How to Get the Financing for Your New Small Business: Innovative Solutions from the Experts Who Do It Every Day

How to Get the Financing for Your New Small Business:

Innovative Solutions from the Experts Who Do It Every Day

By Sharon Fullen

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How to Get the Financing for Your New Small Business:

Innovative Solutions from the Experts Who Do It Every Day

Copyright © 2006 by Atlantic Publishing Group, Inc.

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ISBN-13: 978-0-910627-55-9

ISBN-10: 0-910627-55-X

Library of Congress Cataloging-in-Publication Data

Fullen, Sharon L.

How to get the financing for your new small business : innovative

solutions from the experts who do it every day / Sharon Fullen.

p. cm.

Includes index.

ISBN-13: 978-0-910627-55-9

1. Small business—Finance. 2. New business enterprises—Finance. I.

Title.

HG4027.7.F85 2006

658.15’224--dc22

2005033189

LIMIT OF LIABILITY/DISCLAIMER OF WARRANTY: The publisher and the author make no representations or warranties with respect to the accuracy or completeness of the contents of this work and specifically disclaim all warranties, including without limitation warranties of fitness for a particular purpose. No warranty may be created or extended by sales or promotional materials. The advice and strategies contained herein may not be suitable for every situation. This work is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. If professional assistance is required, the services of a competent professional should be sought. Neither the publisher nor the author shall be liable for damages arising herefrom. The fact that an organization or Web site is referred to in this work as a citation and/or a potential source of further information does not mean that the author or the publisher endorses the information the organization or Web site may provide or recommendations it may make. Further, readers should be aware that Internet Web sites listed in this work may have changed or disappeared between when this work was written and when it is read.

A few years back we lost our beloved pet dog Bear, who was not only our best and dearest friend but also the Vice President of Sunshine here at Atlantic Publishing. He did not receive a salary but worked tirelessly 24 hours a day to please his parents.

Bear was a rescue dog who turned around and showered myself, my wife, Sherri, his grandparents Jean, Bob, and Nancy, and every person and animal he met (well, maybe not rabbits) with friendship and love. He made a lot of people smile every day.

We wanted you to know a portion of the profits of this book will be donated in Bear’s memory to local animal shelters, parks, conservation organizations, and other individuals and nonprofit organizations in need of assistance.

– Douglas and Sherri Brown

PS: We have since adopted two more rescue dogs: first Scout, and the following year, Ginger. They were both mixed golden retrievers who needed a home.

Want to help animals and the world? Here are a dozen easy suggestions you and your family can implement today:

•  Adopt and rescue a pet from a local shelter.

•  Support local and no-kill animal shelters.

•  Plant a tree to honor someone you love.

•  Be a developer — put up some birdhouses.

•  Buy live, potted Christmas trees and replant them.

•  Make sure you spend time with your animals each day.

•  Save natural resources by recycling and buying recycled products.

•  Drink tap water, or filter your own water at home.

•  Whenever possible, limit your use of or do not use pesticides.

•  If you eat seafood, make sustainable choices.

•  Support your local farmers market.

•  Get outside. Visit a park, volunteer, walk your dog, or ride your bike.

Five years ago, Atlantic Publishing signed the Green Press Initiative. These guidelines promote environmentally friendly practices, such as using recycled stock and vegetable-based inks, avoiding waste, choosing energy-efficient resources, and promoting a no-pulping policy. We now use 100-percent recycled stock on all our books. The results: in one year, switching to post-consumer recycled stock saved 24 mature trees, 5,000 gallons of water, the equivalent of the total energy used for one home in a year, and the equivalent of the greenhouse gases from one car driven for a year.

Here’s What Industry Experts Say About

How to Get the Financing for Your New Small Business:

Obtaining money for startup businesses can be challenging. This is a great guide for the new entrepreneur.

— N. Michael Phung, MBA, JD

Beltway Capital Inc., Custom Mortgage Solutions

www.beltwaycapital.net

This book is extremely resourceful. It creates so many valid options that the business owner can feel empowered to make things happen... this book provides direct and simple solutions that enable today’s small business owner to understand he can open doors he didn’t even know existed.

— Howard Nevins, President

Marathon Financial Factoring Services

www.marathonline.com • 800-647-0850

Sharon’s book is a comprehensive look at owning a small business. From top to bottom, it covers all the bases that lead up to getting the capital to make a business become successful.

— Gary W. Honig, President

Creative Capital Associates, Inc.

www.ccassociates.com/blog

The most crucial part of starting a business is the financing. Without money, many good business ideas will never make the transition from dream to reality. This book presents a balanced, unbiased overview of the many financing options available to today’s entrepreneur.

— Steve Johnson, CEO

RealNvest, Inc.

www.FundYourDeal.com

Foreword

Walk down Main Street in any town in America and you’ll be quickly reassured that America’s entrepreneurial spirit is alive and well. According to the Small Business Administration, over 500,000 new businesses were formed during 2002—and if you’re reading this book, you’ve probably either entered the pool or are wading in. You probably have a great idea for a unique product or service, tremendous energy, and a will to succeed. Unfortunately, the road to independence is littered with entrepreneurs with these traits.

Small, growing businesses face a variety of challenges. These challenges include, but are not limited to, finding the right employees, safeguarding propriety interests, developing market awareness, and operating at a profit. The relative importance of these issues is dependent upon the unique facts and circumstances of each business. However, one other challenge impacts almost every business: securing the financing necessary to execute the business plan. The reality is that even the most profitable businesses will, at some point, face working capital issues that will necessitate additional debt or equity financing. The good news is that there are an enormous number of financing alternatives for small businesses, from family loans to angel investors to public offerings. So how do you decide which source is right for you?

In this particular case, there is no substitute for research. Financing and structural decisions made by entrepreneurs at early stages can ultimately come back to haunt them. I have worked with many companies that sought venture capital early in their life cycle, only to be shocked when the businesses that they built were taken over by the new outsiders on their boards. Of course, there are numerous other examples where venture capital was critical to a company’s ultimate success. These varying outcomes simply underscore the fact that it is never too soon to develop a business plan and consider your ultimate personal and professional goals. The right source of financing varies from business to business and will be driven by issues such as the relative importance of retaining control of the business, anticipated growth, volatility in sales and earnings, as well as your ultimate exit strategy.

How to Get the Financing for Your New Small Business: Innovative Solutions from the Experts Who Do It Every Day provides a comprehensive analysis of common—as well as uncommon—financing options available to small business owners. The book provides details on typical steps involved in connection with different sources of financing, as well as common pitfalls and issues. Additionally, it provides valuable insight into techniques you can use to more effectively market your business to potential lenders or investors, including techniques and resources for business plan development. Perhaps the greatest benefit is that the book creates awareness so entrepreneurs can make educated decisions early, to avoid unwanted surprises later.

Finally, there is a very fine line between success and failure, and success almost always involves a great deal of planning and hard work. The information provided in this book, combined with advice from legal and financial experts familiar with your unique circumstances, can help ensure that your plans and decisions are well thought out and that potential risks are identified and managed. So plan well and work hard, and hopefully you can become one of the millions of successful small businesses powering the American economy.

Christopher F. Meshginpoosh

Certified Public Accountant

Philadelphia, PA

Mr. Meshginpoosh currently serves as a partner in a Philadelphia-based accounting and advisory firm. Additionally, Mr. Meshginpoosh has served as a Senior Manager at a Big 4 firm, as well as an executive officer or board member of private and publicly held companies. He is licensed as a CPA in Pennsylvania and is a member of the Pennsylvania Institute of Certified Public Accountants and the American Institute of Certified Public Accountants.

Table of Contents

Introduction

Chapter 1 – Learning Your Money Formula

Chapter 2 – The Money Is Out There

Chapter 3 – Your Business Plan

Chapter 4 – Investing in Your Own Dream

Chapter 5 – Neither a Borrower nor a Lender Be

Chapter 6 – Your Loan Proposal

Chapter 7 – Valuation of Your Business

Chapter 8 – Debt Financing Versus Equity Financing

Chapter 9 – Uncle Sam Helps Out

Chapter 10 – Grants

Chapter 11 – Venture Capital

Chapter 12 – Investor Angels

Chapter 13 – Initial Public Offerings

Chapter 14 – Direct Public Offerings

Chapter 15 – Strategic Alliances

Chapter 16 – Legal Considerations

Chapter 17 – The Pitch

Chapter 18 – Glossary

Chapter 19 – Resources

More Books

Introduction

You have to spend money to make money. Many entrepreneurs know this saying to be true, but what about the step before spending? After all, you have to have money to spend money. So how does a small business owner get the capital needed either to launch a new business venture or to grow his or her existing business?

This book will explore ways to underwrite your dreams, including how to select the right type of financing for your business and how to sell yourself, your company, and your ideas to the potential lenders and investors.

As a small businessperson, you play a vital role in our society. Your success is like a stone dropped in a pond—the ripples radiate well beyond the point of entry. Your success affects your family, your employees, your customers, your community, and even the U.S. economy. Our government, charitable organizations, and the business community have a stake in your success. So if you have a solid business idea and the ability to make it happen, others will want to invest in your dream.

Did You Know?

1. A small business is any independent business with 500 or fewer employees.

2. As of 2003, 5.7 million small businesses have at least one employee.

3. As of 2003, 17 million small businesses are sole proprietorships.

4. Fifty-three percent of small businesses are home-based.

5. Women own at least 50 percent of some 10.6 million firms.

6. The number of minority-owned firms is growing four times faster than all other U.S. firms.

7. Of all employers, 99.7 percent are small businesses.

8. Sixty to eighty percent of all new jobs (net) over the past ten years were created by small businesses.

9. Eighty-two percent of small businesses use some form of credit for financing.

10. Approximately 95 percent of new small businesses rely on personal financing (savings, second mortgages, and family or friend support).

Money, Money, Money

Angel investors invested an estimated $22.5 billion in 48,000 companies in 2004. Venture capital firms estimate that they invest between $3 and $5 billion annually. The Small Business Administration (SBA) guarantees more than $10 billion in loans every year.

Borrowing wisely is important—even if it is from your own piggy bank. Initial financing may be a loan from Mom, but how you approach this business relationship and use the funds is just as important as borrowing from a bank. Chapter 2 will discuss the various types of personal financing and tips on how to make each work for you.

For the 5 percent of entrepreneurs who will rely on formal outside financing, remember that every new business starts with some type of personal financing. Investors and lenders expect you to be financially (besides physically and emotionally) invested in your dream.

Whether you need a few hundred dollars or thousands of dollars to launch your new business, there is money available to people with sound business skills and a solid business plan.

Table of Contents

Chapter 1: Learning Your Money Formula

If only it were this easy: Business Idea + Money = Success.Many businesses, large and small, have discovered they couldn’t buy their way to the top. It takes more than an influx of cash to launch and grow a business.

There are few do-overs when it comes to seeking financing. You have only one chance with a potential investor. You may only have ten minutes to tell your story, show your profit potential, close the deal, and secure the money you need for your business.

Be Prepared

The most common mistakes made by beginning entrepreneurs result from a simple lack of preparation. All of the enthusiasm in the world cannot make up for a failure to research when seeking capital.

Before you fill out a loan application or contact a potential investor, you need to be prepared—in your head, in your heart, and on paper. A good place to start is with the creation of your elevator pitch.

Develop an Elevator PITCH

Imagine you were alone in an elevator with a rich investor. Here is your chance to pitch your idea. Can you capture his attention, sell him on your idea, and intrigue his entrepreneurial spirit before you reach the twenty-second floor?

Your elevator pitch, which should take about the length of an elevator ride to deliver, is a brief description that neatly sums up your business concept. It isn’t a lifeless declaration—I want to start a Chinese restaurant. It is a statement that captures the excitement and potential of your idea—I’m starting a trendy restaurant featuring exquisite dinners from every region of China. I’ve hired a chef from a popular New York establishment, and renowned restaurant designer Barbara Lazaroff is working with us.

Your elevator pitch is also useful in helping you focus on your goals. You will find several ways to build upon your elevator pitch throughout the book.

Know Your Investors

Both understanding the current market as well as anticipating and addressing the needs and concerns of typical investors are necessary when creating a business plan. Entrepreneurs need to show that their business will be capable of generating a steady flow of revenue with profits on the horizon.

Show that your team is competent and familiar with the target industry. Otherwise, to investors the risk may seem too great. Many investors rely on the bet on the jockey, not on the horse philosophy, or investing based on the person in charge.

Focus Your Search

Focus your search on the sources most likely to deliver. Otherwise, you risk spending countless