production partnerships, lien operations and financial commitments, unique employee contracts, etc.

There are many value drivers that can be found within any small business and influence business valuation; these should be investigated on a case-by-case basis, ideally with the assistance of a professional consultant. Take a closer look at your operations to uncover some of the hidden gems and unique benefits your business has to offer future buyers. While primary drivers will be reflected in your company’s past and future financial performance, some of these intangible value drivers can enhance a buyer’s perceived value of your business leading to a higher purchase price. You cannot reap rewards overnight, but a systematic emphasis on how to your increase your value through day-to-day operations will set you on the right path for higher financial rewards when you are ready to sell your business.