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Many years ago, a friend of mine came to me with an intriguing business problem. He had long wanted to start his own business. He decided he wanted to buy either an existing business or a franchise, the thinking being that he didn’t want to have to start a business from scratch.

 

When we looked at franchises, it became apparent that a franchise wasn’t going to work for him for two reasons. First, he really wasn’t the type to take direction well, a requirement for being a franchise. Second, most franchises were beyond his financial capacity.

 

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Buying an existing business

 

So he decided to buy an existing business. Generally speaking, buying an established business is a  good idea for several reasons:

  • First, there is less risk. You can review the books of the business and get a pretty good idea as to how much money you can expect to make
  • Second, there is the built-in clientele
  • Third, you do not have to spend years creating a brand; goodwill is already established
  • Finally, it is sometimes possible to get the present owner to stick around for a while (six months or so) in order to teach you the business.

 

Seller financing

 

My suggested solution was that, beyond finding an existing business, that he specifically look for one where the owner was willing to help finance the purchase. This sort of financing is well known in the real estate industry where the owner agrees to “carry the paper” for the buyer. The homeowner’s note is usually recorded as a second mortgage and is paid off in due time. The same idea is at play with owner financing in the sale of a business. The owner carries the paper and is paid off over time.

 

Why would a seller help finance the purchase of his business?

 

Usually, a business owner will finance the sale of his or her business for one of several reasons:

 

First, it might be a slow market or bad economy. Seller financing can help expedite a sale in those circumstances.

 

Second, it could be that it is not a great business. If the seller cannot sell the business the old-fashioned way – via a broker and getting the buyer to pay 100 percent – it may be because the business is sort of like a car that is a lemon. The owner figures that financing the business will at least make it someone else’s lemon.

 

Finally, and this is what we looked for, there are times when a seller is, as they say, “highly motivated,” and so helping out the buyer financially with the sale helps move the business faster. It may be that he’s getting divorced and needs cash or, or that she is ready to retire and move to the Bahamas and wants to cash out. Whatever. The seller needs cash now.

 

How it works

 

In my friend’s case, we found a good business that was listed for $65,000. The owner had been given the chance to teach overseas and wanted to sell the business pronto. The problem was that my friend only had $25,000 and didn’t qualify for a $40,000 business loan.

 

But we convinced the seller to carry a $25,000 note and that carried the day. My friend was able to put $25,000 down, the owner carried a note for another $25,000, and then we were able to get him a $15,000 bank loan to cover the balance.

 

By offering a motivated owner a way out, a chance to sell the business if they carry some paper, you become a solution to their problem.

 

Are there risks? Of course, this is business after all.

 

The main risk is that the buyer will default on the loan and the owner will be forced to repossess a business he no longer wants. But a business owner can reduce the likelihood of that happening by doing some due diligence. The seller must check out the buyer as much as the buyer must check out the seller and the business.

 

But the good news is that once everyone agrees that the other party and the business are on the up-and-up, then seller financing is a creative way to solve everyone’s problems. In the case of my friend, he still owns that business to this day and makes a very good living with it.

 

And the previous owner? She made 12 percent on her $25,000 over three years. Not a bad deal for all concerned.

 

About Steve Strauss

Steve Strauss Headshot New.png

Steven D. Strauss is one of the world's leading experts on small business and is a lawyer, writer, and speaker. The senior small business columnist for USA Today, his Ask an Expert column is one of the most highly-syndicated business columns in the country. He is the best-selling author of 17 books, including his latest, The Small Business Bible, now out in a completely updated third edition. You can also listen to his weekly podcast, Small Business SuccessSteven D. Strauss.

 

Web: www.theselfemployed.com or Twitter: @SteveStrauss

You can read more articles from Steve Strauss by clicking here

 

Bank of America, N.A. engages with Steve Strauss to provide informational materials for your discussion or review purposes only. Steve Strauss is a registered trademark, used pursuant to license. The third parties within articles are used under license from Steve Strauss. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.

 

Bank of America, N.A. Member FDIC.  ©2018 Bank of America Corporation

There are two ways to get the money you need for your business – the right way and the wrong way.

 

First, the wrong way: My friend Jeff had read a lot about crowdfunding and decided that was how he would fund his new food cart business. He heard people give you money if you throw up a video on Kickstarter.

 

So he did. But they didn’t.

 

The right way: After licking his chops (so to speak), Jeff decided to learn everything he could about starting a business. A year later he had saved some money, had a solid business plan, and found a great business partner. This time, Kickstarter was only one part of his funding plan, and as such, it worked. As did his plan to get a bank loan, and also get some investors.

 

In the end, he raised the $100,000 he needed.

 

There are two morals of the story: The first is that you need to do your homework if you want to get your business funded. The second, you need to cast a wide net. Today I want to concentrate on that second lesson.

 

The good news is that there are indeed a lot of ways to get the money you need these days. Here are a few of our favorites:

 

SBA loans: The Small Business Administration does not make loans but it does guarantee them. As such, getting an SBA-backed loan can be easier for entrepreneurs because they are, in fact, guaranteed. Find out more and get a list of SBA lenders, here.

 

Related Content: Understanding SBA Loans: What To Know Before Applying

 

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Crowdfunding: Crowdfunding is a recent addition to the business funding toolkit. With crowdfunding, yes, you post a video on a site like Kickstarter or IndieGoGo, and then you give people rewards for investing in your dream. The beauty of this is that these funding pledges do not need to be repaid. They are not loans, they are investments made in exchange for the “reward.” In Jeff’s case for instance, the second time around he named sandwiches after his investors.

 

I have coached many people through successful crowdfunding campaigns and would say the keys to success are:

 

Microloans: A typical bank loan might be for $5,000 up to a million or more. But some people don’t have the credit to get those bigger loans. Others have smaller needs. Enter microloans. Institutions like Kiva and the Small Business Administration offer such smaller loans.

 

Also check out Community Development Financial Institutions, CDFIs. These local non-profits also make small microloans (some as small as $500.) Our friends at Bank of America are significant funders of CDFIs. You can learn more, here.

 

Retirement accounts: No, I am not telling you to raid your retirement savings to fund your business, but there is a nifty trick you can use:

 

The IRS allows you to take an interest-free loan from your retirement accounts for up to 60 days, penalty free.

 

Related Content: Borrowing From the Bank of You: Taking a loan from your retirement account

 

Factoring: If your business has money owed to it – accounts receivable for example – you can sell that down-the-road income for money today to a company called a factor.

 

Seller financing: Maybe you want to buy a business but don’t have the capital or credit necessary to do so. What to do? Look for a “motivated seller.” A business owner who needs to sell his or her business, for whatever reason, might be willing to act as the bank and help finance your purchase.

 

Related Content: How to Buy a Business in Three Steps

 

Supplier financing: I love the book, “Starting on a Shoestring” by Arnold Goldstein. In it, Goldstein shares how he started “Discount City” by having his suppliers supply almost all his inventory on consignment – to the tune of $120,000 in product. Goldstein started the business with only $2,600 out of pocket.

 

Want to know more? All of these ideas, and more, are discussed in more detail in my book, The Small Business Bible.

 

Related Content: Credit & Lending Resource Center

 

About Steve StraussSteve Strauss Headshot New.png

Steven D. Strauss is one of the world's leading experts on small business and is a lawyer, writer, and speaker. The senior small business columnist for USA Today, his Ask an Expert column is one of the most highly-syndicated business columns in the country. He is the best-selling author of 17 books, including his latest, The Small Business Bible, now out in a completely updated third edition. You can also listen to his weekly podcast, Small Business SuccessSteven D. Strauss.

 

Web: www.theselfemployed.com or Twitter: @SteveStrauss

You can read more articles from Steve Strauss by clicking here

 

Bank of America, N.A. engages with Steve Strauss to provide informational materials for your discussion or review purposes only. Steve Strauss is a registered trademark, used pursuant to license. The third parties within articles are used under license from Steve Strauss. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.

 

Bank of America, N.A. Member FDIC.  ©2018 Bank of America Corporation

Credit and Lending Collection: Credit insight for every step of your business journey.

Our library of resources below can assist you whether you’re applying for credit for the first time, trying to build it or looking for a fresh start.

Understanding business credit scores Why you got declined for business credit Infographic: Building Credit for Your Small Business How Your Personal Credit Impacts Your Business Credit Building Better Credit with a Secured Credit Card 5 C's of Credit: What Are Banks Looking For? Borrowing Options for Small Businesses What is a Business Line of Credit & How Does it Work? Eight Ways to Maintain and Repair Good Business Credit Small Business Financing Tips: Banks, Family and Additional Resources How to Assess New Lending Sources An Overview of SBA Loans - SBA Loans Guide Part 1 Types of SBA Loans − SBA Loans Guide Part 2 How to Apply for an SBA Loan− SBA Loans Guide Part 3 Understanding SBA Loans: What To Know Before Applying Tapping the SBA: What Works for Your Business A Small Business Microfinance Loan Might Be Right Size for You CDFIs: Promoting small businesses and economic development Help grow your small business with a CDFI loan Need Capital? Consider a CDFI

SBC Team

Need Capital? Consider a CDFI

Posted by SBC Team Apr 20, 2018

If you’re a small business owner looking for capital, you may want to consider looking into Community Development Financial Institutions, or CDFIs—organizations that specialize in lending to small businesses. While approval rates are higher than at traditional banks, there are pros and cons. Check out our infographic to learn more about whether a CDFI fund might be right for your business.

 

Bank of America Business Advantage

NEED CAPITAL?
CONSIDER A CDFI

It can be tough for a small business to get access to credit—but it can be easier if you know where to look. According to the Federal Reserve Small Business Credit Survey, in 2016, 77% of small business applicants for loans or lines of credit at Community Development Financial Institutions (CDFIs) were approved.

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SO WHAT IS A CDFI AND COULD ONE HELP YOUR SMALL BUSINESS?

CDFIs are lenders that help certain small business owners gain access to capital.

Banks, credit unions, loan funds, microlenders or venture capitalists may serve as CDFIs.

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HOW THEY WORK:

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A region, population or group may face certain economic challenges.

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The federal CDFI Fund, run by the Department of the Treasury, issues loans, grants, deposits or equity investments to local CDFIs.

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Banks also help fund those local CDFIs, helping them to provide financial assistance and mentoring. Bank of America sends millions of dollars each year to different CDFIs.

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The businesses grow in their communities, helping revitalize them.

BORROWING THROUGH A CDFI IS DIFFERENT THAN SECURING A BANK LOAN OR LINE OF CREDIT. CDFIs OFFER CERTAIN PROS AND CONS.

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PROS

Approval rates of 77% at CDFIs, vs. 67% at small banks and 54% at large banks.1

Rates are often competitive with other common funding sources.

Many are geared toward working with start-up and early-stage companies.

Like Bank of America customers, borrowers have access to business education and support, such as help with business plans.

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CONS

Not every business is eligible; borrowers may need to reside in a certain area or be part of a specific population (e.g., women- or minority-owned).

There may be caps on loan amounts.

Funding time may be slower than traditional lenders.

INTERESTED?

Figure out if there's a CDFI that could work for you by checking the U.S. Treasury's tool, or try the Bank of America CDFI locator.

Remember: If you decide to apply for CDFI financing, be prepared—they may operate differently than your bank and ask for other information.

 

Click here to download a PDF version of this infographic.

A good business credit score may help your business qualify for better rates on credit cards, loans and lines of credit. So how do you find out what your business credit score is and see what’s on your business credit report? Plus, how do you improve your score if it’s not where you’d like it to be? Check out our infographic.

 

Bank of America Business Advantage

WHAT’S A BUSINESS CREDIT SCORE?

You’re probably familiar with your personal credit score—but did you know your business may have one, too? It also may have its own credit report. A good business credit score and report may help your business qualify for better rates on credit cards, loans and lines of credit.

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Even someone who knows their way around a personal credit score and report may be surprised when it comes to their business.

Here are some of the key differences between personal and business credit.

WHO ISSUES THE SCORE

PERSONAL CREDIT

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Just 3 agencies issue scores: Experian, Equifax and TransUnion.

BUSINESS CREDIT

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Scores come from a variety of vendors who collect data about your business and create reports. Three of the largest are Experian, Dun & Bradstreet and LexisNexis.

THE NUMBER

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300 to 850. All 3 agencies use the same scale.

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Variable, depending on the issuer. For example, Dun & Bradstreet PAYDEX scores range from 1 to 100; LexisNexis scores fall between 222 and 900.

WHAT'S IN THE REPORT

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Personal credit information, including history with creditors such as mortgage lenders, auto finance companies and credit cards.

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Business credit information,including payment history with creditors such as trade finance providers, history of business credit cards and lines of credit.

STANDARDIZATION

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All 3 reports will look similar, with minor variances.

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There’s no standardization, so a report from one vendor may include information about a certain vendor or creditor that another does not.

While your personal and business scores are different, your personal score can affect your business score. So keep an eye on it.

WANT TO IMPROVE YOUR BUSINESS SCORE?

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Pay all bills on time.

This is one of the most important factors when it comes to your credit score.

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Maintain positive cash flow.

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Reduce debt.

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Review your scores periodically and update your business profile.

This includes reporting business income.

To find out more, please visit a financial center or speak with your banker.

 

 

 

Click here to download a PDF version of this infographic.

Getting denied for business credit is frustrating, but knowing why you were turned down can help improve your chances next time. From your cash flow to your utilization ratio, this infographic breaks down the common reasons small businesses are turned down and explains steps to take before reapplying.

 

Bank of America Business Advantage

BUSINESS CREDIT:
IF YOU GET DECLINED

When a bank considers your application for business credit, they take a close look at your history with creditors and billers—as well as reviewing your company’s financials. These are some of the reasons applications are declined.

YOUR CREDIT

REASON FOR DECLINE 02-mini-icon-x.png
Your payment history is unsatisfactory.

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Your personal or business credit report shows a pattern of late or missed payments.

WHAT YOU CAN DO 02-mini-icon-star.png
Always pay on time. It can take years for blemishes to fall off your report completely, but consistent, on-time payments will help.

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REASON FOR DECLINE 02-mini-icon-x.png
You have a lack of established revolving credit.

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Your credit report doesn’t show a long history with credit cards or other creditors.

WHAT YOU CAN DO 02-mini-icon-star.png
Time is one of the most important factors in your credit history. The longer you can show a pattern of on-time payments, the better. Applying for a secured credit card is one way to build your history.

REASON FOR DECLINE 02-mini-icon-x.png
You’re using too much of your credit.

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Lenders dislike when you’re using all—or even most—of the credit that’s available to you.

WHAT YOU CAN DO 02-mini-icon-star.png
If you can, keep your utilization ratio—the percentage of credit you’re using vs. total available credit—as low as you can.

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REASON FOR DECLINE 02-mini-icon-x.png
You’ve filed for bankruptcy.

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A past personal or business bankruptcy may affect your chances of securing new credit.

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In the coming months and years, work to improve cash flow, boost revenue, cut expenses and improve your credit score. You can also look into a Community Development Financial Institution (CDFI) loan, which may have different requirements.

YOUR BUSINESS

REASON FOR DECLINE 02-mini-icon-x.png
Your business has insufficient revenue.

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The lender is concerned that your revenue can’t support increased credit.

WHAT YOU CAN DO 02-mini-icon-star.png
Consider a smaller amount or a collateral-backed loan or credit line.

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REASON FOR DECLINE 02-mini-icon-x.png
Your business doesn’t qualify.

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Not every service or business is eligible. For instance, to qualify for certain credit products, Bank of America requires your business to be under current ownership for at least two years. And some products have minimum revenue requirements.

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If your business hasn’t been around long enough, try again when it has. Or consider a CDFI loan, which may have different requirements.

REASON FOR DECLINE 02-mini-icon-x.png
Your business has insufficient cash flow coverage.

WHAT IT MEANS 02-mini-icon-check.png
The lender thinks you don’t have enough cash flow to make payments on new debt.

WHAT YOU CAN DO 02-mini-icon-star.png
Consider a smaller amount or a collateral-backed loan or credit line.

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YOUR BANKING RELATIONSHIP

REASON FOR DECLINE 02-mini-icon-x.png
You have sufficient credit with your bank already.

WHAT IT MEANS 02-mini-icon-check.png
Even if you have great qualifications, a bank may not want to exceed a certain amount of credit exposure.

WHAT YOU CAN DO 02-mini-icon-star.png
If you have unused credit lines, close them. If not, you may need to consider other sources.

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ADMINISTRATIVE REASONS

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REASON FOR DECLINE 02-mini-icon-x.png
It’s a duplicate application.

WHAT IT MEANS 02-mini-icon-check.png
If you’ve applied for the same product within the last 90 days, it’s considered a single application.

WHAT YOU CAN DO 02-mini-icon-star.png
Wait it out.

Getting turned down for business credit is frustrating, but knowing why it happened can help improve your chances next time.

To discuss your needs and find the solutions that work best for your business, please contact a small business banker.

 

 

 

Click here to download a PDF version of this infographic.

Starting a business can be difficult. The reality facing all business owners is that a market of individuals must like and, ultimately, support your product or service through their patronage.

 

Let’s face it – to start, you need logos, websites, office space and office supplies. Eventually, you will need to buy inventory, hire employees and advertise to win customers. This all requires money!

An overwhelming majority of small businesses fail and one of the biggest reasons is a lack of capital. There are three major ways to bring capital or money into your business:

 

  1. Investment capital
  2. Bank or business loans
  3. Sales and company revenue

 

Investment Capital

ABC’s Shark Tank features entrepreneurs from across the country pitching five very successful entrepreneurs (The Sharks) for the hope of winning an investment. The Sharks are essentially venture or angel capital investors because they invest their own money and provide expertise in exchange for equity in the entrepreneur’s business.36333069_s.jpg


One of the disadvantages of relying on outside  funding is you need to convince someone to invest their personal assets into your business. The process often requires you to know someone or have an existing relationship with a private investor. Secondly, investor capital is most expensive, often requiring to give up some portion of your ownership rights in the business.

 

Bank or Business Loans

Bank and business loans can be a great way to capitalize and grow your business. For example, you may need to hire an employee but your current cash flow may be tight because you are waiting to be paid by a customer. In that case, a bank loan or line of credit could be very useful for meeting your company’s payroll. 

For example, one of the advantages of a business term loan is that you can pay for a new piece of equipment over a longer time period generally at a fixed rate of interest for the duration of the term of the loan. On the other hand, a line of credit can be useful if you are looking to meet increased temporary working capital needs that are seasonal in nature and your business will be able to pay it back in a short period of time. The line of credit allows you to borrow the amount you need and pay it back when your business cash flow improves, however, the outstanding borrowed amount incurs interest cost that is generally a variable rate of interest. 

 

Additionally, it’s in the best interest of your bank or lender to work with you to solve your cash-flow challenges. Your business and banking relationship can be strengthened by working closely with a banking professional.

 

Sales and Revenue

Sales and revenue are the most important areas of focus for your business. Self-sufficiency in your business should be the goal and sales/revenue can help you grow to self-sufficiency quickly. The first two ways to bring money into your business (investment capital and bank or business loans) support the goal of growing your revenues.

 

These three important ways to bring money into your business should be used in conjunction with your business needs. Learn more about how to raise capital for your business.

 

Related Content:

 

  1. Credit and Lending Resource Center
  2. Get answers and information about business financing
  3. Find the right financing for your business

 

About Ebong EkaEbong+Eka+Headshot.png

Ebong Eka is no stranger to the world of personal finance. As a certified public accountant and former professional basketball player he offers a fresh perspective to small business planning and executing. With over fifteen years of accounting, tax & small business experience with firms like PricewaterhouseCoopers, Deloitte & Touche and CohnReznick, Ebong provides practical money solutions tailored to the everyday person, the aspiring entrepreneur or the small business owner.

 

Ebong is the founder of EKAnomics, a sales, pricing and leadership firm. He is also the founder of Ericorp Consulting, Inc., a tax and management consulting firm. Ebong is the author of “Start Me Up! The-No-Business-Plan, Business Plan.

 

Ebong is also the founder of The $250 Tax Pro, which provides tax preparation and consulting services in the Washington, DC area.

 

Web: www.ebongeka.com or Twitter: @EbongEka.

You can read more articles from Ebong Eka by clicking here

 

Bank of America, N.A. engages with Ebong Eka to provide informational materials for your discussion or review purposes only. Ebong Eka is a registered trademark, used pursuant to license. The third parties within articles are used under license from Ebong Eka. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.

 

Bank of America, N.A. Member FDIC.  ©2017 Bank of America Corporation

Most business owners see the true “pay day” for their work when they sell their business. Other entrepreneurs decide to sell because of changes in circumstances. Regardless of the reason, one of your top goals is to maximize the value you receive in exchange for the years of hard work you have given your business.

 

Yet many entrepreneurs don’t plan for their exit, which can cause you to leave money or other assets on the table when you sell your business.

Below is the first part of this three-part series designed to help you prepare to sell your business and maximize the value you receive.

 

Check out part 2: How to Get Your Business Ready for a Sale—Before You Plan to Sell: Part 2

 

List and Prioritize Shareholder Objectives

Maximizing value in a sale is not always about getting the highest sale price –  there are often other drivers of value for entrepreneurs – including a variety of non-financial priorities. These can range from ensuring that long-term employees have a job post-sale to keeping brand names intact. To maximize value, it is critical for you and your other shareholders to establish and rank your priorities. This can be a tedious task, as purely financial investors may want to maximize dollars, where entrepreneurs with more of an emotional tie to the business may prioritize non-financial aspects of a deal.

 

While priorities may change as the company grows and evolves, this exercise will provide a roadmap for decision making about the business – while also positioning the company for sale and assisting in assessing potential offers.31019757_s.jpg

 

Create a Dream Team for Your Sale—and Do So Early

While some entrepreneurs try to sell their business themselves, doing so almost always is a penny-wise, pound-foolish endeavor. Strong service providers should help you prepare for the sale, as well as add substantial value during a sale process. In fact, if you pick the right providers, they should more than pay for themselves.

 

Your team should have at least the following three “players.”

  • First, hire an accountant that has substantial audit experience (most buyers will want to see audited financial statements, so your cousin who is an accountant won’t cut it).
  • Second, you should hire a lawyer that specializes in mergers and acquisitions (or “M&A”) transactions. Preferably, he or she will have experience representing both buyers and sellers (again, your uncle Ira the lawyer doesn’t cut it here).
  • Third, hire an investment banker that works with companies of a similar size and, potentially, one who has an industry specialization as well. The investment banker will help to prepare key materials, help run an orderly and competitive process and help to maximize those shareholder objectives that you laid out above.

 

Too many entrepreneurs wait until the day they are ready to sell the business to establish these relationships, but truly, they should be established early on, ideally years before a transaction is contemplated. This allows these providers not only to give you guidance on strategic decisions that can ultimately impact a sale, but also to get to know your business, which can add value during a sale.

 

You may also need to change service providers if you have outgrown your existing relationships, so don’t be shy to find new providers if the old ones are no longer a fit.

By building a strong advisory team, the company will be prepared with all of the tools and resources necessary to maximize the transaction value and structure, as well as prevent any deterioration in value during negotiations.

 

(Related: Bookkeeper or Accountant: Determining which is best for your small business)

 

Develop a Succession or Transition Plan

Selling a business at the time the owner wants to retire – especially when that owner also runs the business – creates one of the largest impacts on valuation. First, perception plays a meaningful role in valuing businesses and if a buyer perceives that a company needs to sell, the seller will be penalized through a lower valuation. Additionally, many buyers want the management to stay on for a transitional period. In the case of financial buyers, this could be upwards of three to five years.

 

Developing a succession or transition plan – whereby the business is sold at least one or two years before you want to retire and where there is capable management in place to take over your responsibilities – will create the most options and the most value when the business is sold.

 

(Related: The Importance of Succession Planning for Your Businesses)

 

Incentivize Non-Owner Management

For companies where key managers are not shareholders, there can be a major conflict of interest during a sale. Management plays a critical role during a sale and may even be desired by new owners to stay with the business. However, managers that don’t have a stake in the sale through equity ownership can be at odds with the shareholders during the process.

 

Whether your management team has concerns over losing their jobs or autonomy, or simply realizes that they have leverage to disrupt a process, non-incentivized management can cost the shareholders significantly –even completely derail a transaction.

 

Put incentives in place for these key managers prior to beginning a sale process. This could include stock options or a sale bonus that help align the interests of the managers and shareholders (i.e., they both get a payday from the sale) and, ultimately, ensures that there isn’t an eleventh-hour power play.

 

Start working on the above immediately and stay tuned for Part 2 of this series, coming soon.

 

(Related: Tips to Sell a Service Business; Be Like Goldilocks When Valuing the Sale of Your Business)

 

About Carol Roth

Carol Roth Headshot for post.png

Carol Roth is the creator of the Future File ® legacy planning system, “recovering” investment banker, billion-dollar dealmaker, investor, entrepreneur, national media personality and author of the New York Times bestselling book, The Entrepreneur Equation. She is a judge on the Mark Burnett-produced technology competition show, America’s Greatest Makers and TV host and contributor, including

host

of Microsoft’s Office Small Business Academy. She is also an advisor to companies ranging from startups to major multi-national corporations and has an action figure made in her own likeness.

 

Web: www.CarolRoth.com or Twitter: @CarolJSRoth.

You can read more articles from Carol Roth by clicking here

 

Bank of America, N.A. engages with Carol Roth to provide informational materials for your discussion or review purposes only. Carol Roth is a registered trademark, used pursuant to license. The third parties within articles are used under license from Carol Roth. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.

This is the final post of a three-part series on capital raising mistakes you can easily avoid.  For the first post, click here and for the second part, click here.

 

Mistake #9:  Not Being Scrappy

 

Scrappiness is one of the hallmarks of being an entrepreneur.  It is the ability to take lemons and make lemonade, get the max for the minimum and generally beg and barter to make things happen.  It’s about trying to find a way to make things happen in alternate ways.  Think of it as being the MacGyver of entrepreneurship. How can you extend payment terms with vendors or get paid upfront for your goods and services?  Both of those efforts will decrease the amount of capital you require.

 

Perhaps you can trade your products or services for legal, accounting or other help? Can you get your website done for less money by using a company located in a less expensive area of the country?  Can you outsource any of your tasks to a virtual assistant, maybe even one overseas? 

 

While you certainly can’t cut out all of the expenses of your business, if you can be scrappy in the early stages of your company, you may be able to achieve critical milestones with less capital, making it easier to do a formal capital raise down the line.

 

How to avoid this mistake:

 

  • Review your plans to see if there are ways to extend payment terms (without incurring penalties)
  • Review expenses to see if there is anything you can beg, borrow or barter for
  • Creatively think about ways you can get paid upfront (in part or whole) for your products and services
  • Continue to think outside of the box

 

 

Mistake #10: Not Understanding Debt

 

Someone along the way must have sent out a memo that was grossly misunderstood because there are lots of misconceptions about debt (loans) for businesses.  From the government giving away money for free (it doesn’t), to the government making loans through the SBA (it doesn’t - it provides “insurance” to lending institutions in the SBA program to lessen the institutions’ risk when making small business loans), there are lots of myths and misunderstandings on the subject.  42201048_s.jpg

 

Lenders take the business of making small business loans pretty seriously. Getting a loan requires one or more of: (I) a good personal credit history, (ii) personal assets/collateral, (iii) business history and/or (iv) business assets/collateral. If your new business doesn’t have major assets, most lenders will want you to personally guarantee the loan with your personal assets, like your house, which adds to your personal financial risk. 

 

If you don’t have appropriate collateral, you may find it nearly impossible to get a loan for the business. Basically, you have to be somewhat successful and have proven your financial abilities to save towards your business in order to get a loan to start a business.

 

Plus, if you fall behind on payments for your debt or if your business is struggling in certain areas and if you aren’t complying with the specifics of your lending agreement (called covenants), the lender may step in and take all kinds of actions that will irritate you but are fully within its right as a lender.

 

Also, many businesses are financed by another type of debt: personal credit card debt.  Credit card debt is very costly and can contain double-digit lending rates. This makes credit card debt a very expensive option, one that may not be able to be made up by the rate of return you produce from your business.

 

How to avoid this mistake:

 

  • Connect with a business banker early to help guide you through the process 

Related: Schedule an appointment with a Small Business Specialist

  • Make sure you ask a lot of questions about what is required of you if you take on debt
  • Don’t sign anything that you do not 100% understand
  • Make sure to keep bank covenants in the front of your mind – even if your business is not in trouble, breaking a covenant can wreak havoc on the business
  • Don’t take out any debt (including credit card debt) at a rate of interest higher (or even anywhere near) the potential rate of return you expect from your business
  • Don’t use debt to bet (or fully mortgage) the farm
  • Remember that your name (and perhaps your assets) is on the dotted line – you are accountable!
  • Look to peer-to-peer lending as a lending alternative

 

Mistake #11: Not Getting Help 

 

So, capital raising can be complicated.  You have to figure out how much money you need (which we have already established is usually more than you think) by putting together financial projections.  Then, you have to think through the pros and cons of each source of capital.  You may also have to put together and review various documents, whether they be loan documents from the bank or a term sheet from angel investors or even just an agreement amongst friends and family. Plus, you may have to set a valuation and potentially file paperwork with various governmental authorities.

 

If you have never done any of this before, it is complicated!  Yet, it is incredibly important and you need to make sure that it is done right and that you understand fully what you are signing up for.

 

The mistake here is not being willing to get help (which often costs money).  You need to hire advisors who have experience with capital raising (not just Uncle Ira, who happens to be a lawyer) to make sure that you are getting the best advice and so that they can educate you as well – ignorance is not bliss in business.  You may pay a little more up front, but you get what you pay for. Also, sometimes a bargain on very important items ends up being more costly in the end if the work takes more of your time or needs to be redone.  

 

How to avoid this mistake:

 

  • Be willing to ask for help
  • Again, use resources like your business banker to assist
  • Review credentials to make sure that the firm or people helping you have experience working with your size company and have capital raising experience too
  • Make sure that you clearly outline expectations and understand exactly what you receiving in terms of advice and help
  • Ask for explanations so you can become educated too – your name is on the dotted line, you will want to “sanity check” all work done for you by any advisors

 

 

Mistake #12: Raising Money to Replace Your Old Salary

 

Before you started your business, you may have had a good salary that helped you pay for nice things, like your home, car and annual trips to Disney World. Once you leave that job to start a business, you may figure (as so many aspiring entrepreneurs do) that you need to replace that salary to maintain your lifestyle.  You decide that since you could find another job that pays that much, you are obviously worth that much and that investors should be willing to pay you that kind of salary for working in your new business.  Plus, if you are raising equity, you also figure that you deserve the lion’s share of the equity stake.  

 

Yeah, that’s not how things work in the real world.  

 

Nobody wants to invest in your salary.  They want to invest in a business that will grow and make them a hefty return.  If you think the idea is so great and you want to keep all of the equity, you better be able to either support that with your own capital or be willing to put in “sweat," the hard work you get in exchange for the equity. That is your payment. 

 

If you want a large salary, that makes you a hired gun, not an owner. 

 

You can expect some small amount of money to live on, but start-ups usually pay below-market salaries to keep costs down.  Asking for a premium salary throws up all kinds of red flags for investors (and they may, in turn, throw-up on your business plan).  It says you care more about sustaining your lifestyle than doing everything possible to make the business work.

 

How to avoid this mistake:

 

  • If you want to make the business a success and have a meaningful stake in it, forget the big salary for a while
  • If you want a big salary, keep your day job

 

 

Mistake #13: Assuming Raising Capital is a One-time Event

 

So, you have written the plan, given your pitch, waited for months (longer than you expected) and finally, the checks have been written and you raised capital. Thank goodness, you never want to go through that again. Yet the capital raising process is rarely a one-time event. As your business evolves and growth prospects present themselves, you have to have funding to grow the business. The more growth you have, the more money is needed to cover working capital items like inventory and accounts receivable. If you have visions of growing, you are going to need to consider capital-raising, whether through equity or debt, on an ongoing basis. Having no capital needs often means you are not growing, which is not a great prospect either. 

 

How to avoid this mistake:

 

  • Get comfortable with the notion that you will have to raise capital over the long-haul

 

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About Carol Roth

Carol Roth Headshot for post.png

Carol Roth is the creator of the Future File ® legacy planning system, “recovering” investment banker, billion-dollar dealmaker, investor, entrepreneur, national media personality and author of the New York Times bestselling book, The Entrepreneur Equation. She is a judge on the Mark Burnett-produced technology competition show, America’s Greatest Makers and TV host and contributor, including host of Microsoft’s Office Small Business Academy. She is also an advisor to companies ranging from startups to major multi-national corporations and has an action figure made in her own likeness.

 

Web: www.CarolRoth.com or Twitter: @CarolJSRoth.

You can read more articles from Carol Roth by clicking here

 

Bank of America, N.A. engages with Carol Roth to provide informational materials for your discussion or review purposes only. Carol Roth is a registered trademark, used pursuant to license. The third parties within articles are used under license from Carol Roth. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.

This is the second article of a three-part series on  capital-raising mistakes you can easily avoid.  If you missed the first post, can check it out here.

 

Mistake #5: Underestimating How Much Time it Takes to Raise Capital

Almost everything in business, particularly those things outside of your control, takes more time than you expect.  Raising capital is one of those things.  This is especially the case when raising money from individual investors.  Even when people tell you they are going to invest in your business, it is difficult to get them to write the check.  Getting people to part with their money is like trying to get food away from me when I am hungry; a tough task!

 

People will wait as long as possible to part with their “Benjamins.”  Just ask the federal government what percentage of tax returns get sent in at the last possible moment (on or around April 15th) and how many taxpayers file for an extension.  You may have to pry that investment check out of your investors’ hands.

 

Even with loans, documents need to be put together, processed, reviewed, put through bureaucratic processes and ultimately signed.  This takes time and lots of it.

 

How to avoid this mistake:

 

  • Take whatever timeframe you think is needed to raise capital and increase it by 50 to 100 percent.  If you have budgeted six months, it will probably take nine to twelve months (and if you are thinking one month, wake up, because you are dreaming).

 

 

Mistake #6: Assuming Your Business is Fundable by Sophisticated Investors

Most business models aren’t big enough to attract the attention of sophisticated investors like angels or venture capitalists.  These investors want to invest in businesses that have the ability to give them a 30% – 50% return (or sometimes higher) on their capital, on average, for every year they hold the investment.  They use this benchmark because they know a large percentage of their investments are going to fail (as most new businesses do) or be limited in the scope of their success, so they need the one that really succeeds to make up for the nine others that flop.  These investors also need a way to get their investment out of the business, so they expect that in some realistic timeframe (usually five to seven years) the business will be big enough to sell or to take public in an IPO.  30504271_s.jpg

 

Based on the above, there are many more venture capital firms focused on industries like technology, rather than consumer or service businesses.

 

This set of criteria means your business may not be a fit for an angel or venture capital investment.  Venture capital firms only fund a fraction of one percent of all businesses in the U.S. each year.  Sophisticated angels also fund a tiny portion of all businesses.

 

If you are one of the few that do have a business that meets the potential criteria of venture capitalists, it will still be tough to get funded.  Every venture capital firm gets hundreds to thousands of business plans submitted for review each year.  They dismiss most plans that aren’t introduced by someone they know and can vouch for them.  So, if you are not in the inner circle of the venture capital community (and if you need the money, you often aren’t), your plan may not even get a glance, even if your business has merit.

 

How to avoid this mistake:

 

  • Be realistic on whether you have a business model likely to scale quickly and be of interest to venture capitalists or sophisticated angel groups – if not, don’t waste your time going to them for funding and look elsewhere.
  • If you do have a plan that meets the above criteria, try to get an introduction through someone who has a relationship – spend time with your network seeing “who knows who,” as a direct introduction will keep you from the bottom of the business plan (or pitch deck) pile.

 

     Learn more about investors and your business: Why Investors Avoid “Ground Floor” Opportunities

     You can read more articles from Carol Roth by clicking here

 

Mistake #7: Taking Investments from “FFFs,” “DDLs” or “the Crowd” Lightly

If you don’t qualify for an investment from a sophisticated investor group, you may turn to folks who you know—friends, family and acquaintances—who may consider investing in your business.  Two acronyms are usually used to describe these investors: “FFFs- friends, family and fools” or “DDLs- doctors, dentists and lawyers”. These are generally people in your network who may have some extra cash lying around.

 

With technology, and the passing of the JOBS Act, you can raise money in various forms from strangers via crowdfunding.  For the purposes of this mistake, I am going to focus on investments vis-à-vis crowdfunding (not the kind that gets you a perk).

 

Typically, FFFs, DDLs and the Crowd don’t truly understand your business, but they invest either because they believe in you, they have some infatuation with your business idea or because of peer pressure (someone else is investing and they invest alongside them).  As investors, these people can become co-owners or lenders to your business.

 

Going to FFFs or DDLs is challenging.  It is hard to ask people you care about or who are in your social circle to give you money.  Once you accept it, you make a deal with the devil of sorts, because now your relationship with this person has gone from its existing form to also being business partners.  Sometimes you will have to make decisions for the sake of the business that will not make your friends and family happy.  This makes for some seriously uncomfortable future interactions.

 

Because they don’t work with you on a daily basis and yet, you are using their money, your FFFs/DDLs may now:

 

  • Want to get updates on a regular basis
  • Want to put in their two cents worth of ideas (e.g. telling you, “don’t you think the store would look so much better with a singing plastic fish on the wall”?)
  • Want to come and hang out at your office or place of business
  • Demand free or discounted products and services
  • Ask you to employ their lazy cousin Nick, or
  • Ask you for a million favors in return

 

You will have to answer to these people, who are now your co-owners or lenders and therefore, people you can’t ignore.  These people, based on their lack of business sophistication, can take up a lot of your time at best, and at worst, will make demands from you and the business. 

 

How to avoid this mistake:

 

  • Think about both the pros and cons of taking an investment from a friend, family member or acquaintance.
  • Make sure you don’t take any money from someone you have a relationship with that cannot afford to lose 100% of the investment.
  • Make sure that you discuss the implications on your relationship with the other party if the investment is lost in whole or in part and decide if the relationship can endure if a problem occurs.
  • Think once again if you can handle an awkward birthday party or family dinner if things don’t pan out as planned.

 

 

Mistake #8: Not Achieving Milestones First

Everyone thinks they have a great idea for a business and many try to raise money for their business idea.  However, a serious letdown about businesses is that the ideas behind them aren’t worth anything (see my previous article on this subject here).

 

Ideas may have had some value back in the day when there were very few businesses in any given sector.  Now that almost everything has already been thought of, not only is it hard to be innovative, but extracting value comes from executing your thoughts into reality.

 

You have to invest time, money and effort to achieve key milestones, such as developing a technology or securing purchase orders, before you raise capital.

 

The more you do, the more value and credibility you create.  Investors really don’t like to take risks.  The more milestones you have achieved, the less risk for the investor. Plus, you will have more confidence in the success of your business.

 

How to avoid this mistake:

 

  • Focus on achieving milestones – get past the idea stage by building a working prototype, landing paying customers or filing defensible patents, to create value.

 

Be sure to check back soon for my final post on capital raising mistakes to avoid.

 

 

About Carol Roth

Carol Roth Headshot for post.png

Carol Roth is the creator of the Future File ® legacy planning system, “recovering” investment banker, billion-dollar dealmaker, investor, entrepreneur, national media personality and author of the New York Times bestselling book, The Entrepreneur Equation. She is a judge on the Mark Burnett-produced technology competition show, America’s Greatest Makers and TV host and contributor, including host of Microsoft’s Office Small Business Academy. She is also an advisor to companies ranging from startups to major multi-national corporations and has an action figure made in her own likeness.

 

Web: www.CarolRoth.com or Twitter: @CarolJSRoth.

You can read more articles from Carol Roth by clicking here

 

Bank of America, N.A. engages with Carol Roth to provide informational materials for your discussion or review purposes only. Carol Roth is a registered trademark, used pursuant to license. The third parties within articles are used under license from Carol Roth. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.

Raising capital for businesses is hard and often misunderstood.  As a “recovering” investment banker, I have helped my clients raise 10-figures in capital over the past 15 years, and have witnessed many individuals who failed to present a compelling, fundable story about their businesses (and themselves).

 

In my unscientific but thorough poll of entrepreneurs, 99% rank raising capital amongst their five least favorite business activities. Hopefully, I can help make sense of the capital-raising process to make it more tolerable – and valuable – for you.

 

To start this three-part series on raising capital, I’ll focus on the key mistakes you must avoid to save time, money and energy while increasing your chances of success when raising money for your business.

 

Mistake #1: Putting all Your Eggs in One Basket

 

The very first capital raising mistake relates to not raising outside capital at all.  Statistics show that the typical start-up business in the U.S. is self-funded from the entrepreneur’s own savings and supplemented with some personal credit card debt.  However, part of balancing risks and rewards is using diversification.

 

It is important for you as an entrepreneur to show your commitment to your business by investing some of your own capital.  This is a safeguard to ensure that you are incentivized to do everything you can to make the business successful.  However, if you are putting every last dime into your business, all of your eggs will be in that one darn basket.

 

How to avoid this mistake:

 

  • Don’t bet the farm on your business.
  • If you don’t have enough money to live on and invest in your business, then: (I) wait until you have more money saved, (II) see if you can revise your budget or (III) consider taking outside capital.

 

Mistake #2: Undercapitalizing Your Business40556715_s.jpg

 

A large percentage of businesses close because they don’t have enough money to survive the rocky first couple of years of business.

 

I have found that early-stage and new business owners underestimate the cost of starting and running the business virtually every time (usually by a factor of 3).

 

In each early stage business I have seen, entrepreneurs say their financial projections are conservative in terms of revenue and expenses (and then I roll my eyes).  They also tend to claim they are raising more money than they need so they have a cushion. When I tell them that their projections, as with all entrepreneurs’ financial projections, are too aggressive, they lecture me about why they are the “exception to the rule.”  Then, a year later, after revenue estimates fall short and expenses were greater than expected, they give me the reasons why they missed their projections.

 

There has yet to be an exception to this in my personal experience.  Note: seasoned investors know this and it is why they always take a “haircut” to the projections; they assume that they are overstated on the revenue line and/or understated on the expense line when they evaluate investments.

 

Another issue arises when you don’t raise enough capital upfront and you start to run out of money.  It is much more difficult—often impossible—to secure capital to stay afloat when things aren’t going so well.

 

How to avoid this mistake:

 

  • Do yourself a favor when you do your projections: Revise them so the amount of money you actually need is three times the amount you originally planned.  If you think you need $10,000, you really need $30,000.  If you think you need $1 million, you probably need around $3 million.

 

Mistake #3: Not Understanding Valuation

 

When you raise money for your business, you are usually dealing with one of two types of capital: equity, where you give up an ownership stake in your business, or debt, where you can take on an obligation for your business that you agree to pay back instead of giving up ownership.

 

There are hybrid scenarios that incorporate both equity and debt (as well as options and warrants), but at a basic level, you need to at least understand equity and debt.  If you raise equity, you end up setting a value for your business, which is based on the stage of your business, the milestones you have reached and the ultimate potential of your business.

 

However, many entrepreneurs don’t understand valuation.  Imagine that your business is symbolized initially by a small pie. You have 100% of the pie and then you give up a slice (or percentage) of that pie in exchange for equity capital.  The hope is that in the future, your business becomes a huge pie, so that even though other people have pieces of the pie, your piece is bigger than when you owned 100% of the small pie (i.e. your stake is worth more in terms of absolute dollars).

 

Often, entrepreneurs don’t understand how the pie works.  They will say that they have a business idea and that they need to raise $200,000.  Then arbitrarily, they will decide that they only want to give up 10% of the equity. However, that establishes a value for the business (and a big one!).  If 10% of the pie is worth $200,000, then 100% of the pie (the whole pie) is worth $2 million!  That $2 million number includes the $200,000 in cash the investor is giving you, so that means before you raise any money, you value your company at $1.8 million ($2 million minus $200,000).

 

Most established small businesses aren’t worth $1.8 million dollars, let alone a brand-new business.

 

Setting unrealistic valuations can increase the amount of time it takes for you to raise capital, prevent you from raising money altogether and create credibility issues for you as an entrepreneur.  Even if you can find a fool to invest at your crazy valuation, beware: You may have to raise capital again in the future and having a silly upfront valuation can impede your ability to raise capital in the future (again, credibility issues). It can also damage the relationship with your investor who is now, in effect, your business partner.

 

How to avoid this mistake:

 

  • Make sure you understand what you are implying in terms of valuation – if you need help, ask a professional.
  • Think carefully about the pros and cons of a high valuation, even if you can get one.
  • Consider an investment structure using debt that either doesn’t require you to set a business valuation or sets one in the future based on achieved metrics and benchmarks.

 

Mistake #4: Being Greedy

 

Let’s say there is a treasure chest of gold located several hundred miles away from your house. If you are the first to get to the treasure chest, you can claim it as yours.  The problem is that you don’t have a car.  You could walk or ride your bike, but by the time you got there, someone else may have claimed the gold.   So, you ask a good friend if they can drive you to the gold and you will share some of it with them if you get there first.

 

In this analogy, the gold stands for the potential upside rewards of your business, and your friend with the car is the investor and investment capital, respectively, that you need to build your business  and reach the treasure chest.

 

So, how much do you give your “friend” for driving you there?  Now, many entrepreneurs take the stance, “well I came up with the idea,” and offer to give their friends a token amount, say 10%.  However, the reality is that you can’t get to the gold in enough time to claim it without your friend and his car.  So, what if you gave him 30%, 40% or even split it? There will still be enough value for it to be worth both of your whiles. True, the friend wouldn’t have known about the gold without you, but you can’t get there without the car.

 

Valuing a business is an art, not an exact science, and splitting hairs over percentage points is often missing the entire point!

 

How to avoid this mistake:

 

  • Other than understanding valuation implications (from Mistake #3), don’t get too caught up in the percentages that you give up for raising equity capital.  Capital is a necessary component of growing a business which is also a great deal of risk for the investor.
  • Be fair and realize that if the opportunity is large enough, there will be enough to go around for everyone – if not, then you should probably rethink the opportunity

 

Be sure to check back for my next post on capital-raising mistakes to avoid.

You can read more articles from Carol Roth by clicking here

 

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About Carol Roth

Carol Roth Headshot for post.png

Carol Roth is the creator of the Future File ® legacy planning system, “recovering” investment banker, billion-dollar dealmaker, investor, entrepreneur, national media personality and author of the New York Times bestselling book, The Entrepreneur Equation. She is a judge on the Mark Burnett-produced technology competition show, America’s Greatest Makers and TV host and contributor, including

host

of Microsoft’s Office Small Business Academy. She is also an advisor to companies ranging from startups to major multi-national corporations and has an action figure made in her own likeness.

 

Web: www.CarolRoth.com or Twitter: @CarolJSRoth.

You can read more articles from Carol Roth by clicking here

 

Bank of America, N.A. engages with Carol Roth to provide informational materials for your discussion or review purposes only. Carol Roth is a registered trademark, used pursuant to license. The third parties within articles are used under license from Carol Roth. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.

 

Bank of America, N.A. Member FDIC.  ©2017 Bank of America Corporation

You may have heard of “microfinance,” but what it is and what the popular perception of what it is are often two different things.

 

According to Forbes, “Back in 1974, a Bengali man named Muhammad Yunus created the concept of microfinance with Grameen Bank, winning him the Nobel Peace Prize in 2006 for the dramatic global impact of his idea. The World Bank estimates that more than 500 million people have benefitted from microfinance to date.” For example, using a Grameen loan, a farmer in Bangladesh might get a loan of $200 to buy cows.

Microfinance.jpg

 

Microfinance is oftentimes considered a tool to help impoverished people in developing countries. A similar institution to Grameen Bank is Kiva.org. Kiva is a person-to-person microlending organization that has provided more than $1 billion in small loans to 2.5 million entrepreneurs from 1.6 million lenders.  The astonishing repayment rate is 97 percent.

 

The good news for small business owners is that microfinance is not just about $100 loans to poor farmers in India. As you might imagine, there are plenty of would-be entrepreneurs in the U.S. who could also use access to loans smaller than what a traditional bank may offer, but more than what someone in the developing world needs.

That is where the misperception and opportunity exists.

 

CLICK HERE TO READ MORE FROM SMALL BUSINESS EXPERT STEVE STRAUSS

 

Microfinance has become a western option now too. Since 2008, microfinance has become an increasingly popular way to finance expansion of a small business. Microfinance loans in the U.S. certainly consist of more money than that Bengladeshi farmer might get, but are still nowhere near the larger loan minimums required by most major banks.

 

The idea is that people with bad credit or no credit can now be eligible to receive a microloan. Microlenders look beyond your FICO score and bank balance; instead, they tend to pay attention to things like your passion, your experience and the opportunity. Although microloan interest rates might be a little high, new standards of eligibility should get you very excited.

 

So, all of this begs the question: How and where do you get a microloan? Here are your options:

 

CDFIs: One of the best ways to get a microloan is through your local Community Development Financial Institution – or CDFI. CDFIs offer many services, such as financial advice, but what they specialize in is offering affordable loans for small businesses, nonprofits, and other moderate to low-income organizations. You will want to start this process by finding a CDFI near you. Make an appointment, bring your business plan, and come prepared to get funded.

 

Accion: Accion is one of the vanguards of microlending in America. They offer up to $50,000, and also offer financial education.

 

RELATED VIDEO: YouTube Panel: Small Business Financing Tips for 2017

 

The SBA: As perhaps the very best resource out there for small businesses, it is no surprise that the Small Business Administration is in the business of microfinance. The SBA does not directly offer microloans, but is a major funder of microloans for third-party lenders. Typically, the average SBA microloan sits at around $13,000, but can go as high as $50,000.

 

Grameen America: As you now know, Grameen Bank started out in Bangladesh. It came to the U.S. a few years back. Grameen America differs from the rest in that it requires training sessions for borrowers, and the maximum first-time loan is much more on the micro-side ($1,500).

 

Kiva: Kiva came to the U.S. in 2010, and is one of the major microlenders today. All loans are funded by user donations. American borrowers can be lent up to $10,000.

 

So yes, microloans are major help for small business the world over.

 

Steve Strauss Headshot New.png

About Steve Strauss

Steven D. Strauss is one of the world's leading experts on small business and is a lawyer, writer, and speaker. The senior small business columnist for USA Today, his Ask an Expert column is one of the most highly-syndicated business columns in the country. He is the best-selling author of 17 books, including his latest, The Small Business Bible, now out in a completely updated third edition. You can also listen to his weekly podcast, Small Business SuccessSteven D. Strauss.

 

Web: www.theselfemployed.com or Twitter: @SteveStrauss

You can read more articles from Steve Strauss by clicking here

 

Bank of America, N.A. engages with Steve Strauss to provide informational materials for your discussion or review purposes only. Steve Strauss is a registered trademark, used pursuant to license. The third parties within articles are used under license from Steve Strauss. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.

 

Bank of America, N.A. Member FDIC. ©2017 Bank of America Corporation

By David Burch

 

As an entrepreneur, you may rely on a variety of sources for capital – such as banks, family, personal savings or even angel investors. Regardless of the financing sources you tap or the stage of your business, securing and accessing capital is likely to play a critical role as you plan for future growth.

 

34977526_s+copy.jpgAccording to the Bank of America spring 2017 Small Business Owner Report, more than half of small business owners nationwide are planning to grow their business over the next five years. If you’re among those millions of business owners planning for long-term growth, what should you know about financing that growth?

 

Below are top strategies to help secure financing, identify resources for capital, and navigate through emotions and financial arrangements when funding is provided by loved ones.[1]

 

1. Know the “5 Cs”

To increase your chances of securing funding, planning is essential – and a key component of that preparation is having a general understanding of creditor expectations. While each business is different and has unique financial needs, there are generally “5 Cs” that creditors evaluate when making lending decisions for small businesses: Capacity, Collateral, Capital, Conditions and Character.

  • Capacity evaluates whether your business can support debt and expenses. Typically, you need enough cushion to absorb unexpected expenses or a downturn in the economy.

  • Collateral can be offered as security for repayment and forfeited in the event of a default. Examples of collateral include accounts receivable, inventory, cash, equipment, and commercial real estate. Creditors may also take into consideration existing debt that your business may still owe on collateral.

  • Capital takes a look at whether your business’ assets outweigh its liabilities, and how much capital you and other outside sources have invested.

  • Conditions such as the economy, industry trends and pending legislation may be a consideration, although these are often out of your control as an individual small business owner.

  • And finally, Character – your own character and the character of those tied closely to the success of your business – is critically important. Factors such as personal integrity, industry experience, and good standing can make a difference.

 

2. Treat every loan as a contract – regardless of the source!

/videos/1039 When you’re starting out, the financial support you might receive from family and friends can make a big difference in helping to get your business off the ground. However, this can sometimes cause stress and awkwardness for everyone involved. To minimize this, it is important to create a contract for every type of loan you receive – whether it’s a financial agreement with a family member, friend or a bank. It can be immensely helpful to clarify up front with family and friends whether you are receiving a gift versus a loan. If it’s a loan – are they expecting some interest to be paid back? Do you need to pay back the loan within six months, a year, or is there more flexibility? Does your family member or friend want something in return, such as a stake in your business? To avoid unnecessary stress and confusion, it is important to know and write out the full terms of your agreement so you can focus your efforts and energies on making your business successful instead of worrying about misunderstandings.

 

3. Take advantage of resources

There are a variety of available resources you can turn to for lending advice, guidance and support – family members, friends, your professional network, financial experts, small business advocates, online content and more. Take advantage of this vast well of knowledge. I also encourage you to meet with a small business banker. They are experts in small business lending and can provide advice about what is best for you and your business, both in the short- and long-term. Even if you are just starting out and don’t think you will qualify for a bank loan, small business bankers can give you guidance on where to turn for capital. They can also help you develop a business plan so you get where you need to be to receive a traditional bank loan.

 

There is a treasure chest of free online tools and technology that can make life easier for business owners, such as Nav and the Small Business Administration. You can also turn to Google to search for answers to your questions, but a word of caution - use Google searching as a starting point, and always double check with other reliable sources to make sure you are getting good advice.

 

Want to learn more about securing the financing you need to grow your business? Check out the Bank of America Small Business Community for tips and information on accessing capital and more.[2]

 

 


[1] The views and opinions expressed herein are solely those of Bank of America, NA (the “Bank”), and have been obtained or derived from sources believed by the Bank to be reliable. The information provided herein is solely for educational purposes, and the Bank does not recommend that the information serve as the basis of any business decision and may not be construed as such. The Bank does not make any representation or warranty, express or implied, as to the information's accuracy or completeness, and the Bank makes no promise or guaranty that any particular measure of success or results will be achieved from relying on the information provided herein

 

[2] Bank of America, N.A. (the “Bank”) provides informational reading materials for your discussion and review purposes only. Please consult your tax advisor, as neither the Bank, its affiliates, nor their employees provide legal, accounting and tax advice. Credit is subject to approval, loan amounts are subject to creditworthiness, and normal credit standards apply. Some restrictions apply.

Ebong Eka Headshot.pngDebt can be used as a tool to grow your business. More importantly, it can provide the much-needed capital to start, grow and expand your business.

 

For example, debt can be used to hire employees, invest in new equipment, purchase new software for your business or acquire bigger office space.  On the other hand, debt can be a problem for the small business owner if you fall into the trap of owing more than you can pay back.


Here are six things to do to alleviate and deal with your small business debt:

 

1. Evaluate the amount of debt you have. It's important to determine whether your debt could be discharged. Additionally, it allows you to find opportunities to renegotiate the amounts you owe. You'd be surprised how many small businesses have credit card, business debt, and various other loans, and not aware of the terms of that debt.

 

CLICK HERE TO READ MORE FROM SMALL BUSINESS EXPERT EBONG EKA

 

2. Make sure your signed loan documents are iron clad. In other words, have your debt contracts reviewed by your attorney. Unfortunately, many small businesses lack resources and can’t hire a business attorney to review their documents. You may have an opportunity to mitigate what you owe by going through the legal documents and make sure it's iron clad on your behalf. You want to make sure all the conditions you initially agreed to are being met, not only by you but also by the creditor.

 

3. Create a repayment schedule. Create a repayment schedule that lists the amount of debt, interest rate, terms and amortization schedule. You want to identify the true cash outlay for your loans and repayment requirements. Nowadays most businesses use auto pay in their bank accounts to repay the debt and may not be keeping track of their payments to their creditors.

 

69264990_s.jpg4. Negotiate settlements of your debt with creditors based on your relationships. It's always important to create and build relationships with your creditors. If you have a good relationship with your creditors, they won't want you to go out of business. It's more work for them to handle your debt in court. Having a simple conversation with your creditor can alleviate their concern of you potentially going out of business and not paying the debt back.

 

RELATED ARTICLE: THE 7 BUDGETING TIPS YOU NEED TO CONSIDER

 

5. Develop a restructuring plan to alleviate the fear of your business being a “going concern” to your creditors. “Going concern” is an accounting term to describe if a business has adequate resources to continue operating. During the audit process, auditors are required to review the company's books and financial health to determine whether the business can continue to operate. This concept is important banks, creditors and investors because it allows them to make decisions to protect their investment and interest in the company. A going concern also refers to a company's ability to make enough money to stay afloat and not have to fall into bankruptcy. You don’t want your creditors worrying about whether you’ll stay in business. Your creditors may force you into bankruptcy if they believe that you don't have the adequate resources to pay back what you owe.

 

6. Sell your existing and obsolete inventory if possible. You could also add fixed assets to this list. I'm not advocating a fire sale, however, items sitting in warehouses, machines and vehicles in your possession are all things you can sell to create additional cashflow to either settle the debt or make your creditors happier.

 

Debt can be a very useful tool to start and grow your business. Don't shy away from using corporate debt or business debt. The secret is to identify how every dollar borrowed relates to additional revenue generated. For example, if you borrow $100, how much revenue should you expect in return?

 

Many small business owners unfortunately borrow money and don’t spend it on income producing activities. Everything you do should be income producing because that will dictate whether you can stay in business and avoid debt service issues. Consult your CPA and business attorney if you think creditors may push you into bankruptcy, or if you're having problems paying off your debt that you owe potential creditors.

 

About Ebong Eka

Ebong Eka is no stranger to the world of personal finance. As a certified public accountant and former professional basketball player he offers a fresh perspective to small business planning and executing. With over fifteen years of accounting, tax & small business experience with firms like PricewaterhouseCoopers, Deloitte & Touche and CohnReznick, Ebong provides practical money solutions tailored to the everyday person, the aspiring entrepreneur or the small business owner.

 

Ebong is the founder of EKAnomics, a sales, pricing and leadership firm. He is also the founder of Ericorp Consulting, Inc., a tax and management consulting firm. Ebong is the author of “Start Me Up! The-No-Business-Plan, Business Plan.

 

Web: www.ebongeka.com or Twitter: @EbongEka.

You can read more articles from Ebong Eka by clicking here

 

Bank of America, N.A. engages with Ebong Eka to provide informational materials for your discussion or review purposes only. Ebong Eka is a registered trademark, used pursuant to license. The third parties within articles are used under license from Ebong Eka. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.

        

Bank of America, N.A. Member FDIC.  ©2017 Bank of America Corporation

Steve Strauss Headshot.pngGetting a bank to loan you money can sound daunting, but one thing I always remind my small business brothers and sisters is that banks want to lend to you. That is their business.

 

It is your job to make their job easy. So, what does a bank want to see?

 

Certainly, a top consideration is reliability, and that is determined under a set of standard conditions often colloquially referred to as the “Five Cs”. Knowing the Cs ahead of time will help you to anticipate, prepare and ultimately get that loan for your small business.

 

The 5 C’s are:

 

1. Character. Character is first for a reason. In the end, business is about relationships, and much of your ability to forge a positive relationship with a bank is based on your reputation; the character of your business and yourself.

 

CLICK HERE TO READ MORE FROM SMALL BUSINESS EXPERT STEVE STRAUSS

 

Much like a job application, a bank will look at your business and personal history, your experience, at your references, and your educational background. The quality and experience of your employees is considered. So of course, is your credit history. Your credit score is meant to serve as a reflection of your ability and willingness to both borrow and pay back lent money, which is the primary factor banks consider.

 

This is where the second C comes in.

 

2. Capacity. This C refers to a business owner’s capacity to repay the loan. The loan applicant must explain exactly, in detail, how they plan to pay back the loan. Credit history is the first and primary indicator of future payment performance. Financial statements are analyzed to determine if the loan applicant has the capacity to repay the loan. In addition to financial history, track records, past employment, and experience in business and in a particular field are also analyzed to conclude whether the applicant has the capacity to successfully handle the loan.

 

RELATED ARTICLE: GET YOUR BUSINESS FUNDED

 

51369135_s.jpg3. Capital. The third C looks at how much money the applicant has personally invested into their startup, the business’s net worth, and the amount requested in relation to that. Having personally invested more capital means that the borrower has more at stake; to lenders, this is an indication of ownership, responsibility and taking the success of the venture seriously. It also means that the business is at least somewhat established, and therefore more viable. You are unlikely to receive a business loan if you don’t have any skin in the game, or if you are seeking too much capital.

 

4. Collateral. Is the applicant in possession of assets that could protect the lender in case of default? Things like property and insurance are considered.

 

Similar to collateral is a guarantee – a document signed by an individual (usually the business owner) promising to pay back the loan if the business cannot. Not all lenders or loans require guarantees, but many do.

 

5. Conditions. Finally, general economic conditions are often at play – that is, external factors that could potentially affect the success of the applicant’s business. Economic factors are considered, both within the specific industry of the business as well as other industries that could potentially impact that business. Macro factors are also considered, such as interest rates, inflation, deflation, supply and demand, and competition.

 

While this one is out of your control, if you prepare yourself ahead of time and present the bank with concrete ways your business plans to respond to these external conditions, it bodes well in your favor.

 

On a personal note, I strongly suggest you meet with your banker well before you apply. One thing I have learned is that your business banker can help prepare you, and your business, to get to yes.

 

About Steve Strauss

Steven D. Strauss is one of the world's leading experts on small business and is a lawyer, writer, and speaker. The senior small business columnist for USA Today, his Ask an Expert column is one of the most highly-syndicated business columns in the country. He is the best-selling author of 17 books, including his latest, The Small Business Bible, now out in a completely updated third edition. You can also listen to his weekly podcast, Small Business SuccessSteven D. Strauss.

 

Web: www.theselfemployed.com or Twitter: @SteveStrauss

You can read more articles from Steve Strauss by clicking here

 

Bank of America, N.A. engages with Steve Strauss to provide informational materials for your discussion or review purposes only. Steve Strauss is a registered trademark, used pursuant to license. The third parties within articles are used under license from Steve Strauss. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.

 

Bank of America, N.A. Member FDIC.  ©2017 Bank of America Corporation

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