16 ways to fund your new business

Saunders Learning Group, LLC May 2012

More Than A Dozen Ways to

Fund Your New (or growing)

BusinessPart One of Our Small Business Management Course

Saunders Learning Group, LLC, Andover, KS

Welcome &

Introductions


Angel Investors

Micro Loans

Bank and SBA Loans

Other SBA Financing

Venture Capital

Mergers and Acquisitions

Trade Credit

Initial Public Offering

Topics

How To Find Start Up Funds

Company Funding Stages

Sweat Equity

Using your Assets

Personal Loans

Friends and Family

Customers

Crowd Funding

Equity Crowd Funding

Social Lending

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How To Find Your Start-up Funds

Starting with personal savings. . .

Eventually, a successful start up would offer shares to investors.and/or venture capitalists . . .

Then raise seed money from personal contacts . . .

(think Apple & Facebook)

and become a publicly traded

company.

Next, find angel investors . . .

Then move on to banks financing . . .


Company Funding Stages

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Capital for product development, market research & building management team

Concept

Completing product development (typically in business for year or les

Initial capital is gone and now need capital for full scale manufacturing and sales

Capital to expand product to national markets

Capital to maintain company until IPO or sale

IPO or Sale


Start With Sweat Equity

Entrepreneurs can “fund’’ the first stage of their business by using their own unpaid labor and resources to create value.

Facebook was launched from a Harvard dorm room by Mark Zuckerberg, Dustin Moskovitz, Chris Hughes and Eduardo Saverin.

Advantages:

With you own resources, you can develop an idea on your own time.

You control the decisions and any intellectual property you create.

Precaution: If you have partners, make sure you get full credit for your contributions.


Use Your Assets

*source: Consumer Reports ** source: Smart Money

68 percent of start-up financing comes directly from the pocket of the business owner.*


Personal Loans, Credit CardsThe initial funding for a fledgling private business often comes from its founders.

Advantages: You retain control of your project. You’re also proving to future funders that you’re willing to put your own money at risk to launch your business.

Can it Work?Convenience store clerk Kevin Smith sold part of his comic book collection and charged as much as he could on his credit cards to finance his 1994 film, “Clerks’’.

He raised $27,000, including contributions from friends and family. The film grossed more than $3 million.

Cautions: Keep careful records of agreements and credit cards is that they carry very high interest rates.


Cautions: Put everything in writing and have a lawyer review it.

Advantages: Friends and family often help because they want to support you, not for an expected profit.

When a young enterprise produces promising early results, the founders’ friends and family often chip in money to help it grow.

Borrowing money from friends and family to finance a new business is a terrific idea -- in theory.

Banks and other lenders will demand airtight business plans and often three years of earnings, before they will lend you anything.

Private loans can offer significant advantages over traditional loans. Interest rates -- if interest is even charged -- are generally much lower than those offered by banks.

Friends and Family


CustomersNow, this one might seem illogical at first. How can customers help finance your new business if it isn't even a business yet? The trick is to use your business plan and your charm to convince people to become your customer even before your business is off the ground.

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Let's say, for example, that you want to start a company that builds custom computers for videogame enthusiasts.

You build a prototype of your computer, bring it to a videogame convention and a large computer retailer wants to buy 1,000 units.

You don't have supplies to build 1,000 units and no bank is going to give you a loan to cover the costs since you're working out of your parents' basement.

You can have the retailer sign a letter of credit saying it will pay for the 1,000 units upon delivery

With that letter of credit, you can convince suppliers to offer trade credit until the computers are delivered.

Here's another customer-based technique. Let's say you're a hairdresser with a loyal clientele. If you decide to start your own beauty salon, you might want to ask your long-time clients to become investors. Throw in free haircuts for life, and you may have yourself a deal.


Crowd Funding

Advantages:

You might raise significant sums made up mainly of small amounts from a large group of individual lenders.

Your project may even attract press coverage and new ideas.

Caution: Funding contributions might be taxable as personal income or business profits.

Innovative businesses use sites like as Kickstarter and Indiegogo to appeal for financial support through “crowdfunding’‘ campaigns.

Entrepreneurs attract backers by posting their imaginative plans, and by promising perks to those who pitch in some money.

Those perks range from product samples to an invitation to join a company-sponsored activity.


Equity Crowdfunding

Advantages: The regulatory requirements, such as financial disclosures, would be less stringent than general SEC rules for registering securities or for making an initial public offering of shares.

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This new form of crowdfunding authorized by the JOBS Act will allow private sales of company shares through social media sites and other intermediaries.

Companies could raise as much as $1 million a year through small private investments from an unlimited number of people.

Crowdfunding websites are expected to crop up after the Securities and Exchange Commission formulates the regulations they must follow.

Check out: crowdsourcing.org for details and sites you can use.

Cautions: Your many new shareholders have rights under federal and state laws. Complying with those rights could soak up company time and money.


Social LendingOne of the more popular social lending sites is called Prosper.com.

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LendingClub.com uses a system based on your credit rating. Terms are based on your rating.

All loans on social lending sites are three-year unsecured loans.

Once the loan is approved, the amount is deposited directly into your bank account. Monthly payments are then deducted from your bank account to pay off the loan.


Angel InvestorsWealthy individuals called angel investors like to make financial bets on early stage private companies that are capable of rapid growth, but that are still too small to seek millions from venture capital firms. This also called private placements.

Pros & Cons of Angel Investors

Check out: Xpert Financial and Second Market if you need to sell privately held shares.


Micro Loans Available from the Small Business Administration (SBA) a micro loan helps a

small business secure the financing they couldn't get from traditional lenders like banks.

Under the micro loan program, the SBA works with 170 non-profit lenders around the country called intermediaries. The intermediaries receive money from the SBA, which they use to make small loans at relatively low interest rates.

Micro loans can be for as little as $100 and as high as $35,000. The SBA says the average loan size is $13,000. Interest rates vary depending on the size and duration of the loan. The maximum length of an SBA micro loan is six years [source: U.S. Small Business Administration].

To apply for a micro loan, you'll need to be within the local lending area of one of the 170 non-profit intermediaries. Most microlenders also require borrowers to complete business training and business planning seminars before receiving the loan.

Some microlenders specialize in lending to businesses owned by women, minorities, the disabled or other economically marginalized groups. [source: Consumer Reports].


Bank and Small Business Administration Loans

To help entrepreneurs navigate the loan process, web-based outfits such as Multifunding.com are now offering to connect you with lenders, guide your choice among banks and help with the loan application.


Bank and Small Business Administration Loans

Example: Highland Brewing Company in Asheville, N.C. was producing 6,500 barrels of beer a year as a craft brewery.

With the help of $1.9 million in loans, he recently built a state-of-the-art production facility that can make 30,000 barrels a year. Highland's products are now sold in seven southeastern U.S. states.

Advantages: You may qualify for loan guarantees or lower interest rates through programs of the Small Business Administration or local economic development agencies. The bank takes no ownership share of your company.

Advantages: You may qualify for loan guarantees or lower interest rates through programs of the Small Business Administration or local economic development agencies. The bank takes no ownership share of your company.

Cautions: To get a loan on favorable terms, you need a solid business plan, extensive documentation of your creditworthiness. A bank will often require collateral or other existing business assets that it could seize in the event of a default.


Other SBA Financing

The U.S. Small Business Administration (SBA) offers a loan guarantee program for new businesses. These so-called 7(a) loans are named after section 7(a) of the Small Business Act.

With a 7(a) loan, the SBA promises to pay back a portion of the loan if the small business borrower defaults.

They're designed for borrowers who wouldn't otherwise qualify for a standard commercial loan because of bad credit or little collateral.

The SBA guarantees a portion of the loan. In exchange for this guarantee, the lender must adhere to rules about interest rates and other loan terms.

Small Business Investment Centers (SBIC) are another SBA program to help finance small businesses. SBICs are privately held investment companies that adhere to SBA guidelines in exchange for SBA loan guarantees.

There are more than 400 SBICs in the United States, some specializing in start-ups and others focusing on certain industries or geographic areas [source: SBA].

SBICs can offer financing either through loans or as equity investments


Venture CapitalVenture capital firms devote several million dollars to the growth of a young

company that has established its potential to market valuable new technology, goods or services. Venture firms invest pools of money, raised from wealthy

individuals, in enterprises with potentially high rates of return.

Example: Robert Swanson, a then-29-year-old partner at

the venture capital firm Kleiner & Perkins, recognized the commercial potential of a cutting

edge technique in academic research: recombinant DNA technology or “gene splicing.’‘

In 1976, he joined with UC San Francisco biochemist Herbert Boyer to found Genentech,

which used gene splicing to produce drugs including human insulin and human growth

hormone. The VC firm contributed early funding to Genentech.

Advantages: Venture firms bring management expertise and guidance in realizing the full financial payoff for investments in fast-growing companies.

Caution: In exchange for risking their capital, venture firms seek a substantial ownership stake, and often, seats on the funded company’s board of directors


Mergers and AcquisitionsAn entrepreneur’s small private company may reach its next stage of growth by becoming part of a large corporation that offers to buy it out. Big companies often acquire creative enterprises whose new product or service dovetails with their own business activities.

Examples:

Google’s You Tube acquired Next New Networks, an independent producer of online video programming. Instagram was purchased recently by Facebook for nearly $1 billion. Advantages:

You, your partners and your investors get a cash payout for betting on a winning idea and bringing it to life. After this “exit’‘ from your investment, you can use your financial gains to start another company, or to rest from your labors. Caution: You may forfeit even greater financial rewards that might have been reaped from retaining control of your company and offering ownership shares to the investing public in an IPO. And if the acquiring corporation doesn’t ask you to stay on, other people will explore the full potential of the business you nurtured.

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Trade CreditTrade credit is the lifeblood of an established businesses.

It works very simply: When you buy parts from a supplier, the

supplier delivers those parts with an invoice for the amount due.

Because you have an established relationship with the supplier, he doesn't ask you for cash on delivery (COD).

You have a period of time (30-60 days) to pay without incurring interest or penalties. That's called trade credit.

Trade credit is based on trust. As a new business, you're at a disadvantage, because you don't have an established track record of paying invoices on time.

One of the greatest advantages of trade credit is that it's interest-free for a fixed period of time.

As a new business, you're at a disadvantage, because you don't have an established track record of paying invoices on time.

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Trade credit is based on trust.

An advantages is that it's interest-free for a fixed period of time, perhaps 30 or 60 days.

Even better, some businesses offer discounts if you pay the invoice within a very short period of time, maybe a week or 10 days.

As a new business, it might take a lot of legwork and a little luck to secure trade credit, but it's worth it.


Initial Public Offering

A privately owned company can raise a substantial amount of fresh capital for further growth by offering shares to the general public in an initial public offering.

The private enterprise becomes a publicly traded company whose shares can be bought and sold on the New York Stock Exchange the Nasdaq or other trading platforms.

After the IPO, the pre-existing ownership stakes of the company founders and early investors have a specific value determined by the stock’s daily trading price.

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Advantages

Your company can fund new growth opportunities.

You and other shareholders may benefit if share prices rise with profits.

Founders and early investors, such as venture firms, have opportunities to cash out, or “exit’’ from the investment by selling their shares on a stock exchange.

Cautions

The value of company shares may fall well below their initial offering price, depending on the ongoing performance of the business and economic conditions.

Registration as a publicly traded company brings new requirements for frequent public disclosures of financial reports, and compliance with other SEC rules.


QuestionsQuestions


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Complete the Post Workshop Action Plan

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Saunders Learning Group provides a variety of training programs, workshops and seminars targeted to the financial services industry.

Programs are available in a wide range of topics, and we are specialists in developing custom programs that are targeted to your needs.

Contact the founder, Floyd Saunders at 316-680-6482 or at [email protected] for more information.

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Reference MaterialReference Material

Book summary: From bank failures to home foreclosures and panic around the world, Figuring Out Wall Street, is the concise guide to help everyone understand how this latest crisis happened, who was responsible and what to do now to restore our financial systems. Written in an easy to understand manner, even the most complex financial concepts are easy to digest. This book provides help to monitor investments with a review of investment products, financial regulators and economic indicators. Learn how the stock market exchanges work and the world of investment banking, hedge funds, venture capital and private equity. Every chapter includes action plans

for investing.

Figuring Out Wall Street Consumer’s Guide To Financial Markets By Floyd Saunders Publisher: Saunders Learning Group

ISBN: 978-0-9824019-0-3

available from Amazon, B&N, and http://www.figuringout wallstreet.comor www.floydsaunders.com

Economy & Finance

16 ways to fund your new business