Wednesday, April 21, 2010

Financing Your Business

2010

April

By Diane Fries, CPA

No matter what stage you are in your business you need access to adequate funding sources to ensure success. There is no “perfect” way to financing a business, but there are some fundamental steps owners need to take to ensure success.
Step 1: Know your business

Have a plan and write it down. Know where you want your business to go and how you are going to get there. Start with a budget and forecast, support these items by making sure you keep good records and know your cash needs. This can be done with the help of the appropriate accounting software. If you show up at the bank with a shoe box full of receipts and an unbalanced check register you will not make a good first impression.

Know your customer, market and your competition. Being in business just because you want too will not get you where you want to go. Do your homework and create a business plan.

Step 2: Establish a relationship with your banker

The next step to financing a business is to build a relationship with a banker. Even though a bank may not always be part of the solution, this step can be crucial and should take place before a financial need arises. If you need money it’s late to get started in this process.

Every business needs a bank for its checking, savings and merchant account services but your relationship should go far beyond this. A good banker can facilitate the lending process, but this works more successfully if you have a relationship with your banker and they have a clear understanding of your business and its needs. This process should take place over time so a true relationship is created between you and a banker (sometimes two or three). Your bank becomes your partner when the bank “invests” in you by lending you money.

When evaluating loan requests, banks essentially attempt to predict your future. Accurately forecasting the future requires a dynamic partnership between the banker and borrower. The banker will need to know you, your business and your market.

Starting a relationship when you open your checking account is not too soon, this will give the banker time to get to know you. As your business goes through its early stages you can ask your banker for referrals to accountants, lawyers and possibly suppliers and customers. A good banker is entrenched in the local business community and is a great resource

Step 3: Determine how much money is needed
Another important initial step to financing a business is identifying the amount of funds that will be needed. The amount will depend on your budget, which would be encompassed in your business plan. For new businesses, Fitzgerald says, the budget would be broken into two components: startup capital and working capital. Startup capital is for items you will need to spend money on before opening, such as equipment, office furniture, lease payments and insurance. Then you would need to anticipate what your cash flow needs would be during the first 90 to 180 days the doors are open.

"This is one of the areas that I see folks typically under budget," Fitzgerald says. "They underestimate the length of time it will take for cash to come in the door or the number of customers they anticipate will come in the door."

Existing businesses, on the other hand, should always be looking back at and updating their original business plan, Alvarado says. "It should be a living document for any business," he says.

The next question becomes whether the need relates to capital fixtures or working capital. Every business is different, and the current need will determine the amount and type of financing that will be required. Once you've determined your expenses, you will need to estimate how much of those funds you can provide and how much you must secure elsewhere.

Step 4: Consider funding sources and types

Many new businesses start out using credit cards, home equity loans/lines or borrowing money from private sources such as family and friends. Relatives and friends can be an important source of capital for businesses because they typically offer more flexible payment terms.

Banks are another obvious solution for businesses needing funds to get established or grow. However, it can be difficult for a new company to borrow from a bank since lenders generally prefer to lend to stable businesses. The bank's first responsibility is to protect its depositors; therefore bankers tend to be very cautious about lending money.

Other private sources of finances also can be external providers, such as angel investors or venture capitalists. Venture capital firms, which specialize in investing in unproven businesses, typically provide equity funds to new and young companies. Venture capitalists don't make outright loans, so there's generally nothing to repay. Instead, they buy an equity interest in the business and become hands-on investors.

Business’ may also be able to take advantage of government-financing programs. For example, the Small Business Administration (SBA) offers a variety of loan-guarantee programs to promote the long-term needs of small businesses that have difficulty getting financing on reasonable terms through normal lending channels. Loans are available for a wide range of business purposes, from working capital and inventory to real estate and expansion. Generally, the SBA can guarantee financing up to $750,000 at between 70 percent and 90 percent of the loan value.

Eligible small businesses can also participate in the SBA 504 Program, which is designed to provide longterm, fixed-rate financing. Loan proceeds can be used for fixed assets, such as real estate and long-life equipment, new construction, and even improvements to existing properties. Participating lenders typically loan 50 percent of the eligible project costs, while the SBA lends another 40 percent in a second-lien position.

Step 5: Provide supporting documentation

Preparing documentation to support the financing request is another important step to securing funding with banks and other lenders. Your proposal should show how much funding you will supply, your budget and your expectations about your future income. Hopefully, you have done good record keeping. It is important to know the financial implications of your business decisions. A good set of internal books and financial statements are the best way to provide the financial information you will need for your loan documents. Most businesses can use their internal financial statements along with tax returns to quantify your supporting information. Those with larger requests--in excess of seven figures--will need more specialized financial reporting. This could include compiled statements, financial statements reviewed by a CPA and even a financial audit.

Once the business has its numbers, business plan, credit and other documentation in order, it's time to move to the negotiation stage. Keep in mind that financing is a business decision on both ends of the equation.

No comments:

Post a Comment