How to Use Your Invoices, Suppliers, and Factors (Huh?) to Fund Your Business

Posted on August 30, 2012 by admin

Now that you’ve taken into consideration such “traditional” funding chain options as bond insurance, home equity loans and boot strapping, let’s take a step off the beaten track just a little and discuss three more business financing possibilities:

Factoring
Invoice Advancement
Supplier Lines of Credit

Factoring –

Before I go any further, let me explain…in case “factor” is a term with which you are not familiar.

Let me start by stating that a “Factor” is a third party to whom you can sell your accounts receivables (your invoices) at a discount. This third party (Factor) pays you (the seller) for the accounts in advance, with the balance of the purchase price being paid, net the factor’s discount fee (commission) and other charges, upon collection. This is what is meant by Factoring. Factoring companies can be found on the internet.

The big advantage of Factoring for you, the business owner, is that it gives you access to ALL your financial assets, not just the fixed assets that a bank considers for its loans. This provides you some extra flexibility you may not otherwise have.

A word of caution here…this funding option, in the end, is cutting into your profit margin because of the discount you are giving to the Factor who is buying your invoices. Knowing you will be able to carry on with your business even though you are doing this is important.

Invoice Advancement (Discounting) –

This funding option differs from Factoring in that you are actually borrowing cash, using your open invoices (receivables) as collateral. This is also known as “receivables assignment”.

Basically, the business (you) has a lending agreement with a lending institution assigning specific customer accounts that owe money (accounts receivable) to the lending institution. In exchange for these accounts, the borrower (you) receives a cash advance for a percentage of the accounts receivable. You can also expect to pay interest and a service charge.

The advantage and disadvantage for this funding option mirror those of Factoring described above.

Supplier Lines Of Credit –

This “line of credit” is, in actuality, a form of trade credit. Suppliers let companies who buy their goods (i.e. raw materials) obtain them (up to a specified dollar amount) and pay the balance on the account within 30 days without any penalties.

This business funding choice does give you cash flow flexibility, especially if you are in an industry where your invoices are generally a net 30-90 days billing/payment cycle. Sometimes your supplier may offer you discount terms—such as 1 or 2 percent off the total invoice price—if you pay them early.

The supplier credit funding option, though a boon for suppliers, can also be a business risk should customers fail to pay the balance on their accounts.

With this post, we are getting near the end of our “Traditional Funding Choice Chain”. Look for four more very viable, very important business funding options for business start-ups in my next blog post later this week.

How to Use Equity You Have Now to Fund Your New Business

Posted on August 28, 2012 by admin

When discussing ways to fund your business, the more you delve into it, the more options you will discover. In my last blog post I expounded on three choices that are among the most familiar when entrepreneurs first begin the thought process of garnering monetary means of making their dreams a reality.

In today’s blog I want to discuss three more ways to come up with the cash to underwrite your dream business:

Bond Insurance
Personal and Home Equity Loans
Aggregated Lines of Credit

Except for the first item on the above list, these may also be avenues that come to mind without too much hard thinking; but as you are considering your options, be sure you know the pluses and minuses associated with them.

Bond Insurance –

If you are in possession of bonds that have a good amount of value to them, you could possibly work with an insurance company that provides “Financial Guaranty Insurance”. These companies are there to guarantee scheduled payments of interest and principal on bonds or securities in the event of a payment default by the issuer. You can consider borrowing against the value of your bonds.

Your first step is to find out whether your bank accepts bonds as loan collateral. You will also need a margin account with a brokerage firm. In addition, it needs to be determined whether your bonds qualify. If they do, then loan papers will need to be filled out.

The advantages of this type of funding, as with the others I reviewed in my last blog post, are:

You control the decision making within your business
You control your intellectual property

The “margin” on bonds is usually about 20 percent. What this means to you is that you can borrow up to 80 percent of your bonds’ worth. Words of caution, however…before you make any decisions about borrowing against your bonds, discuss the pros and cons with your financial advisor.

Personal & Home Equity Loans –

Other choices you can make as ways to “fund’’ your business include taking out a personal loan and borrowing against your home with a home equity loan or line of credit. A personal loan will be considered based on your personal credit history.

If you want to go the home equity route, you have two approaches you can take. A home equity loan is given in one lump sum, has a fixed rate of interest, and a fixed number of payments. In contrast, a home equity line of credit (HELOC) is similar to a credit card, with interest due on the outstanding balance. That interest rate could vary over time.

Two advantages with these considerations would be:

You remain in control of your company
Possible lower interest rates than traditional business loans

You may want to be cautious of the following things:

Stable interest rates are needed, as well as rising home values
This type of loan is not tax deductible

Aggregated Lines of Credit (Credit Cards) –

As a means of financing a new business, this is probably among the more popular sources for funding a start-up. These are business credit cards, but with a personal guarantee.

It is also relatively easy, depending on your credit score. Responding to credit card offers with introductory rates is one way of getting this line of credit or going through an online credit service.

The advantages here are the same as the home equity loan or home equity line of credit above:

You remain in control of your company
A lower interest rate than a traditional business loan

Make sure you are aware, however, that:

The zero to low introductory rates only last 6-18 months, then increase to a much higher interest rate.
The online credit service can have hidden fees and misrepresentations.
You need to include an equal commitment to credit card debt in all partnership agreements.

We’ve now reviewed six “traditional” means of funding a start-up business. My next blog post will target the ins and outs of three more “traditional”, yet perhaps lesser-known, methods that could get you the financial resources you need. If the first choices didn’t float your boat, read my next blog for others that might.

Traditional Funding for Your Business – Know the Advantages and Where to be Cautious

Posted on August 24, 2012 by admin

Over the past couple of weeks, I have been discussing funding your business using three different, basic options: Seed-Funding, Angel Funding, and Venture Capitalist Funding.

Today I’m going to backtrack a bit and go into more detail regarding three choices in the “Traditional Funding Chain”:

Boot Strapping
Family and Friends
Personal Retirement Plans

Boot Strapping – “I’d Rather Do It Myself!”

As an entrepreneur, you most certainly can “fund” your business as you’re getting started, using your savings and sweat equity, often taking no salary for your efforts. Many start-up entrepreneurs also become a one-man show while “legging in”…staying at their primary jobs or maybe working a second one.

Although this is the most common way of funding new businesses, it is also the slowest route to success. It can be a struggle, not to mention stressful. Unfortunately, looking for other ways of funding a business sometimes comes too late…after savings are used up and desperation is setting in.

The advantages of “boot strapping”, as I’ve touched on previously, can be:

Developing your idea on your own time
Controlling the decision making process
Controlling your intellectual property (one of the most valuable assets of your company)

What you should be cautious about:

You can end up at the mercy of economic cycles
Becoming a “one-man band”, doing everything yourself
Neglecting to put things (contributions) in writing, should there be partners involved; this point is very important. As the saying goes, “all is well until something goes wrong”.

The Friends and Family Plan –

If…or let’s say when…your new and promising enterprise appears to be heading toward success, it’s often friends and family who will want to chip in money to help grow the business, perhaps for a small stake in ownership. However, because they care about and believe in you, they may not always pay attention to important business aspects.

Taking funding support from friends and family does have its advantages:

They want to help simply because they are already in your corner
They aren’t necessarily doing it for the profit that’s expected
You don’t have to give up your equity

Again, let me caution you to put things into a written agreement, however. The uncle you thought was giving you a no-interest loan may think he’s now part owner of your company, with voting rights.

Protecting Your Nest Egg – Personal Retirement Plans (401K & IRA)

“Funding” your business can be done by borrowing against your 401K or transferring retirement accounts, although this is not one of the better ways to do it. Many entrepreneurs cash out their retirement accounts and take the penalties. If you are considering this option, be sure to work with your financial advisor and/or an attorney to make sure you do it in a way that will, hopefully, benefit you and your business in the end.

The key is rolling over the money into a C-Corp retirement account that permits you to invest in the business through a stock purchase. Another consideration is to take a loan against your 401K while you are still working, as long as you pay it back before you leave your employer.

The advantages of this funding choice are also:

Controlling the decision making for your business
Controlling and protecting your intellectual property

Be cautious of a couple potential issues:

If you’re under age 59 1/2 and you don’t handle things correctly, you’ll end up paying taxes on the money you use, as well as risking an early-withdrawal penalty.
Professional Financial Advisors will charge for setup.

The three traditional funding options discussed above are more than likely the most well known and those that would come to mind first if wanting to follow the seed funding route. Watch for my next blog post for a description of a few other choices that may not readily come to mind but that might be worth considering.

Know the Goals of Venture Capitalist Funding Before Going After Those Millions

Posted on August 23, 2012 by admin

Your business idea is brilliant! It’s growing fast in a fast-growing industry (i.e. technology, health, etc.), but you need a major player with some major dollars to help with funding your business to keep that growth on track. You know where you want to go with your business, but the financial outlay is much more than you can generate. What you need is a Venture Capitalist…the next funding option we want to discuss.

There are real fundamental differences between courting a venture capitalist and seeking funding with an angel investor.

Let’s keep in mind right from the start that we are talking about millions of dollars, not hundreds of thousands. For that kind of risk, you can expect that a Venture Capitalist is often going to want a majority stake in the ownership of your company. This is a significant equity dilution for the company’s founders.

The Goal of the Venture Capitalist

Although you can conceivably gain several million in investment dollars to help keep your company growing and alive for 6 months to 2 years, it’s important to keep in mind that you are definitely going to give up some control to investors. The goal of the Venture Capitalist is to see you get bought out within a 3- to 4-year time frame. It’s the goal of VC investors that they…and everyone with a vested interest in the business…get to walk away with a lot of money in their pockets. There can be no doubt that a Venture Capitalist is looking for you (your business) to be successful.

Keep in mind that once a Venture Capitalist comes into your business, you (as the founder) only get money out through an IPO or acquisition. Profits from the company are now tied to the business operations.

Control, as alluded to above, should be an area that is given a great deal of forethought while looking for further business funding. Having a Venture Capitalist on board (and on your board) can require a lot of you in the way of hand holding, because the VC will want to have a say (with voting rights) in what happens with your company. You want to make sure you are partnering with people truly in line with your mission and vision. If your business has a “socially-based” vision, it can prove to be especially heart wrenching if the VC investor doesn’t share that same vision. Be aware!

Beware the “Zombie” Scenario

You must also beware of what is called the “zombie scenario”. This occurs when a moderately profitable company is without a good enough growth curve, which will allow for an IPO ending or a high-priced acquisition. A company such as this, with initial Venture Capitalist support, would no longer be of real interest for additional investments, basically causing the business to stall out. Stall outs cause a real dilemma for Venture Capitalists in that you are now looking at a problem with your exit strategy.

The Venture Capitalist Funding Option is the lowest risk path to take if your business idea is unquestionably good and/or your company is already experiencing meteoric growth and potential. It can provide you maximal resources, along with great advice and network opportunities.

You may want to be considering where in the spectrum from Boot-Strap funding to VC Investors your business falls. In our next couple of blogs, I want to get more in depth on traditional start-up funding and what many of those options are.

Four Benefits of Angel Funding You Should Know and Consider

Posted on August 16, 2012 by admin

Last week we left off talking about seed funding your business and the ups and downs of that option. This week I’m going to discuss a couple other alternatives, beginning today with Angel Funding and the role it can play for your business endeavor.

Let’s assume that your business is up and running having used whatever seed funding you were able to pull together; but now you could use a little more cash flow to take care of growing business needs, i.e. bringing some staff on board. You know that if you could just have an infusion of a larger amount of funding, the business could really take off; and you’d be good to go to that next level of success.

Angel Funding Benefits

An influx of possibly several hundred thousand dollars for up to three years
Collaborative partnerships bringing more than money to the table
Not as high maintenance as using Venture Capitalist
Less upfront risk for business owner because of lower cash investment

Having substantially more dollars flowing into the business for initial salaries and operating costs for the next 1-3 years can certainly be an answer to your prayers. Naturally, with Angel Funding, there will be (in most cases) some dilution of your equity in the business, usually to the tune of about 20%. Unlike venture capitalists, Angel Investors are looking for a non-majority share in return for their investment.

One thing they will be looking for is to invest where they can see the founder of the company has kicked in “earnest money” as a way of showing that there is confidence the business is viable and has a future. So before Angel Investors put any “skin in the game”, they are going to look to see what YOUR investment has been.

Although the monetary funding is a great advantage, Angel Investors also love to help in other ways, such as forging business relationships with those who have experience in your industry. They may also know influential players in that environment and can help introduce you to networking opportunities, as well. This is a terrific advantage when growing a business.

Angel Investors will want to have an exit strategy that will normally be an ROI of somewhere between 2 to 10 times what they’ve put in. Full ownership of the business can be restored if cash from the business is used to pay back the investors, possibly even using the company’s profits to do so. Although this may mean giving up a good part of your profit margin, this isn’t necessarily a bad thing. After all, a small part of a big pot is not a bad deal.

So if you have dreams for your business that you can’t quite make happen with your own investment funds, Angel Funding should be a consideration. With Angel Investors, you have more people in the game with you who are interested in your business being successful. After all, it benefits them as well when the profits soar. Not to mention the weight it takes off your shoulders having someone else to share the load.

Our next blog post will deal with the other funding option in our armory…the Venture Capitalist… and how going after that kind of investor compares and can affect the future of your business.

What Should You Consider if You Want to Fund a Business with the Seed Funding Option?

Posted on August 8, 2012 by admin

As I discussed in my last blog post outlining the Three Key Types of Funding, funding a business on your own is very often the choice made by entrepreneurs, especially in the early, start-up phase of the business. The option to self-finance in order to get things off the ground, as with other funding methods, has its upside and its downside.

The obvious first consideration is the significant amount of money that may be required to get things underway when pulling together inventory, employees, property leases, etc. This can easily move into the range of $100-200K before your business starts to turn a profit. The time frame that this might require can easily run into three years or more.

Seed Funding Key Consideration –

If you have access to funds of this kind, it can be a great way to go. One of the things that makes this such an attractive option is the pot at the end of the rainbow (also called “profit”). With seed funding, when your company becomes profitable, the profits come back to you. However, what this also means is that if your business flounders, if it’s a failure…if the pot at the end of that rainbow is empty…you have a lot to lose.

Seed Funding Key Advantage –

Another very attractive part of the seed funding piece for many is the fact that YOU are in control of your business and how it is run. You and those you choose to help manage your business venture can run things as you see fit, whether it is day-to-day decisions or future deals, such as private equity sales. There’s no waiting for anyone else’s stamp of approval!

The promise of profits and control are a huge motivation for choosing to seed fund a business for an enormous number of start-ups. If you’ve had your own experience (whether good or bad) with seed funding your business, maybe you can share a little insight. In my next blog post, I will talk about another type of funding for your business…Angel Funding.

Three Key Types of Funding and Criteria You Need to Know to Finance a Business

Posted on August 6, 2012 by admin

If you have come to the conclusion that financing your business is the most beneficial and…in the end…most lucrative option for starting or growing your company, you should familiarize yourself with the overall “funding landscape”.

Before I say more about the general landscape, I do want to address a few facts of which you should be aware if you are a female business owner. Albeit the rate of women starting businesses these days is twice that of men (women own 30% of privately owned businesses), statistics also show that:

Most female-owned businesses earn less than six figures
30% of the businesses owned by women generate only 11% of business sales
If you’re a self-employed woman, you make 55% less than a self-employed man
Women seek less financial help for their businesses
Women historically have had less access to funding, but that is changing

Different kinds of funding sources often focus on financing businesses based on different criteria, such as:

The stage of the business cycle you are in
How much risk you’re willing to take (if you’re willing to take more risk, you have more opportunities)
What you already have in the way of financial resources
How much you want to control your company

As a rule, the more financing you need, the longer the funding process will take. It’s important you’re clear on where your business is in the funding landscape:

Seed Funding – getting things off the ground; often done by owner, family and friends
Bridge/Angel Funding – your business is showing signs of growth, revenue, and merit
Venture Capitalist – when your business has signs of quick growth, as well as the potential for a quick return on investment

Keep in mind that there is no “right” or singular way to finance your business venture. Although the pursuit of funding has been described by some as a “shark tank”, it should be comforting to know that there are definitely people out there wanting to invest in businesses for the right reasons (i.e. Crowd Funding). Make yourself aware of the basic processes and do your due diligence.

Our future blog posts will expand on each of the three funding types, and explain the advantages and disadvantages for each one. Be sure to start thinking about the stage of business you are in and your risk level as you finance a business.

Why Get Help to Finance Your Business

Posted on August 1, 2012 by admin

So…you want to start your own business. You have a passion and a vision that you’re sure will translate into a successful venture and now is your time! Or perhaps you already have a business that is up and running, but you want to take it to the next level. Though you may have some personal resources for infusing your business with cash, maybe you should consider the reasons why financing your business is an excellent alternative.

Considering the idea of seeking funding for your business may seem like a daunting task, especially if you are a start-up operation. But it may surprise you to know that there are more and more opportunities these days for unearthing much-needed financial support.

Still the question on the table is “why” go searching for ways of financing your business. Statistics are showing us these days that those businesses that do take advantage of outside funding benefit by:

More rapid growth than those who try to fund themselves (the lone wolf often ends up lonely and struggling)
Total sales that average five times more after ten years than those of companies that aren’t funded
Receiving access to resources that may not fall into their area of expertise

These additional resources can include, yet may not be limited to, strategic and collaborative partnerships, new and unique talent pools, and much-needed management skills.

If any of these “whys” sound appealing (and why wouldn’t they), pursuing a means for financing your business should be at the top of your list of ways for infusing your company with not only monetary help, but also other extremely valuable resources.

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