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So you want to start a business and need funding. Here are more than a dozen ways to finance your new business, from using your own assets all the way to an initial public offering, just like …

So you want to start a business and need funding. Here are more than a dozen ways to finance your new business, from using your own assets all the way to an initial public offering, just like Facebook.

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  • For decades, entrepreneurs have followed traditional stair-step methods of financing to move their companies through successive stages of growth.
  • Rather than contributing cash, they might write code for a new iPhone app or build a workshop in their garage. Unequal financial contributions or sweat equity among the partners may change their views on the ownership shares they deserve. Draw up a written “deal memo’’ on the ownership percentage for each partner. A truly original idea conceived in an instant can be worth hours of computer programming.
  • The initial funding for a fledgling private business has often come from its founders. A budding entrepreneur might draw on a personal savings account to finance an indie film, or plunk down a credit card to pay for the machine tools needed to build a sample product or prototype. 
 Cautions: If you’re not already keeping careful books, start now. Unequal financial contributions or sweat equity among the partners may change their views on the ownership shares they deserve. Clear agreements can avoid multimillion-dollar lawsuits years later if the enterprise takes off. The huge drawback of credit cards is that they carry very high interest rates. At the time of this writing, the average interest rate for a balance transfer credit card is 13.2 percent [source: Bankrate.com]. So if you choose to use a credit card for start-up capital, make sure you have a plan to pay it back quickly. If not, that interest will add up fast.
  • When a young enterprise produces promising early results, the founders’ friends and family often chip in money to help it grow. The entrepreneurs’ parents may give them a loan, or their college friends may buy small ownership stakes. Borrowing money from friends and family to finance a new business is a terrific idea -- in theory. Banks and other lenders will demand airtight business plans and often three years of earnings, before they will lend you anything. That said, private loans can offer significant advantages over traditional loans. Interest rates -- if interest is even charged -- are generally much lower than those offered by banks. Private loans are also an important show of support (both financial and emotional) in the early stages of a new business [source: Advani].
  • Innovative businesses can now use social media sites such as Kickstarter and Indiegogo to appeal for financial support through “ crowdfunding ’‘ campaigns. Entrepreneurs attract backers by posting their imaginative plans, and often, by promising perks to those who pitch in some money. Those perks range from product samples to an invitation to join a company-sponsored activity. 
 Advantages: You might raise significant sums made up mainly of small amounts from a large group of individual lenders. Offering perks like product samples or invitation to join a company kick-off party can raise more funds. Your project may even attract press coverage and new ideas. 
 Caution: Your funding contributions might be taxable as either personal income or business profits. Look for guidance from the Internal Revenue Service.
  • This new form of crowdfunding authorized by Congress recently through the JOBS Act will allow private sales of company shares through social media sites and other intermediaries. Companies could raise as much as $1 million a year through small private investments from an unlimited number of people. Crowdfunding websites are expected to crop up after the Securities and Exchange Commission formulates the regulations they must follow. 

 They hope to do it: These fundraising platforms are expected to emerge after the SEC draws up regulations for them to follow. Indiegogo has expressed interest in supporting Equity Crowdfunding. 
 Advantages: The regulatory requirements, such as financial disclosures, would be less stringent than general SEC rules for registering securities or for making an initial public offering of shares. 

 Cautions: Your many new shareholders have rights under federal and state laws. Complying with those rights could soak up company time and money. A start up’s crowdfunding investors may also look like a cumbersome burden to some venture capital firms you’d counted on for your next round of financing.
  • The Internet has added an interesting new wrinkle to the world of new business financing. On so-called social lending Web sites, individuals can apply for loans from other individuals. The two parties set their terms and the Web site acts as the intermediary. One of the more popular social lending sites is called Prosper.com. The site is designed around the auction model popularized by eBay. As a borrower, you register at the Web site and post a loan request for a fixed amount of money at a maximum interest rate. Interested lenders then bid on your loan. When you find a lender that offers an attractive interest rate, you proceed with the loan. All loans on social lending sites are three-year unsecured loans. Unsecured simply means that the loan is made without any collateral. A credit card is another form of unsecured loan. LendingClub.com is another social lending Web site, except it uses a system based on your credit rating. When you register at LendingClub.com, the site assigns you a credit rating (A, B, C, et cetera). Different credit ratings qualify for different interest rates [source: Lindner]. Once the loan is approved, the amount is deposited directly into your bank account. Likewise, fixed monthly payments are automatically deducted from your bank account for the life of the loan.
  • Angel investors are successful businesspeople who dig into their deep pockets to finance new businesses with high growth potential. If you're low on start-up capital, an angel investor can truly seem "heaven sent," but it's important to read the fine print. First of all, money from an angel investor is not a loan. It's an equity investment . An equity investment buys the investor a share in the ownership of the company [source: FindLaw]. So if you accept money from an angel investor, you're also giving up partial control of your new business. An angel investor will ask for at least a 10 percent stake in your business, but could go as high as 50 percent for a riskier start-up [source: Entrepreneur]. For many small business owners, it's difficult to cede authority to an outside investor, so think hard before attaching strings to your money. On the bright side, since angel investors don't give loans, there are no regular payments with interest to worry about. As partial owners, however, they'll take a chunk of your profits. How do you find an angel investor? Ask people who do business with the extremely wealthy, like bankers, accountants and lawyers and look for a local venture capital club. Often times, a local college business school will have contacts. Wealthy individuals called angel investors like to make financial bets on early stage private companies that are capable of rapid growth, but that are still too small to seek millions from venture capital firms. Angels, who may belong to groups such as the Vermont Investors Forum, often take an ownership stake in exchange for their private investment of personal funds. Such sales of company shares are called “private placements.” 

 They did it: In 1998, Sun Microsystems co-founder Andy Bechtolsheim gave Larry Page and Sergey Brin a check for $100,000 to support their work to found Google Inc. 
 
Advantages: Angel investors are often experienced entrepreneurs, who can become valuable advisers to a young company. 

 Cautions: Any financing round that involves selling shares to new investors can reduce the entrepreneur’s freedom to make business decisions unilaterally. The new ownership structure may also limit valuations and options for the next round of financing. Privately held shares have traditionally been hard to sell to others, but new online businesses, such as Xpert Financial and Second Market, have arisen to serve as trading platforms.
  • In 1992, the United States Small Business Administration (SBA) launched a micro loan program to help small business secure the financing they couldn't get from traditional lenders like banks. Under the micro loan program, the SBA doesn't actually lend money directly to small businesses. Instead, it works with 170 non-profit lenders around the country called intermediaries . The intermediaries receive money from the SBA, which they use to make small loans at relatively low interest rates. A new business can secure a micro loan for as little as $100 and as high as $35,000. The SBA says the average loan size is $13,000. Interest rates vary between 8 percent and 13 percent depending on the size and duration of the loan. The maximum length of an SBA micro loan is six years [source: U.S. Small Business Administration]. To apply for a micro loan, you'll need to be within the local lending area of one of the 170 non-profit intermediaries. Most microlenders also require borrowers to complete business training and business planning seminars before receiving the loan. Some microlenders specialize in lending to businesses owned by women, minorities, the disabled or other economically marginalized groups [source: Consumer Reports].
  • Bank loans are one of the most traditional and conservative ways to finance a small business. Unfortunately, they're also some of the hardest loans to get. Small business loans are small beans for banks because they make a lot more money from big loans [source: Consumer Reports]. But with the right attitude and the right business plan, you might get lucky. A typical commercial loan from a bank feels a lot like a mortgage. There's a fixed interest rate, fixed monthly or quarterly payments and a maturity date. The specific terms of the loan vary depending on whether it's an intermediate-term loan (less than three years) or a long-term loan (up to 20 years) [source: Entrepreneur]. One reason why bank loans aren't ideal for new businesses is that the bank will often require collateral or other existing business assets that it could seize in the event of a default. New businesses typically don't have a lot of collateral. That's why bank loans are better suited for construction projects, buying new equipment or expanding an existing small business. Still, don't give up on banks. If you already have a strong working relationship with a local bank, you might be able to convince them to give you a small commercial loan. Remember to bring a solid business plan with realistic financial projections. Of course, it wouldn't hurt if the loan officer were a close family friend, too.
  • Bank loans are one of the most traditional and conservative ways to finance a small business. Unfortunately, they're also some of the hardest loans to get. Small business loans are small beans for banks because they make a lot more money from big loans [source: Consumer Reports]. But with the right attitude and the right business plan, you might get lucky. A typical commercial loan from a bank feels a lot like a mortgage. There's a fixed interest rate, fixed monthly or quarterly payments and a maturity date. The specific terms of the loan vary depending on whether it's an intermediate-term loan (less than three years) or a long-term loan (up to 20 years) [source: Entrepreneur]. One reason why bank loans aren't ideal for new businesses is that the bank will often require collateral or other existing business assets that it could seize in the event of a default. New businesses typically don't have a lot of collateral. That's why bank loans are better suited for construction projects, buying new equipment or expanding an existing small business. Still, don't give up on banks. If you already have a strong working relationship with a local bank, you might be able to convince them to give you a small commercial loan. Remember to bring a solid business plan with realistic financial projections. Of course, it wouldn't hurt if the loan officer were a close family friend, too.
  • Trade credit is the lifeblood of most established businesses. It works very simply. When you buy parts from a supplier, the supplier delivers those parts with an invoice for the amount due. Because you have an established relationship with the supplier, he doesn't ask you for cash on delivery (COD). Instead, you have a period of time to pay him back without incurring any interest or penalties. That's called trade credit. Trade credit is based on trust. As a new business, you're at a disadvantage, because you don't have an established track record of paying invoices on time. If you want to win the confidence of suppliers, you'll need to present them with the same credentials you might give a bank: a business plan, collateral, financial statements and other proof that you have your act together [source: Entrepreneur]. One of the greatest advantages of trade credit is that it's interest-free for a fixed period of time, perhaps 30 or 60 days. Even better, some businesses offer discounts if you pay the invoice within a very short period of time, maybe a week or 10 days. As a new business, it might take a lot of legwork and a little luck to secure trade credit, but it's worth it.
  • The new JOBS Act also allows companies to delay SEC registration as a publicly traded company while raising funds from private investors. Formerly, companies could not sell shares to more than 500 investors without registering and complying with SEC rules governing public companies. That shareholder threshold has now been raised to 2,000. However, the JOBS Act will reduce the regulatory requirements for up to five years for “emerging growth companies’’ that conduct IPOs. These companies can delay compliance with certain SEC rules, including some auditing requirements. But they must comply fully once they reach annual gross revenues of $1 billion, or meet other milestones . 
 Mark Pincus founded social media game maker Zynga in 2007, and its games, including FarmVille and CityVille, took off. In December 2011, Zynga announced an initial public offering of 100 million common shares at $10 apiece. 
Facebook’s IPO was the most actively traded first day IPO ever, making the founder, a Billionaire several times over.

Transcript

  • 1. More Than A Dozen Ways to Fund Your New (or growing) Business Part One of Our Small Business Management CourseSaunders Learning Group, LLC May 2012
  • 2. Welcome & IntroductionsSaunders Learning Group, LLC, Andover, KS
  • 3. Topics How To Find Start Up Funds  Angel Investors Company Funding Stages  Micro Loans Sweat Equity  Bank and SBA Loans Using your Assets  Other SBA Financing Personal Loans  Venture Capital Friends and Family  Mergers and Acquisitions Customers  Trade Credit Crowd Funding  Initial Public Offering Equity Crowd Funding Social Lending Saunders Learning Group, LLC, Andover, KS 3
  • 4. How To Find Your Start-up Funds and become a publicly traded company. Eventually, a successful start up would offer shares to investors. and/or venture capitalists . . . Then move on to banks financing . . . Next, find angel investors . . . Then raise seed money from personal contacts . . . Starting (think Apple & Facebook) with personal savings. . . Saunders Learning Group, LLC, Andover, KS
  • 5. Company Funding Stages IPO or Sale Capital to maintain Capital to expand company product to national until IPO or sale Initial capital is markets gone and now need capital for full scale Completing product manufacturing development and sales (typically in business for year or les Capital for product development, market research & building management teamConcept Saunders Learning Group, LLC, Andover, KS 5
  • 6. Start With Sweat Equity  Entrepreneurs can “fund’’ the first stage of their business by using their own unpaid labor and resources to create value.  Facebook was launched from a Harvard dorm room by Mark Zuckerberg, Dustin Moskovitz, Chris Hughes and Eduardo Saverin. Advantages: With you own resources, you can develop an idea on your own time. You control the decisions and any intellectual property you create. Precaution: If you have partners, make sure you get full credit for your contributions. Saunders Learning Group, LLC, Andover, KS
  • 7. 68 percent of start-up financing comes directlyUse Your Assets from the pocket of the business owner.* *source: Consumer Reports ** source: Smart Money Saunders Learning Group, LLC, Andover, KS
  • 8. Personal Loans, Credit CardsThe initial funding for a fledgling private business often comes from its founders. Advantages: You retain control of your project. You’re also proving to future funders that you’re willing to put your own money at risk to launch your business. Can it Work? Convenience store clerk Kevin Smith sold part of his comic book collection and charged as much as he could on his credit cards to finance his 1994 film, “Clerks’’. He raised $27,000, including contributions from friends and family. The film grossed more than $3 million. Cautions: Keep careful records of agreements and credit cards is that they carry very high interest rates. Saunders Learning Group, LLC, Andover, KS
  • 9. Friends and Family When a young enterprise produces promising early results, the founders’ friends and family often chip in money to help it grow. Borrowing money from friends and family to finance a new business is a terrific idea -- in theory. Banks and other lenders will demand airtight Advantages: Friends and family often help business plans and often three years of earnings, before they will lend you anything. because they want to support you, not for an expected profit. Private loans can offer significant advantages over traditional loans. Interest rates -- if interest is even charged -- are generally much lower than those offered by banks. Cautions: Put everything in writing and have a lawyer review it. Saunders Learning Group, LLC, Andover, KS
  • 10. CustomersNow, this one might seem illogical at first. How can customers help finance your new business if it isnteven a business yet? The trick is to use your business plan and your charm to convince people to becomeyour customer even before your business is off the ground. Lets say, for example, that you want to start a company that builds custom computers for videogame enthusiasts. You build a prototype of your computer, bring it to a videogame convention and a large computer retailer wants to buy 1,000 units. You dont have supplies to build 1,000 units and no bank is going to give you a loan to cover the costs since youre working out of your parents basement. You can have the retailer sign a letter of credit saying it will pay for the 1,000 units upon delivery With that letter of credit, you can convince suppliers to offer trade credit until the computers are delivered.Heres another customer-based technique. Lets say youre a hairdresser with a loyal clientele. If you decide to startyour own beauty salon, you might want to ask your long-time clients to become investors. Throw in free haircuts forlife, and you may have yourself a deal. Saunders Learning Group, LLC, Andover, KS 10
  • 11. Crowd Funding Innovative businesses use sites like as Kickstarter and Indiegogo to appeal for financial support through “crowdfunding’‘ campaigns. Entrepreneurs attract backers by posting their imaginative plans, and by promising perks to those who pitch in some money. Those perks range from product samples to an invitation to join a company-sponsored activity. Advantages: You might raise significant sums made up mainly of small amounts from a large group of individual lenders. Your project may even attract press coverage and new ideas.Caution: Funding contributions might be taxable as personal income or business profits. Saunders Learning Group, LLC, Andover, KS
  • 12. Equity Crowdfunding  This new form of crowdfunding authorized by the JOBS Act will allow private sales of company shares through social media sites and other intermediaries. Advantages: The regulatory requirements, such as  Companies could raise as much as $1 million a year financial disclosures, through small private investments from an unlimited would be less stringent than general SEC rules number of people. for registering securities or for making an initial public offering of shares.  Crowdfunding websites are expected to crop up after the Securities and Exchange Commission formulates the Cautions: Your many new regulations they must follow. shareholders have rights under federal and state laws. Complying with those rights could soak up company time and money.Check out: crowdsourcing.org for details and sites you can use. Saunders Learning Group, LLC, Andover, KS 12
  • 13. Social LendingOne of the more popular social lending sites LendingClub.com uses a system based on youris called Prosper.com. credit rating. Terms are based on your rating.All loans on social lending sites are three-year Once the loan is approved, the amount is deposited directlyunsecured loans. into your bank account. Monthly payments are then deducted from your bank account to pay off the loan. Saunders Learning Group, LLC, Andover, KS 13
  • 14. Wealthy individuals called angel investors like to make financialAngel Investors bets on early stage private companies that are capable of rapid growth, but that are still too small to seek millions from venture capital firms. This also called private placements. Pros & Cons of Angel Investors Check out: Xpert Financial and Second Market if you need to sell privately held shares. Saunders Learning Group, LLC, Andover, KS
  • 15. Micro Loans  Available from the Small Business Administration (SBA) a micro loan helps a small business secure the financing they couldnt get from traditional lenders like banks.  Under the micro loan program, the SBA works with 170 non-profit lenders around the country called intermediaries. The intermediaries receive money from the SBA, which they use to make small loans at relatively low interest rates.  Micro loans can be for as little as $100 and as high as $35,000. The SBA says the average loan size is $13,000. Interest rates vary depending on the size and duration of the loan. The maximum length of an SBA micro loan is six years [source: U.S. Small Business Administration].  To apply for a micro loan, youll need to be within the local lending area of one of the 170 non-profit intermediaries. Most microlenders also require borrowers to complete business training and business planning seminars before receiving the loan.  Some microlenders specialize in lending to businesses owned by women, minorities, the disabled or other economically marginalized groups. [source: Consumer Reports]. Saunders Learning Group, LLC, Andover, KS
  • 16. Bank and Small Business Administration LoansTo help entrepreneurs navigate the loan process, web-based outfits such as Multifunding.com are now offering to connectyou with lenders, guide your choice among banks and help with the loan application. Saunders Learning Group, LLC, Andover, KS
  • 17. Bank and Small Business Administration LoansExample: Highland Brewing Company in Asheville, N.C. was producing 6,500 barrels of beer a year as a craft brewery.With the help of $1.9 million in loans, he recently built a state-of-the-art production facility that can make 30,000barrels a year. Highlands products are now sold in seven southeastern U.S. states. Advantages: You may qualify for loan guarantees or lower interest rates through programs of the Small Business Administration or local economic development agencies. The bank takes no ownership share of your company. Cautions: To get a loan on favorable terms, you need a solid business plan, extensive documentation of your creditworthiness. A bank will often require collateral or other existing business assets that it could seize in the event of a default. Saunders Learning Group, LLC, Andover, KS
  • 18. Other SBA Financing The U.S. Small Business Administration (SBA) offers a loan guarantee program for new businesses. These so-called 7(a) loans are named after section 7(a) of the Small Business Act. With a 7(a) loan, the SBA promises to pay back a portion of the loan if the small business borrower defaults. Theyre designed for borrowers who wouldnt otherwise qualify for a standard commercial loan because of bad credit or little collateral. The SBA guarantees a portion of the loan. In exchange for this guarantee, the lender must adhere to rules about interest rates and other loan terms. Small Business Investment Centers (SBIC) are another SBA program to help finance small businesses. SBICs are privately held investment companies that adhere to SBA guidelines in exchange for SBA loan guarantees. There are more than 400 SBICs in the United States, some specializing in start-ups and others focusing on certain industries or geographic areas [source: SBA]. SBICs can offer financing either through loans or as equity investments Saunders Learning Group, LLC, Andover, KS
  • 19. Venture Capital Venture capital firms devote several million dollars to the growth of a young company that hasestablished its potential to market valuable new technology, goods or services. Venture firms investpools of money, raised from wealthy individuals, in enterprises with potentially high rates of return.Advantages: Venture firms bring managementexpertise and guidance in realizing the fullfinancial payoff for investments in fast-growingcompanies. Example: Robert Swanson, a then-29-year-old partner at the venture capital firm Kleiner & Perkins, recognized the commercial potential of a cutting edge technique in academic research: recombinant DNA technology or “gene splicing.’‘ In 1976, he joined with UC San Francisco biochemist Herbert Boyer to found Genentech, which used gene splicing to produce drugs including human insulin and human growth hormone. The VC firm contributed early funding Caution: In exchange for risking their capital, venture to Genentech. firms seek a substantial ownership stake, and often, seats on the funded company’s board of directors Saunders Learning Group, LLC, Andover, KS
  • 20. Mergers and AcquisitionsAn entrepreneur’s small private company may reach its next stage of growth by becoming partof a large corporation that offers to buy it out.Big companies often acquire creative enterprises whose new product or service dovetails withtheir own business activities.Examples:Google’s You Tube acquired Next New Networks, an independent producer of online videoprogramming. Instagram was purchased recently by Facebook for nearly $1 billion. Advantages:You, your partners and your investors get a cash payout for betting on a winning idea andbringing it to life. After this “exit’‘ from your investment, you can use your financial gains tostart another company, or to rest from your labors. Caution:You may forfeit even greater financial rewards that might have been reaped from retainingcontrol of your company and offering ownership shares to the investing public in an IPO. And ifthe acquiring corporation doesn’t ask you to stay on, other people will explore the fullpotential of the business you nurtured. Saunders Learning Group, LLC, Andover, KS 20
  • 21. Trade CreditTrade credit is the lifeblood of an establishedbusinesses.It works very simply:  When you buy parts from a supplier, the supplier delivers those parts with an invoice for the amount due.  Because you have an established relationship with the supplier, he doesnt ask you for cash on delivery (COD). Trade credit is based on trust.You have a period of time (30-60 days) to pay An advantages is that its interest-freewithout incurring interest or penalties. Thats for a fixed period of time, perhaps 30 orcalled trade credit. 60 days.  Trade credit is based on trust. As a new business, Even better, some businesses offer youre at a disadvantage, because you dont have an discounts if you pay the invoice within a established track record of paying invoices on time. very short period of time, maybe a  One of the greatest advantages of trade credit is week or 10 days. that its interest-free for a fixed period of time. As a new business, it might take a lot  As a new business, youre at a disadvantage, because you dont have an established track record of legwork and a little luck to secure of paying invoices on time. trade credit, but its worth it. Saunders Learning Group, LLC, Andover, KS 21
  • 22. Initial Public Offering  A privately owned company can raise a substantial amount of fresh capital for further growth by offering shares to the general public in an initial public offering.  The private enterprise becomes a publicly traded company whose shares can be bought and sold on  the New York Stock Exchange  the Nasdaq  or other trading platforms.  After the IPO, the pre-existing ownership stakes of the company founders and early investors have a specific value determined by the stock’s daily trading price. Advantages CautionsYour company can fund new growth opportunities. The value of company shares may fall well below their initial offering price, depending on the ongoingYou and other shareholders may benefit if share prices rise performance of the business and economic conditions.with profits. Registration as a publicly traded company brings newFounders and early investors, such as venture firms, have requirements for frequent public disclosures ofopportunities to cash out, or “exit’’ from the investment by financial reports, and compliance with other SEC rules.selling their shares on a stock exchange. Saunders Learning Group, LLC, Andover, KS 22
  • 23. QuestionsSaunders Learning Group, LLC, Andover, KS
  • 24. Post Workshop Action Plan  Complete the Post Workshop Action Plan Saunders Learning Group, LLC, Andover, KS24
  • 25. Training from Saunders Learning Group Saunders Learning Group provides a variety of training programs, workshops and seminars targeted to the financial services industry. Programs are available in a wide range of topics, and we are specialists in developing custom programs that are targeted to your needs. Contact the founder, Floyd Saunders at 316-680-6482 or at floyd@floydsaunders.com for more information. Saunders Learning Group, LLC, Andover, KS25
  • 26. Reference Material Figuring Out Wall Street Consumer’s Guide To Financial Markets By Floyd Saunders Publisher: Saunders Learning Group ISBN: 978-0-9824019-0-3 available from Amazon, B&N, and http://www.figuringout wallstreet.com or www.floydsaunders.com Book summary: From bank failures to home foreclosures and panic around the world, Figuring Out Wall Street, is the concise guide to help everyone understand how this latest crisis happened, who was responsible and what to do now to restore our financial systems. Written in an easy to understand manner, even the most complex financial concepts are easy to digest. This book provides help to monitor investments with a review of investment products, financial regulators and economic indicators. Learn how the stock market exchanges work and the world of investment banking, hedge funds, venture capital and private equity. Every chapter includes action plans for investing.Saunders Learning Group, LLC, Andover, KS