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6 Posts authored by: Steve Strauss
Steve Strauss

Get Your Business Funded

Posted by Steve Strauss Jan 18, 2017

I always like when I get to see the latest Bank of America Small Business Owner Report (SBOR) because not only do I learn something new, but there are typically fascinating facts in there that I don’t find anywhere else. That was especially true when I recently got to look at the latest SBOR.

 

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The Small Business Owner Report is a semi-annual survey of 1,000 small business owners that examines the views and insights of business owners. This latest Report covered all sorts of things such as business outlook, hiring trends, economic indicators, and more. One thing that really stood out was the section that took a look at funding.

 

One particular fact that really caught my eye and made me do a double take was an incredible statistic about business funding. I’ll get to what it was in a moment, but let’s first note up front that when it comes to getting a business funded, small business owners are a resourceful, creative lot, because they need to be. Getting the dream funded is one of the most challenging things that an entrepreneur faces, both in the short-run at the startup phase, in the long-term, and during the more mature growth phase.

 

Question: How do you think most small businesses get most of their capital at the startup phase? Usually, people say “friends and family” when answering that question, and certainly that is true. For instance, it is a big part of the funding section of my book, The Small Business Bible.

 

But it turns out that ‘friends and family’ is the wrong answer.

 

According to this latest Small Business Owner Report, when first getting their business of the ground, the vast majority of entrepreneurs used personal savings (76%). The next most popular sources of funding were:

 

  • Credit cards. Used by 36% of these new entrepreneurs, followed by
  • Bank loans. Used by 25%. Only then, in 4th place, do we find
  • Friends and family at 21%.

 

Interestingly, 38% of the respondents said that they had received a financial gift or loan from family and/or friends at some point in the life cycle of their business. One of the fun and different things about the SBOR is that it doesn’t just stop there. These entrepreneurs were also asked how that financial support made them feel. Their answers were enlightening:

 

  • Grateful – 66%
  • Extra motivated - 39%
  • Anxious – 30%
  • Happy and optimistic - 27%
  • Embarrassed - 23%

 

While all of these stats are very interesting, I found the lending statistic (of all things) to be the most interesting - the one that gave me the double take.

 

Click here to read more from small business expert Steve Strauss.

 

Bank lending is really important because it is where most entrepreneurs turn to for funding as their business becomes more established. After a few years, most small businesses outgrow the friends and family / credit card / personal savings level and need more money to grow bigger and handle increased capacity.

 

So let me ask you the question: What percentage of small business bank loans do you think were approved in 2016?

 

  1. 25%?
  2. 60%?
  3. More than 80%?

 

The correct answer is C.

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Yes, that’s right. According to the spring 2016 Bank of America Small Business Owner Report, approval rates for small business loan applications were an astonishing 89%, falling only slightly this fall to 84%. And get this, “While stable, these numbers are the lowest since the question was first posed in fall 2012.”

 

Roughly 85% of all small business loans were approved. Wow. That flies in the face of urban legends that state that getting a bank loan for a business is very difficult.

 

But, if you think about it, such approval rates actually make a lot of sense. By the time a business has been around for, say, five years or more, the small business owners know what they are doing. By then, they clearly have come up with a business that serves the market, makes a profit, and has a good foundation. Additionally, by that time, they also usually have established a solid relationship with a bank and/or banker. Combined, this adds up to all sorts of reasons to not only get a loan, but have that loan approved.

 

And it comes with the added bonus of not having Uncle Chuck ask about his loan at Thanksgiving dinner.

 

(You can read more of the Small Business Owner Report here.)

 

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 listen to his weekly podcast, Small Business Success, visit his new website TheSelfEmployed, and follow him on Twitter. © Steven D. Strauss.

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

A tale of two cities:

 

My pal Jeff in New York wanted to make a documentary film but didn’t have enough money to fund the project. He had heard about crowdfunding and decided to give it a shot. He made a quick video about his movie and put it up on Kickstarter. Jeff said to me, “I figure people will definitely donate the money I need if I give them an Associate Producer credit”.

 

A colleague of mine, Jonah, wanted to launch a food truck in Portland, Oregon. He also opted to crowdfund his idea with Kickstarter, but was much more methodical about it. Yes, he created a solid video, but he also cultivated a great list of people to pitch to once he launched his campaign. He also thought very strategically about the rewards people would get, and created tiers that made sense. He put three months into his campaign before he even posted it on Kickstarter, and even then, as he told me later, “I worked it. I treated it like a marketing campaign.”

Guess which entrepreneur met his funding goal? You guessed it – Jonah.

 

So yes, there is a right way and a wrong way to go about crowdfunding the dream. Here are the dos and don’ts:

 

THE DO’S:

 

Do have a concrete, focused product/solution to a problem: It should be no surprise that people will be much more likely to invest their time and money into something that they see solves a problem, especially if it is a problem that they personally have. Potential backers will stay away if your vision is too muddled or abstract.

 

As such, you need to be sure that your product or service is simple, clear, focused and logical. You are also more likely to be successful if the problem you are attempting to solve is fairly ubiquitous.

 

And for the record, physical objects, and games, have the highest rate of success on Kickstarter, whereas documentaries, shorts, and music are by far most likely to fail.

 

Do know who your product is for, and market to them before launching: Jonah intuitively had the right idea. Thoroughness and forethought are needed throughout every phase of your campaign, but especially before launching. Prior to the launch, you should be

doing plenty of marketing to your tribe and target audience via email and social media – regularly sharing ideas, prototypes, sketches, your mission, etc. Remind your audience over and over again about your great solution to this problem so that they become familiar with it.

Getting your audience excited ahead of time and wanting to be a part of your solution is what works.

 

Have other sources of income: Kickstarter pledges should not be your only source of funding. There are several reasons for this:

  • Backers will want to see that you have skin in the game
  • Also, you need capital to run a campaign – to make prototypes, videos, for marketing, and to handle unexpected road blocks or changes of plan Steve-Strauss--in-article-Medium.png

 

Your Kickstarter funds should be going toward manufacturing and distribution, while your own money should be for things like paying office rent, etc.

 

Click here to read more articles from small business expert Steve Strauss

 

THE DON’T’S:

 

Don’t set your funding goal too high: A lot of Kickstarter campaigns make the #1 mistake of setting their funding goal much too high, thinking that it reflects their drive and passion. Yes, you should be proud of that drive, but your funding goal needs to be more strategic and realistic.

 

Your Kickstarter goal should reflect your actual funding needs, and should be an amount that you feel you can reach. People feel much more confident investing in something that looks like it’s already winning, so if your page reads “200% of goal,” you are sure to attract more potential backers.

 

For reference, the median funding goal for the top one thousand most successful Kickstarter campaigns is $1,000.00, whereas most campaigns set a goal of $5,000.00 or more

 

Don’t make your campaign a second or third priority: This project should be your first priority, and you and each team member should be spending enough time ensuring its success. People are not just going to give you money because you posted a cool video on Kickstarter; that’s not how it works.

 

Perhaps the most crucial element of this is prioritizing your backers and potential backers. If you do your campaign right, your inbox will be overflowing with questions and introductions. You need to promptly respond to those queries in a personal, informative, and transparent manner. Give folks regular updates. Get your rewards out the door on time. Respond to requests for additional info.

 

The key here is to act in such a way that backers will want to take a chance on your vision. Do that, and they will help you, well, kick start the dream.

 

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 listen to his weekly podcast, Small Business Success, visit his new website TheSelfEmployed, and follow him on Twitter. © Steven D. Strauss.

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

When Warren Buffet was first starting out in business as an investor, naturally, he needed funds to invest. Like many small business people, he turned to friends and family to get his stake. Specifically, six close relatives and a college roommate helped Buffet get started.

 

Among those believing and investing in the young man was Buffet’s Aunt Katie. Over several installments during those early years, Aunt Katie eventually invested about $20,000 with her nephew. In an interview with Fox Business on the occasion of his 50th anniversary in business, Buffet was asked what Aunt Katie’s investment was worth when she passed away,

 

“Oh, probably a couple of hundred million dollars,” replied Buffet.

 

Similar to Warren Buffet, Richard Branson was also given an early assist by an older relative, in his case, his mother. Branson says that when he was 16 he wanted to start a magazineSteve-Strauss--in-article-Medium.png to give the youth in Great Britain a voice, especially given the war in Vietnam. The problem was that he had no money and neither did his family.

 

It was fortuitous that around this time his mother found a bracelet on the street. She turned it into the police as a lost item. Two months later, when it still had not been claimed, the police said it was legally hers to keep. Wanting to support her son’s dream, Branson’s mother sold the bracelet for $200 and gave it to him, which he used to start the magazine (and what would eventually become The Virgin Group).

 

Click here to read more articles from small business expert Steve Strauss

 

While the story of family and friends helping entrepreneurs is not an unfamiliar one, it still is interesting. It turns out that more often than not, small business owners turn to their extended tribe to get help with launching and growing their businesses.

 

This fact is borne out by the latest Bank of America Small Business Owner Report. The Report is a bi-annual survey commissioned by Bank of America that looks at the views and aspirations of small business owners. While this fall’s Small Business Owner Report examined, among other things, economic confidence and hiring trends, it also surveyed the extent to which small business owners rely on friends, family, and community in their businesses.

 

It turns out that they do, a lot. Consider these interesting statistics from the survey:

 

  • More than half of those surveyed (53%) rely on family to serve important roles in their business (advisers, employees, investors, partners, etc.)
  • More than one-third (38%) have received financial gifts or loans from family and/or friends to fund their business
  • Nearly two-thirds (62%) report that residents in their community actively shop at small businesses

 

Sharon Miller, Managing Director and Head of Small Business for Bank of America says,

 

“For this report we looked closely at the roles that family, friends and communities play in supporting small business owners. The vast majority of entrepreneurs depend on their family for emotional, operational and/or financial assistance, and more than one-third have at some point received financial support from family and/or friends to fund their business . . . while nearly half say the local community plays an important role in the success of their own individual enterprise.”

 

There is a view out there that entrepreneurs are iconoclastic lone wolves; that they are this unique breed of individual who can buck a trend and head off in an uncharted, unique direction that only he or she can see.

 

That is a misconception.

 

What we see from this latest Small Business Owner Report is just the opposite. Oh sure, entrepreneurs have to have a vision – whether it’s creating an investment firm or a student-run magazine or launching a dry cleaner – but the fact is, they can’t and don’t do it alone, and they don’t want to.

 

Whether it is enlisting relatives to invest in the dream or hiring their kids to clean the shop or recruiting elders to act as advisors, the fact remains that entrepreneurs weave together a rich tapestry of people in order to create businesses that serve us all.

 

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 listen to his weekly podcast, Small Business Success, visit his new website TheSelfEmployed, and follow him on Twitter. © Steven D. Strauss.

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.  ©2016 Bank of America Corporation

So let’s say you started or even want to start a business and need financing. Where do you get the capital need to start it? There are traditionally two ways to finance a business: Debt financing and equity financing (these days, there is also a third option, crowdfunding, but that is an article for a different day.)

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Debt financing is what it sounds like – you get a loan and take on debt that will need to be paid back. Equity financing is when you get an infusion of cash from an investor in exchange for a share of the business. If you have ever seen the television show Shark Tank, that is equity financing; you sell a percentage of your business for the money.

 

Click here to read more articles from small business expert Steve Strauss

 

One thing that both debt and equity financing have in common is that they make you a better businessperson. In order to get the loan, or induce that investor, you have to have a business plan that makes sense with numbers that are realistic. A good idea and a wild guess will not do. In both cases, lenders and investors want to see that you have a good understanding of your business.

 

The question then becomes, which option is better? The answer depends upon your business, situation and goals.

 

Here are the pros and cons to both debt and equity financing to help you decide which is right for your business.

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Debt Financing:

Some benefits of debt financing include:

 

  • No partners: While a bank or other lender will have a vested interest in your success, they do not become partners per se. If you like being the boss then debt financing is the way to go because you retain 100 percent ownership of your business.
  • Builds credit: Getting a loan builds your credit, and having strong credit is always good for your business.
  • Tax deductible: Interest on the debt is a business expense and tax deduction.

 

The downsides of debt financing are:

 

  • Personal guarantee: Most business loans (but certainly not all) ask you as the entrepreneur to guarantee the loan personally. This then subverts your corporate shield as your personal assets (i.e., home, car, and investments) will be at risk if the business fails.
  • You will be in debt: There is good debt and bad debt, and generally speaking, a loan to help you grow your business is good debt. However, if you can’t pay it back then it becomes bad debt.

 

For most entrepreneurs, the benefits of getting a loan usually far outweigh any negatives.

 

Equity Financing:

As mentioned, equity financing can seem like the perfect solution because you get the money and don’t have to pay it back. But of course, the analysis has to be deeper and more nuanced than that.

 

Aside from the cash infusion, another big benefit to getting an equity partner is that this will in fact be a partner – someone with a vested, financial interest in seeing you succeed. Angel investors therefore often help the entrepreneur in many other ways – with introductions, advice, feedback and so on.

 

But that same fact can also be a negative. As they say: The good news is that you will have a partner. The bad news is that you will have a partner. And investors and entrepreneurs don’t always see eye to eye, so there is always that too. Be prepared to spilt the pie (in many ways) if you seek equity investors.

 

Other factors on the positive side of the ledger include:

 

  • More flexible pay back: Investors will want to see a return on their investment, yes, but that won’t be in the same, rigid timeframe that a loan requires. And if things do unfortunately go south, your personal assets are not at risk and you won’t be on the hook for a loan repayment.
  • Intellectual capital: Angel investors are usually pretty sharp people who have been successful in business and want to stay in the game. Tapping that experience and expertise can be a real advantage.

 

Other negatives include:

 

  • Sharing profits. Just as you will have to repay a loan, so too will you need to split the profits with your equity investor.
  • Time consuming: it is usually a quicker process to get a loan than it is to find the right equity investor.

 

So, whether you decide that debt or equity is better for your business, it is good to know that you have options.

 

Have you recently financed your business using debt or equity financing? Share your story below.

 

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 listen to his weekly podcast, Small Business Success, visit his new website TheSelfEmployed, and follow him on Twitter. ©Steven D. Strauss

http://www.smallbusinessonlinecommunity.bankofamerica.com/people/Steve%20Strauss/content

You can read more articles from Steve Strauss by clicking here

 

 

Back in the late 70s, two unemployed journalists went to play a game of Scrabble one night. When they opened up the game, they realized that they were missing a couple of tiles. So they hopped in the car to go buy a new set, and then it hit them: How many Scrabble sets did they buy over the course of their lives?

 

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Right then and there, they decided what they really needed to do was invent a new board game that didn’t require so many pieces. Like many entrepreneurs, they cobbled together the funding they needed using a combination of their own savings, loans and the help of friends and family. In total, they raised a little over $70,000 and each investor got 1 percent of the company.

 

The game they created? Trivial Pursuit. Not a bad investment, right?

 

Click here to read more articles from small business expert Steve Strauss

 

 

Once the game became a big hit, the inventors went to a bank for a traditional loan to grow their business. These inventors understood that banks are a valuable resource in terms of lending small businesses money.

 

This story is still true today and can be seen in the latest iteration of the Bank of America Small Business Owner Report (SBOR), a bi-annual survey that looks at the health of small businesses in the United States. The latest findings indicate that many small businesses are having their financial needs met by the lending community.

 

Consider:

 

  • 67 percent of those surveyed said they had enough access to capital to effectively run their business
  • Almost 80 percent of those surveyed who applied for a loan within the previous two years, were approved

 

Pull Quote.pngThis then raises the question: How do owners use these loans to grow their business, and how can you do the same?

 

Before you answer, it is important to note why you might want to consider getting a bank loan. The fact is that without financial capital, the ability to grow your business is severely restricted. The only funds you will have for growth are your profits, which may be enough for some small businesses, but not for all.

 

The SBOR found that businesses planning to take out a loan intended to use their capital to do the following:

 

  • 43 percent would use funding from a loan to invest in new equipment: Equipment can be expensive, but you simply must stay on top of technological changes in your industry. Without great equipment, it becomes difficult to maintain a thriving business.

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  • 40 percent would use it to market their business: The only way to get new customers is by marketing your business, and then marketing it some more. Using a loan to get more business is smart business.

 

  • 34 percent would use it to expand operations: Expansion might mean getting a second store, or even just expanding your current location. Either way, it definitely also means you will be better able to serve more people.

 

  • 29 percent would create a new product or service: If you keep selling the same goods or services, you will keep getting the same results. But with additional capital you have more availability to create a new offering, and potentially set yourself up for growth.

 

  • 26 percent would hire more employees: The same idea applies here. Unfortunately, you can’t do all the work by yourself, and an overworked entrepreneur and staff makes for poor customer relations. By getting the capital you need to bring on additional staff members, you can make your business both more professional and capable of serving more people at the same time.

 

Overall, by obtaining the capital you need through small business loans, your business’ bottom line can be well-served.

 

How would you use capital to grow your business? Share your story below.

 

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 listen to his weekly podcast, Small Business Success, visit his new website TheSelfEmployed, and follow him on Twitter. © Steven D. Strauss

http://www.smallbusinessonlinecommunity.bankofamerica.com/people/Steve%20Strauss/content

You can read more articles from Steve Strauss by clicking here

Steve Strauss

5 Tips for Tax Season

Posted by Steve Strauss Apr 2, 2013

There are many reasons you may have gone into business for yourself— maybe you desired more freedom or creativity, or you had a dynamite idea Steve-Strauss--in-article-Medium.pngor a great opportunity. But in all probability it’s a pretty safe bet you did not become an entrepreneur because you liked handling business taxes (unless of course, you are an accountant).

 

The irony is that no matter how you feel about them, taxes are one of those things you have to master if you want to stay in business. You can possibly survive a less-than-stellar location or an occasional lapse in service, but fail to handle your taxes properly and Uncle Sam will make sure that a late shipment is the least of your concerns.

 

And with tax season and its accompanying stresses upon us, it is important to remember that the best thing you can do to prepare is, well, prepare.

 

Here are five tips that can make doing your taxes a little bit easier:

 

1. Digitize your receipts: Do you still keep all of your receipts in the proverbial shoebox, only to spend days sorting through and inputting them into your computer? Well, there are better ways!  Here are two great options for handling receipts:

 

  • Use apps: These days, the ability to have all of your receipts scanned and inputted is only as far away as your smartphone. There are many mobile apps that allow you to take pictures of your receipts and have them uploaded into a spreadsheet in the cloud. I am partial to the one offered by Concur, which was the first to pioneer this kind of technology.  The quality of their product is unmatched, in my humble opinion.

 

  • Outsource it: Shoeboxed has an app like Concur, but they also offer the option of taking care of everything for you— you can actually send them all your receipts, and they’ll scan them for you and send you the digitized files.

 

Click here to read more articles from small business expert Steve Strauss

 

2. Get your income in order: You likely have different sources of income as a small business owner— large clients, small customers, real estate investments and so on. One of the biggest mistakes you can make in your taxes is underreporting income, so you should begin to reconcile your books now. Go over invoices, ledgers, bank statements, 1099s and any W9s you filled out for the year. Make sure you know who paid you how much so you can report it accurately.

 

3. Review your benefits: Don’t forget to take benefits into account— anything you paid out over the year for you and your staff should be noted. This includes payments you made for contract labor over $600, retirement benefits paid to employees, travel expenses reimbursed, trainings you paid for, etc.


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4. Prepare for the worst: While the chance of the dreaded audit is relatively low for a small business owner (about 2.5% according to the IRS), it still would behoove you to prepare your taxes and records as if you may be audited because, unfortunately, it is a reality. The entire experience can potentially be avoided, or at least its impact mitigated, if you take the proper steps right from the start.

 

Not only does that mean having your taxes and records accurate and in order, but it also means avoiding certain behaviors that can prompt an audit in the first place, such as:

 

  • Questionably high deductions: The more liberal you are with your expenses, the more you raise a red flag.
  • Not reporting income: All income is income. Forgetting to add any of it can land you in hot water.
  • Reporting repeated losses, or very high income: Reporting a loss every year on your Schedule C, or income in excess of $1 million, can also be a trigger. However, if that is your situation, it is fine— as long as you can back it up.

 

5. Speak with a pro: To the extent you have issues and questions as you do your taxes, it is smart to get the advice of a tax professional. Because mistakes on your taxes can be very costly, this is one place where you do not want to skimp. An enrolled agent, CPA, or other tax professional is usually well worth the money, both in actual savings and peace of mind.

 

How do you prepare every year for tax season? Share your stories below.

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 listen to his weekly podcast, Small Business Success, visit his new website TheSelfEmployed, and follow him on Twitter. © Steven D. Strauss

http://www.smallbusinessonlinecommunity.bankofamerica.com/people/Steve%20Strauss/content

You can read more articles from Steve Strauss by clicking here.

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