Archive for the ‘Business Financing’ Category
-
Bootstrap Financing – A Great Way to Become Successful
What is bootstrap financing? Bootstrap financing is a method of making a business out of meager or nothing at all or in other words, with negligible outside capital. Sounds interesting but why should anyone use this?
It has been known that businessmen who make use of bootstrap financing become more successful in their venture. While an entrepreneur is running his business, he may receive different offers from retailers and other service providers who will try to persuade him into having their products as such can improve his business’ profits. A businessman must be careful since if these offers do not provide guarantees, then most probably they are exaggerating or lying. A businessman can improve his sales and profits by maintaining a good eye on his finances.
What are the advantages of bootstrap financing?
It is the cheapest way of raising a capital for a business. Besides that, bootstrap financing sounds good to money lenders when you need to raise some money through lending. This makes your money more valuable since not much money was involved and there is a little need to worry for there is no need to pay for interest simply because the money is produced from your own business and your resources.
What are the basic ideas of bootstrap financing?You must set a goal. How do you want to see your business company after five, ten, or fifteen years from now? Then start with small things and be sure to think before buying. Learn also how to barter. What is most essential is to manage your finances well by buying only the things that are most needed for the business to assist you in reaching your goal. Even if you have just inherited a huge amount of money, you have to bootstrap so long as you can.
What are the types of bootstrap financing?
The following are the different types of bootstrap financing:
1. Leasing is done by getting cash by leasing apparatus rather than purchasing promptly.
2. Real Estate properties can be used by leasing or borrowing money from its equity to obtain capital for a business.
3. Trade Credit. Another form of bootstrap financing wherein you could find a supplier to expand trade credit and let you order goods on a term. In case you were able to sell goods before the term is due, then it means that you have just produced cash flow without using any cash from your business’ pocket.
4. Customers. A business can use a letter of credit from a customer to buy materials.
5. Factoring is using your company’s accounts receivable to make cash flow by selling it to some “factor” in return for cash.
What can you do to save money?
When you need to buy non-commodities, you must consider quality first rather than price. On the other hand, when you need to buy commodities, you can do some things to save like trading your service for other forms of service and products. Get yourself a budget notebook to keep you posted with your finances.
Business Financing FAQ:
Question: How can a firm employ bootstrap financing to stretch its current capital supply?
Answer: The only way I know to increase capital, without a pay raise, is to reduce spending. That is if your income is not going up any time soon. Then you must save. Save. Save. Save. And some things just take time. My husband is a good mechanic, so to supplement our income, to raise capital, he will buy a car needing some work, (people sell them cheaply when they’re broke) fix it, then resell it, and usually for a good profit. Maybe there’s something you are good at that you can do on the side too.
Question: Where can I get financing for my business?
I run a home improvement company out of northeastern PA. It is becoming increasingly harder to make a profit due to the tightening up of GE Money Bank. I cannot get my clients approved for enough money. Does anyone know any other banks offering unsecured/NIV loans?Answer: Maybe your local credit union? Why don’t you offer a discount for cash purchases, and maybe that will bring in cash customers. Advertise your discount.
Question: Suppose a business is considering the purchase of a 3-year license for publishing software. The license costs?
What is the IRR of the investment in this machine? Suppose the business is going to finance the printer with a loan. The interest rate on this loan is 7% annually. Is this a good idea?Answer: First, you usually have to decide between a perpetual or term license. Perpetual licenses have a lot higher upfront costs, but are lower cost over the long-term, usually. Your IRR would not be determined by your costs alone. You would need to determine the benefit (most likely revenue) that is derived from this license. The IRR would be the % return you get from the benefit minus the cost, taking into account the time value of money.
If a business needs to finance the cost of a printer then it probably has some serious cash flow issues.
Question: I want to start my own business, but I have personal bad credit. Any suggestions?
I am 21 year old male looking to start my own business. I have horrible personal credit, but I know I can apply for an LLC and apply for credit and loans through the entities FEIN number, but establishing that new credit could take up to 1-2 years or I even heard just 6 months. I’m really in a bind to get the financing and I honestly don’t have that much time to waste. Is their a faster way to obtain capital?Answer: My personal advice here is to work on learning the skills necessary to run a successful business such as budgeting tips, cash flow management, sales, service, etc. while you’re waiting for your credit to get better
Robert T. Kyiosaki worked as a successful salesperson with xerox before becoming a successful businessman. This will also give you the opportunity to save up some of the capital you need to get started.
The next 6 months to 2 years will fly by while you wait.
Question: Purchasing a truck for a business. How much of the expense can I write off on Taxes?
I would like to purchase a truck for my small business at home. I wanted to know from the insurance, car payment, gas, etc, how much of this can I write off on taxes the following year? And when financing the vehicle initially, am I suppose to add my tax id to the application in order to claim any of the expensesAnswer: Tax write offs vary from country to country. If you are in the US, it depends on how you want to write off expenses. You can simply claim business mileage and operating expenses for the vehicle which is the simplest thing to do. If your business will acquire and own the vehicle, you can also claim depreciation on it, I would think 5-year accelerated would be appropriate.
Question: What is the difference between QuickBooks & Quicken? I need to keep track of finances for a small business.
Answer: Quicken is basically a checkbook ledger replacement. Quickbooks is a full blown accounting package.
Question: Is venture capital usually a good financing source for a small e-business?
Your e-commerce site was successful in its first year of operation; however, you would like additional financing for expansion. You are intrigued by venture capital. Is it usually a good financing source for a small e-business?Answer: Not really. Most venture capitalist are generally looking for companies with market potential in the hundreds of millions. They are looking for BIG business opportunities that create new markets and/or use new business models/products/technologies to substantially expand existing large markets. They were in ebusiness when they were new but now most ecommerce opportunities will be trying to crack into very competitive areas with players like Amazon already dominant.
Question: If I review restaurants for a website (and make money), can I deduct the cost of the meals on my taxes?
I am planning on starting a website that assists people visiting Philadelphia in finding quality cheesesteaks. I plan to offer info on location, price, quality, hours of operation, “how to order,” etc… I often get lots of questions when I travel about steaks and where to go when in Philly. Well, I’d like to formalize my recommendations and offer a website with all the info in one place. I hope to generate income with ads and (some) merchandise, but I’m wondering to what extent I can deduct the price of meals (that I obviously must eat in order to review the steaks). I am a freelance artist and currently handle my small business finances, but I’m currently drawing a business plan for my cheesesteak-internet-hub and I’m trying to project some costs/benefits.Answer: I’m not a CPA, but I’ve been self employed for seven years, and one of the lines on the Schedule C is for deductions of meals and travel, mileage and entertainment, etc. If I were you, I would just keep my receipts, and put down the numbers spent on the form, and you have your proof when you need it with your envelope of neatly stacked receipts, the stubs from restaurants, and don’t forget to keep a record in a mileage book. Good deduction! There is a book called Schedule C from A to Z, written by Bob Hughes, CPA.
-
Business Expansion Financing – Your Ultimate Guide
If you’re a small-scale entrepreneur who has set up your business and got it off the ground, you have more than your lucky stars to thank. Thank your creditors, and yourself, of course, because all your hard work has paid off.
Now you are ready to go to the next level – opening a new branch in some other strategic location. After careful assessment, the circumstances point to an important need – fresh capital. For a typical small business expansion, financing may be sourced through family members and friends willing & able to lend some funds to let your business soar.
The good thing about this is the funds (in most cases) can be handed to you immediately and you can return the loan to kin or friends without interest. Or it may be through cash advances from your credit cards. You may also take out unsecured loans from a bank. A multi-purpose loan granted by a bank is generally structured to allow easy repayment terms. Try not to be late in settling the monthly loan amortizations so as not to accumulate late penalty charges and interests.
There are also other small business loan lenders who may grant you your business expansion financing after examining your credit history and business plan. Business expansion financing by a lending institution or government agency may be easy to get, especially if they can see how your initial foray in the business arena has succeeded.
During these tough economic times characterized by tough credit, it is good to note the symbiotic relationship between certain banks (which encourage borrowers to utilize their funds as efficiently as possible and to take into consideration long-range needs) and small entrepreneurs.
It may be worthwhile to take out new business loans to pay off numerous debts, cover business essentials like an accounting software package to help manage & record expenditures & other financial records, and invest on a vehicle as well as equipment that will be used for business may be worthwhile.
The main thing to keep in mind is not to overspend, and end up feeling the pinch soon enough. The fact is, many small firms fell by the wayside after only two years of operations because of an overambitious expansion strategy. The stumbling block: accumulated debt and cash flow problems. Retire costly sources of debt (such as bank loans upon maturity) and be open to other good business financing options.
The alternative business expansion financing is to exchange a certain amount of capital for a piece or share of the business.
Fast forward several years and additional branches later. If your well-known flourishing chain of branches requires new funding facility to support yet another expansion program and/or buyout decision, you can opt to go public and issue stock. Time this well.
See if market conditions are ideal at the time of an offering and be sure that your company can measure up to the expectations and close scrutiny of analysts and investors. Experts advise not abandoning core competencies as diversification/expansion plans are actualized.
Business Financing FAQ:
Question: Financing the expansion of a insurance agency. I own the equipment and book of business valued at 1.3 million?
I need to borrow 150,000 for a 10 yr period.Answer: If a local bank won’t finance this for you, then either your valuation of the agency isn’t accurate, or your credit is too rotten.
You could sell half interest in the company to another agent who wants to get into agency ownership to raise the funds.
Question: Is there anyway that I can get Business Financing to Start my Business?
I am 14 years old and looking to open my paintballing Business in northern Idaho next year. I have my business plan and Budget setup but the amount of money I need is a bit more than I have (I need about $22,000). Is there anyway I can get Financing or anything? I have decided to have it as a LLC.Answer: Wow, what a smart and industrious kid! You should be proud of yourself. I think you have a problem though. You will need to have an adult make all the contracts, as minors cannot sign binding contracts. This goes for loans/financing as well as everything else. So your first step is to find an adult who will act as your agent in this and other business matters.
Question: Where is the best place to get small business financing?
I just started a landscaping business about a year ago. I ran into very hard times in the fall and got behind on my payments which really screwed up my credit. Now I am full with jobs for almost this whole summer but I need a loan to combined all my loans into one to make it easier to make the payments but I can’t get a loan with my bad credit.Answer: SBA – The SBA provides short- and long-term loans to eligible, credit-worthy start-ups and existing small businesses that cannot obtain financing on reasonable terms through normal lending channels.
Note, however, that SBA does not provide direct loans. Rather, the agency provides guarantees to loans availed through SBA’s partner lending institutions, which includes many community banks. The applicant must satisfy the lender’s requirements before he or she can ask for a guaranty from the SBA, unless the borrower is deemed prequalified based on the person’s character, credit, reliability and experience (prequalification is for loans $250,000 or less).
Question: I have bad credit and need financing for my business to expand? Does anyone have any ideas on how to do this?
I have a small residential and commercial cleaning business that I am looking to expand. I have been shopping around for financing through traditional lenders, but due to my 518 FICO score and millions of charge-offs, I can’t get financing.Answer: I think Prosper.com may be your last best chance. Maybe you need to change your writeup. Potential lenders want to know about your past but, most of all, they want to hear your honest description of why and how you think you’ll be successful this time. Potential lenders like to invest in people, not in businesses.
Just be careful that any solution you decide on is not taken in desperation and quick judgment. The results could make your situation worse than it already is.
I’m sure you realize it now, but others should learn from your experience that poor financial responsibility has very serious long-term effects that are extremely difficult to overcome.
Question: What is the best way of financing for a new business when you have no credit and cannot borrow from bank?
I am just curious as I am trying to find ways of getting my business start it, but so far I am having problems with the financing.Answer: You need to save the money or borrow from family or take partners. Financing is the hardest part of most businesses. Unless you have a very simple service business you will have cost. The simple service business is what they call low barrier to entry like cleaning houses, mowing lawns, babysitting, many people can do the labor and the equipment is cheap so most have almost everything they need.
Question: Starting a small business. How do I get financing? Does anyone know of a good resource for good information?
I’m looking into starting a small business but apparently banks don’t loan to startups and there aren’t gov’t grants available for startups either. How do i go about getting the financing together? Are there any good resources? I am writing the business plan now.Answer: Banks Do lend money to start ups, but it is harder now than normal and you are likely to have to shop banks to get a loan and get decent terms. Try to find on with a designated Small Business Banker. They will likely be able to help you better and have more experience than most branch managers. If you can not get bank financing there are a couple of options: Find outside investors, Home equity loan, Find a partner, start small and work your way up.
Question: Does anyone know how to get 100% financing to start a business?
I would like to open a franchise but I have no money down and not really any assets. I am looking for someone who finances 100% to startup a business.Answer: Doesn’t exist. What you can do is approach an existing owner that may be getting tired of running the store, growing old, moving, etc… and see if they will let you take over on a lease with option of the existing business. However, 100% financing to start your own business, be it franchise/whatever, just doesn’t exist
Question: Can One really do business without serious financing?
Answer: Depends on what you mean by “serious.” Many small businesses have grown without incurring debt.
-
Small Business Finance – Finding the Right Mix of Debt and Equity
Financing a small business can be most time consuming activity for a business owner. It can be the most important part of growing a business, but one must be careful not to allow it to consume the business. Finance is the relationship between cash, risk and value. Manage each well and you will have healthy finance mix for your business.
Develop a business plan and loan package that has a well developed strategic plan, which in turn relates to realistic and believable financials. Before you can finance a business, a project, an expansion or an acquisition, you must develop precisely what your finance needs are.
Finance your business from a position of strength. As a business owner you show your confidence in the business by investing up to ten percent of your finance needs from your own coffers. The remaining twenty to thirty percent of your cash needs can come from private investors or venture capital. Remember, sweat equity is expected, but it is not a replacement for cash.
Depending on the valuation of your business and the risk involved, the private equity component will want on average a thirty to forty percent equity stake in your company for three to five years. Giving up this equity position in your company, yet maintaining clear majority ownership, will give you leverage in the remaining sixty percent of your finance needs.
The remaining finance can come in the form of long term debt, short term working capital, equipment finance and inventory finance. By having a strong cash position in your company, a variety of lenders will be available to you. It is advisable to hire an experienced commercial loan broker to do the finance “shopping” for you and present you with a variety of options. It is important at this juncture that you obtain finance that fits your business needs and structures, instead of trying to force your structure into a financial instrument not ideally suited for your operations.
Having a strong cash position in your company, the additional debt financing will not put an undue strain on your cash flow. Sixty percent debt is a healthy. Debt finance can come in the form of unsecured finance, such as short-term debt, line of credit financing and long term debt. Unsecured debt is typically called cash flow finance and requires credit worthiness. Debt finance can also come in the form of secured or asset based finance, which can include accounts receivable, inventory, equipment, real estate, personal assets, letter of credit, and government guaranteed finance. A customized mix of unsecured and secured debt, designed specifically around your company’s financial needs, is the advantage of having a strong cash position.
The cash flow statement is an important financial in tracking the effects of certain types of finance. It is critical to have a firm handle on your monthly cash flow, along with the control and planning structure of a financial budget, to successfully plan and monitor your company’s finance.
Your finance plan is a result and part of your strategic planning process. You need to be careful in matching your cash needs with your cash goals. Using short term capital for long term growth and vice versa is a no-no. Violating the matching rule can bring about high risk levels in the interest rate, re-finance possibilities and operational independence. Some deviation from this age old rule is permissible. For instance, if you have a long term need for working capital, then a permanent capital need may be warranted. Another good finance strategy is having contingency capital on hand for freeing up your working capital needs and providing maximum flexibility. For example, you can use a line of credit to get into an opportunity that quickly arises and then arrange for cheaper, better suited, long term finance subsequently, planning all of this upfront with a lender.
Unfortunately finance is not typically addressed until a company is in crisis. Plan ahead with an effective business plan and loan package. Equity finance does not stress cash flow as debt can and gives lenders confidence to do business with your company. Good financial structuring reduces the costs of capital and the finance risks. Consider using a business consultant, finance professional or loan broker to help you with your finance plan.
Frank Goley works for ABC Business Consulting as a business success consultant. He has extensive experience in business finance and has over twenty years experience as an expert business planner.
Small Business Finance FAQ:
Question: How do I get money to finance my small business with bad credit?
My credit is bad from my younger years and I have been working like hell to repair it. No matter how many bills I pay off of my credit report rating stays low. How do I get a small business loan or financing in this situation?Answer: Get a partner. You will have to repair you credit first and to do that you should buy a book or two on it. There are lots of good ideas out there on how to do it.
Question: What are creative ways to finance a small business?
Other than venture capitalists and banks, (and cash of course), what are some creative ways to finance a small business?Answer: Become public and get people to invest.
Question: Can you use a credit card to finance your small business?
Answer: In theory yes you can, however it might not be the most cost effective way to do it. To one degree or another, almost ALL businesses do it.
Question: Is there any free online accounting program for small businesses (not personal finance)?
I have a small home-based business and do not have money to spend on expensive software or monthly subscriptions. I would prefer to use something online that doesn’t require me to download anything so I can access it from any computer and my phone. Are there any truly free programs like this?Answer: Probably not. If it is a small home-based business, then just use microsoft excel or word. I’ve used excel and word for my accounting homework and it wasn’t really hard to use. And if you can’t afford excel, then go to open office and download their free version of excel. If you want something online try using Google Docs. This way you can access your information from any computer that has internet access.
Question: How do I get a small business loan if I don’t have good credit?
I would like to open a small tax prep company and a finance company. So how do I get a loan if I don’t have good credit?Answer: For small business you have to personally secure any loans, so they are made on your personal credit rating. If your credit is bad, then you will not be able to get a small business loan. Work on improving your credit position so lenders will see you can be responsible with financial obligations.
Question: What software should I get for my small business?
I plan on purchasing Quickbooks for my accounting purposes, since I’ve learned that this is the #1 accounting software for small businesses in the USA. But what other software would you recommend? I see a number of businesses use Quicken, but is it necessary? Does it help with organizing finances? If I had Quickbooks, would Quicken just be an added benefit?Answer: Quicken is a personal accounting system by microsoft. It is for individuals budgeting & managing their own financials. It is not a “business” tool.
Quickbooks is a professional business tool and can be used for small to medium sized business. Most of it will be overkill but for the $300 it costs every 3-5 years, I say it is worth it. There are other similar packages available like PeachTree. They are all more or less the same. Quickbooks is good because as you say, it the most popular, and it’s easier to find people who know it to help you.
Question: How much it costs to start a brick manufacturing business?
I am considering my options to start a small scale business in Tripura, NE India. Can you please provide me with the details/refer me to a place to find out all the details about brick manufacturing, starting with the kind of finance I need?Answer: It is very expensive because you will need the machines. Probably 7 to 10 lakhs on a small scale to start with.
Question: What are the chances of opening a subway store?
I just purchased a house at 100% ltv (all finance), so the property does not have equity. However I want to get a small business loan (200k loan) putting the property as collateral = money for opening the store. My income is around $1,400 a month, 23 yr old guy. So do you think the bank will loan the money?Answer: NO. Not a chance.
1. You can’t put something as collateral when you don’t have any equity in it. And even if you owned it outright, doesn’t sound like it’s worth $200K.
2. How do you plan to pay back a $200K loan?
3. $200K would not likely be enough anyway to open a Subway store.
-
The Oldest Business Funding Question – Debt Versus Equity
There is a constant debate over the use of the two main types of small business loans and which is more useful. In truth they both have their place, and rather than argue over the attributes of each, businesses are wise to use a combination of both at opportune times during their growth.
Small, or new business owners may not fully understand what the differences are, and some, new to the business financing realm may not even know what equity financing is. The term equity is bandied about in personal loans regarding the value of assets versus outstanding loan amounts placed on it, and equity is acquired much the same way in businesses. However, equity lending is not done on a personal level so understanding how the equity can be used to fund a business is something all newcomers should understand.
The Two Sides of a Coin
Debt Loans:
Debt lending is the side of business financing almost everyone is familiar with. It is a straightforward loan that works much the same for businesses as it does for personal loans. It is a set amount of money “mortgaged” on the business or is other variable assets set to play out over a period of time and charged an interest structure for repayment.
Debt lending has many qualities that make it an attractive form of business financing the first of which is the all important build up of credit for good performance in repayment. The downside of debt financing is that it requires repayment that can take away from a business’ profits, usually requires collateral in the form of business assets, or personal assets to secure the loan, and perhaps the most difficult aspect of debt financing of all: debt lenders are notoriously conservative. It is up to the business owner to prove the value of their company, their ability to repay a loan, and the financial prospects of their company.
Another positive value of a debt loan vs. an equity loan is that the interest paid on a debt loan is tax deductible. Perhaps an even bigger incentive to choose a debt loan is that debt loans offer lenders no control over the way the business is run.
Equity Loans:
Equity loans are far less understood by many business owners. These types of loans can be made by private investors as well as banks, and do not involve payment structures or interest because, hang on to your seats-you don’t have to pay them back! Whoa, before you go dancing off to your local finance institution to plunk down a request for equity financing here’s the catch: Equity financing is an exchange of financing in exchange for a piece of your company. You are selling off part of the value of your company.
This is basically like taking on a partner, although some financing is offered without actual control, you will be paying an equal amount of the profits of your future business profits to your new “partner.”
Whether equity financing comes with an active or silent partner many business owners are reluctant to sell off part of their future profits. Another downside is that since there are no “payments” as in debt financing there is nothing to deduct on your businesses tax filings.
Another aspect to take into consideration is that equity financing, often known as venture capital, is usually only offered if a business can prove it has the potential to use that money to create an explosive growth so that its performance escalates, thereby providing a great return on investment for the lender.
Which Type of Financing to Choose
Equity financing can be difficult to obtain in some situations. New businesses usually neither have the equity built up, nor the track record to judge a business’ performance to obtain such a loan. That however, is also the problem for new businesses when applying for a standard debt loan. Chances are, if you have a strong business plan, good concept, and any equity value at all in the form of inventory, building, or equipment you can find private investors that might be easier to obtain than bank debt financing.
Equity finance companies are also more competitive and aggressive. They can take more chances because the potential for payoffs are greater. With debt financing the return on investment is a set figure-no less, no more than the original contract. With equity financing if the business really takes off the financer stands to reap great rewards.
One argument is that debt financing, if at all available, offers business owners the most security, less potential loss over time, and no loss of control over company direction or operation. It would seem that it is the best choice in all situations, and yet businesses big and small who understand both forms of financing well know that there are times when equity financing simply makes more sense.
If you do not have enough profit to repay a debt loan, equity financing makes good sense. It can offer you the means to expand or implement new procedures to maximize your income potential where you can then apply for a more standard type of loan. Startups with a dynamic business plan have the most to gain from equity financing. They very often cannot afford to repay a debt loan, but will in the foreseeable future have massive profits.
Established businesses that find themselves stagnated and in need of a boost of cash to expand may not be in a position to pay monthly payments on a debt loan either. They may also find banks even more reluctant to lend money on the chance they will improve than they are willing to finance a startup. In those cases an equity loan works excellently.
Once a company, regardless of its duration is capable of acquiring and maintaining payments on a debt loan it should seek that type of financing. Even venture capital lenders will shrink away from a company that never grows to the point where it can afford to take on a debt loan. Companies that are ever expanding and always on the edge of fiscal stability will look like risks to either side of the coin so it is important to have lengthy periods of time where the business is operating in a healthy profit margin before attempting to get further loans of either type.
Each individual businessman will have their own ideas of the perfect combination of debt and equity financing. Businesses using both to their maximum benefits are well on their way to a solid future. Instead of thinking about the issue as debt VS. equity financing, business owners should think of it as debt AND equity financing for a secure future.
Corey Pierce is the CEO of BusinessFinance.com that since 1995 has been one of the internet’s largest resources for business owners in search of business loans. BusinessFinance.com has developed a business funding system that matches a businesses owner’s need for capital to the approval requirements of over 4,000 business lenders. Find out more about getting your business loan approved at: => http://www.businessfinance.com/
Debt Versus Equity Financing FAQ:
Question: What are the advantages of using equity versus debt to capitalize a firm?
Answer: Investors will be more attracted to the possible growth of a firm and dividends they will collect as opposed to fixed income. There’s more growth potential with shares than with bonds.
Question: What would the advantages and disadvantages of raising capital via debt (bonds) versus equity (stock)?
Instead of borrowing cash to pay for its investments, a firm can sell new shares of common stock to investors. Whereas bond issues commit the firm to make a series of specified interest payments to the lenders, stock issues are more like taking on new partners. The stockholders all share in the fortunes of the firm according to the number of shares they hold.Answer: It’s usually a question of not either or but rather a question of the optimal mix of debt vs equity. A company’s optimal capital structure is a fairly complex analysis but in general a company analyzes the risk and reward between debt vs. equity with the goal of maximizing the company’s stock price. Every company establishes a target capital structure (% of debt vs. % of equity) which may change over time based on the company’s current capital structure, future expected capital raising needs, tax position, expected need for financial flexibility etc. Generally, when a company’s debt ratio is below the predetermined optimal target % companies typically raise new capital by issuing debt…when the debt ratio is above their optimal target % they typically raise capital by issuing equity. The advantages of issuing debt are primarily that the interest is tax deductible which lowers the effective cost of the debt and stockholders don’t have to share the profits of the business with debt holders. The main disadvantages are when a company’s debt ratio increases to the point where the associated risk makes future borrowing too expensive and therefore reduces a firms capital flexibility…it can also lead to bankruptcy due to the fixed cost of servicing the debt in an otherwise healthy company.
Question: Should a company have more debt or more equity in its capital structure? What are some limitations of utilizing debt versus equity in the capital structure?
Answer: Excessive debt financing may impair your credit rating and your ability to raise more money in the future. If you have too much debt, your business may be considered overextended and risky and an unsafe investment. In addition, you may be unable to weather unanticipated business downturns, credit shortages, or an interest rate increase if your loan’s interest rate floats.
Conversely, too much equity financing can indicate that you are not making the most productive use of your capital; the capital is not being used advantageously as leverage for obtaining cash. Too little equity may suggest the owners are not committed to their own business.
Question: What is an advantage of equity financing over debt financing?
Answer: It’s possible to raise more money than a loan can usually provide.
Question: Why is debt financing said to include a tax shield for the company?
Answer: People who advocate borrowing money for the “tax advantages” are bad at math. Pay $1 (in interest) to save $.28 (in taxes) STILL leaves you a net negative amount.
Question: What were the advantages of debt financing in the early 1990’s?
Answer: Fairly low interest rates. Debt financing was cheaper than the cost of capital. Basically, it was cheaper to borrow money than to give an investor an ownership stake in your profits.
Question: How tax advantage is available in case of debt financing?
Answer: The advantage is if interest expenses can be deducted from income, resulting in a lower cost of money borrowed.
Question: Will personal credit debt affect financing of my company?
Answer: The personal credit debt will effect financing of a company if you are a partner/owner of that company. The owners of smaller to medium sized companies may be effected.
-
Business Finance – Shares and Equity
The term equity finance refers to share capital that is invested into a business for the medium to long term in return for a share of the ownership and in many cases an element of control over the running of the business. There are two main forms of equity finance available to businesses. These are business angels and venture capitalists. Equity finance is fast becoming one of the most popular ways of gaining start up finance for businesses.
Equity finance is the perfect example of true risk capital. This is because there is no guarantee that your investor will ever get there money back. Unlike lenders equity finance investors don’t normally have the rights to interest or to be repaid at a particular date. The way in which equity investors regain the money that they have invested into a company is through taking a share of the business and a percentage of the profit. It is because of this high risk involved in equity finance that if your business can not support growth rates of at least 20% you may not be able to attract equity funding. Equity investors are more likely to invest in someone they feel they can trust with a clear business plan and strategy.
As a business you need a clear business plan and strategy regardless of what type of business start up finance you are hoping to attract. You need a comprehensive business plan with a detailed marketing plan and your financial forecast. Your business plan needs to address issues such as how much funding you are going to need and how much control you are hoping to retain over your business. You also need to clearly state what you are using your business start up finance for as well as if your plans are realistic and if your venture is appropriate for outside funding. Whilst you are completing your business plan you also need to consider what potential investors may be concerned about. Without all of this; plus much more no potential investor will go near your business, planning is key if you are hoping to secure external funding.
If you are hoping to gain the financial help of an equity investor there are several questions that you need to keep in mind such as are you prepared to give up some of the shares within your business as well as part of the control over your business? Investors will expect to have some say in the way in which your business is run so you should be prepared for this. You also need to be confident in your business and the products and services that your business has to offer, one way in which you can do this is by identifying what your businesses unique selling point is. As well as this you also need to have the necessary industry skills and experience to drive your business.
For more information about what equity finance can do for your business get in touch with a business angel or venture capitalist today and they will advise you on what to do next.
Helen is the web master of Angel Start-ups [http://www.angelstartups.com/articles/showarticles/BusinessFinanceArticles/4/InvestmentFinanceStrategiesBusinessOpportunityLoan.html], specialists in all aspects of Equity Finance [http://www.angelstartups.com/content/venturecapitalists.php].
Business Financing FAQ:Question: Is it possible to receive full financing on a small business loan?
Answer: Years of successful industry experience is always a consideration….unless you have hard assets that can fully secure the loan.
Question: How can I arrange financing to expand my own business?
Need to expand my existing small manufacturing business. We manufacture Shock absorber components in India. Looking for opportunities to market the components here in USA. Do you know who are major shock absorber manufacturers in USA and what approach can I take to solicit business from them.Answer: For money your options are either taking on partners, securing money from the bank or looking into venture capital. Tenneco has Monroe autoparts division. I believe they are the largest shock company in the US.
Question: How would someone with bad credit get approved for financing to start a new business?
I want to start my own tanning salon and espresso stand. I personally have a low credit score and limited start up funds. I have a few locations in mind and after much research I know that this business is VERY profitable, yet…VERY expensive to start up. Where could I find financing to get the start up funds?Answer: Look for investors. If you can demonstrate that the business is as profitable as you say prepare a business plan and advertise for investors. You will have to give up a substantial piece of the action, but if you don’t you probably won’t have a business at all.
Question: In buying a business, should I obtain financing before I negotiate a price?
Or should I sign a letter of intent first, get financing, and then go forward with negotiation? What are the steps in buying a business? What are the pit falls and things I should look out for?Answer: Firstly you need to know how much finance you are able to raise, then you can negotiate with letter of intent in offering. But you need to fully examine all aspects of the intended business before purchase or even making an offer. This entails going to a business accountant to have him run over books etc, then having Lawyer/Legal rep look over legalities of what pitfalls he can see. Insurance would have to be involved as that is a major part in any business purchase.
Question: I just retired and want to start a tree trimming business and would like to find financing. Any tips?
Where do I look for financing and where would if find a checklist that would help me is getting the things that I need to start this business.Answer: The best routes to take are to research the process of starting a business as well as the industry you’re interested in. I recommend checking out the SBA, Entrepreneur, The Start Up Journal & Nolo. All 4 are great informational resources for the new/small business owner. I posted links for you in the source box.
Associations may be a good avenue to explore. These organizations will address many of the thoughts, questions and concerns you’ll inevitably have as well as many you haven’t anticipated yet.
Research, research, research – this cannot be stressed enough. Read as much as you can about the industry. There are plenty of free informational resources out there.
Question: Does anyone know how to get 100% financing to start a business?
I would like to open a franchise but I have no money down and not really any assets. I am looking for someone who finances 100% to start up a business.Answer: Talk to your franchiser. They may have some ideas. If not, your best bet is Small Business Administration, although success is by no means guaranteed.
Question: How do you get financing for a business venture?
I am a 22 year old in college, and I am looking at starting up a new private business. However, I am broke. Is there any way that I can get a loan from a bank or get involved with angel investors? If I wanted to get about $30,000, how could I go about acquiring it? Any help would be greatly appreciated.Answer: First make sure what ever you are doing you have all your bases covered before approaching any one. If it is something new TRADEMARK IT! Then when speaking with any one- have them sign Nondisclosure -Non Compete agreement first. As far as “Angel” investors are concerned a lot of them prefer “Tech” or some kind of tangible business that can produce fairly quickly. Most investors like the “Principal Party” to have some form of equity stake. It is tough, as far as $30,000 is concerned, you are in college- If you could round up 300 people at $100 each- you have what? Get some parties going, talk to local bars get them to let you use the bar a night a week-charge cover, convince the owner to do have price night, etc etc and keep the cover as a fee to promote the place and tell the owner to give a % off the register that night. IT IS SO EASY to do something along those lines.
Question: How do I find a financing company to work with our home improvement business?
The business does renovations on homes – kitchen/bathroom updates, adding dormers, etc. But some people aren’t able to afford the full price of the renovation up front. How can I find a financing company that would be willing to partner with our business to get loans for the customers?Answer: Talk to the bank where you have your business account.
-
Business Start-up Finance For Your New Venture
When it comes to starting your own business one of most important factors to take care of is your start-up business finance. There are many funding options open to you, with the main forms being categorised as either debt finance or equity finance.
It has been said that roughly 60 or 70% of all new business ventures call on their local bank as their first attempt to gain start-up finance. Gaining a bank loan to fund a business start-up is one form of debt finance. This debt finance comes in the form of a bank loan that typically has to be repaid at an agreed interest rate. The way in which banks usually agree to bank loans is by securing your loan against an asset. The way in which this works is if your business then fails to repay the loan, the bank can then claim the asset. So what exactly is this asset? An asset stands as usually a house/premises or equipment that is owned by your business.
The main problem with a bank loan is your company then becomes locked into a tight payment schedule that could cause problems for small businesses. There are also other forms of debt finance that are starting to prove just as popular with small business, such as credit cards and leasing. The term leasing refers to the borrowing of money to buy specific equipment/machinery. In this case small businesses borrow against the store sales.
All forms of debt finance means that you are borrowing against reserves rather then giving someone ownership of your shares. The main thing that you have to keep in mind when it comes to debt finance is finding the aspect of funding that is right for your business; there is however one flaw to this theory; what if no form of debt finance is right for your business? To answer this predicament I bring to your attention, equity finance.
Although the definition of equity finance slims down to pretty much being risk capital, it is the saviour of many small/new businesses who are either turned down for a bank loan or merely can’t keep up with the repayments.
Equity equals true risk capital as there is no guarantee that the investor will get there money back. The big advantage however is that the money that is invested into your business from equity finance never has to be repaid. Investors to your business are prepared for risk capital in return for a growth share of your business profit.
The investors behind equity finance give you the money that you need to get your business off the ground and to cover all aspects of your business start-up costs such as rent, the purchasing of equipment and staff wages as well as all of your utility bills for the first few months.
Whatever finance you decide to use for your business venture, make sure you make a realistic and informed decision based on your business needs. There is a lot to take into account and you need to ensure that you have all of your business information sorted before making any decisions.
Helen is the web master of ARCH Entrepreneurs, specialists and experts in all aspects of Business Finance.
Business Financing FAQ:
Question: How dose equity financing work for small business?
Answer: The short answer is that “equity” means ownership. Equity financing means that an investor would provide some money to the business in exchange for part ownership.
Question: What is the definition of “group equity” in business/finance terms?
Answer: I am not familiar with this term, at least not in the context of your question. If you are referring to an LLC or partnership, perhaps it’s the amount of equity you and your partners have in the business cumulatively.
Question: Financing a business with no collateral?
I have few patents and I want to start a small business based on one of these patents. Banks require collateral and/or equity which I do not have. Can the patents be used as equity since Patenting is expensive and cost me tens of thousands of dollars.Answer: No, the patent may have potential value. It is not a commodity that can be priced, bought and sold.
Maybe you should look to venture capitalists for financing. Those people are experienced and interested in helping start up companies get started, if and when they recognize the potential. Bankers charge interest on loans. That is all they get out of any deal. Bankers get scammed all of the time and are wary of people with new ideas.
For a piece of the action, investors put up the cash, and look for profits well above and beyond the amounts the banks can make on loan interest.Question: How does the federal income tax structure impact a business decision to finance with use of debt vs. equity?
Answer: In both cases, there is usually a payment for use of the money. A person who lends money(debt) expects to be paid interest, while a person who invests money(equity) expects to receive dividends. The payment of interest for business purposes is deductible, while the payment of dividends is not. For the person receiving the payments, qualified dividend income may be taxed at a maximum of 15%, while interest income is taxed at the recipient’s normal tax rate.
Question: Nervous about asking bank for business financing for a new liquor store. Need 100K and have $15,000.?
Have been planning every single detail of a liquor store for 3 months and I am finally getting to the point to where I ask a bank for a 100K loan. I have $15,000-$20,000 of equity in my house. Have business plan, experience with liquor (3 years as liquor manager), perfect location, name and logo, and cheapest/best vendors to buy pens to registers to 8 door walk in cooler (checked over 5 vendors for everything). Don’t like to be embarrassed or to look like an idiot if I have not a chance in hell to get the money. What should I do to make my chances better?Answer: You should definitely do it! Show them your experience and how you have everything planned out! Liquor stores do pretty well because, well, people like to drink! If you are still a little nervous just think the worst that can happen is they say no and you’ll never see them again!!
Question: How do I find sources of Business Financing?
I am looking for ways to find small business financing. I am not looking to borrow 100K+. I want to only borrow $25,000 to grow my company. I am not look for VC sharks or loan sharks. My experience is that the SBA is nothing but red tape. Anyone have any ideas? My company is profitable (about 7,500/month NET) and it’s based in the Philippines.Answer: Opt for applying for specific loans in your search. For example, if you need office equipment or other equipment, seek equipment financing or leasing from companies that specialize in those areas.
Question: Is there small business financing available that will not effect you personally if your business goes under?
I want to open an ice cream shop in my area but I do not want to put my house up for collateral in a loan or if the business goes bankrupt for the lender to be able to come after my personal assetts. Is there financing available? Or anyone know of grants to open a shop.Answer: If you open your business as an LLC (limited liability corporation), you can get a loan on the LLC, and then if the business goes under they can’t tap your personal assets. This is why an LLC exists.
However, you’ll need a solid business plan and a willingness to put some of your own assets into the business.
Question: What is the best way of financing for a new open business when you have no credit and cannot borrow from bank, friends or family?
Answer: You need to save the money or borrow from family or take partners. Financing is the hardest part of most businesses. Unless you have a very simple service business you will have cost. The simple service business is what they call low barrier to entry like cleaning houses, mowing lawns, babysitting, many people can do the labor and the equipment is cheap so most have almost everything they need.