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    0 Replies Latest reply on Aug 4, 2008 11:26 AM by tscheer

    Finding Your Funding

    tscheer Wayfarer
      The thing about clichés is that they are often true. This is certainly
      the case with the old chestnut, "You have to spend money to make
      money." It is one of the hard truths of the world that no matter how
      wonderful your business concept is, no matter how solid your business
      plan may be, no matter how good you are at the work you want to do;
      without funding for your new business, you will not get anywhere. The
      issue is not simply getting money. The issue is finding the right
      amount of money from the right sources at the right time. Failure to do
      this is actually one of the reasons half of all new small businesses
      fail within the first four years.

      To find start-up funding for
      your company, you must consider both the details and the big picture.
      You need to determine how urgently you need capital, or start-up
      funding. How much do you need to launch and run your business and how
      soon do you need it? You must also decide how much of your own
      resources you're willing to invest as well as how much financing you
      plan to pursue. You have to know if potential lenders and investors can
      realistically be compensated for the amount of risk they would assume
      by putting money into your business. Is your business steady or
      seasonal? Will potential investors be confident in your management
      team's ability to run the business? You also need to determine the
      developmental stage your business has reached and the funding sources
      and amounts that are most appropriate for that stage.

      Determining Costs, Needs and Resources
      to the Small Business Administration (SBA), start-up costs include all
      the expenses you'll incur while getting your business' doors open. They
      include both one-time and recurring expenses. A one-time expense could
      be for equipment or signage, while recurring expenses include things
      like rent and utilities. Specific start-up costs depend on the type of
      business you're opening, but there are some common categories-some
      necessary and others optional-that cross most business types. They
      Space to run your business (office, storefront, manufacturing, warehousing)
      Office equipment and supplies
      Utilities (electricity, heat, water)
      Communications (phone, Internet, mobile)
      Marketing and advertising
      Payroll (all the individuals it will take to run your business)
      Business licenses
      Raw materials/packaging materials
      Legal, accounting and insurance services

      Cash Flow Needs
      is the liquid funds available for obligations such as payroll and
      supplier bills. Cash flow is the movement of cash in and out of your
      business and it is something you need to plan for. In basic terms:
      Being cash flow negative, means that you lack the cash required to pay
      your bills, while being cash flow positive means you have money left
      over after paying your expenses. As the owner, it is your job to make
      sure that your business' cash flow remains positive. Cash flow is
      usually divided into three components:
      Operating cash flow, or working capital, is the money generated and spent from within your business.
      cash flow is money received from external sources, such as bank loans
      or outside investments, as well as the money you pay out to those
      Investing cash flow is money from non-operating activities
      such as funds in an interest-earning money market account. The interest
      earned would be part of your investing cash flow. Money spent for a
      one-time purchase of a large fixed asset might also be considered
      investing cash flow.

      Investing in Your Own Business
      one thing all potential investors and lenders want to see is your own
      financial investment in your business. It shows your willingness to
      take the same risks that you are asking of them. To determine how much
      you will personally invest, you have to consider two competing issues:
      First, the more you invest, the easier it is to get financing; and
      second, the more you invest, the more personal risk you assume.
      Investors and lenders like to see you investing your own funds, and it
      is common for them to require that you personally supply at least 25
      percent of the funds required to start your business. On the other
      hand, when it's your money getting invested, you could stand to lose a
      lot of it. Remember, you are the only person who can decide how much of
      your own money you're comfortable investing.

      The Right Kind of Financing for You: Debt vs. Equity
      is one thing to determine how much you need and quite another to figure
      out what kind of financing you want to use to get it. Essentially,
      there are two basic types of financing: debt and equity financing.
      According to the SBA:
      +Debt capital is represented by funds
      borrowed by a business that must be repaid over a period of time,
      usually with interest. Debt financing can be either short-term, with
      full repayment due in less than one year, or long-term, with repayment
      due over a period greater than one year. The lender does not gain an
      ownership interest in the business and debt obligations are typically
      limited to repaying the loan with interest. Loans are often secured by
      some or all of the assets of the company.+
      +Equity capital is
      represented by funds that are raised by a business, in exchange for a
      share of ownership in the company. Equity financing allows a business
      to obtain funds without incurring debt, or without having to repay a
      specific amount of money at a particular time. (
      problematic situation-having to sell a piece of your business-may be a
      real benefit for you. By sharing ownership and the risk of your
      venture, your investors have a vested interest in your success. In
      addition, these people are usually business veterans with a great deal
      of practical experience and insight. Because of this, they are often a
      great source of input, advice, and assistance in launching and
      operating your business. Giving up some control and a percent of future
      profits is usually a cheap price to pay for the kind of help these
      industry pros can offer. (For more on the differences between debt and
      equity financing, see "Funding Your Small Business: Debt vs. Equity" on
      page 51.)

      Determining Which Way to Go
      To determine
      whether you want to go the debt or equity route, there are some
      questions you will need to ask yourself about your business, your
      situation today, and how you see your business tomorrow:
      Can the business be self-financed?
      Will the business generate enough cash flow to cover the repayment of your debts?
      Can you provide the guarantees required to secure debt funding in the first place?
      Are you interested in spreading the risks and rewards of your business?
      Is your company already in a lot of debt?

      Making it Happen
      the end of the day, getting the money you need to start and grow your
      business comes down to three basic things: the right amount of money,
      the right sources of money and acting at the right time. Make sure that
      you have a solid business plan (see page 40 of this issue to learn how
      to write one) and don't be afraid to get the help and advice of a good
      broker or business attorney. They can be helpful in finding contacts
      and preparing you to meet with them, but their advice is vital before
      entering into any agreements. Finally, understand that this process
      will take time. Depending on the sources you are trying to tap, it
      could take months. Be patient and check out the great information and
      programs available at the Small Business Administration,