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SIMPLE STEPS FOR STARTING YOUR BUSINESS

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Session 5: Funding Options

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SIMPLE STEPS FOR STARTING YOUR BUSINESS

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[insert local sponsorship information here if relevant, otherwise delete this slide]

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ABOUT SCORE

SCORE volunteers are successful and experienced business executives

Seminars and workshops Free mentoring:

One-on-one
E-mail

Resources for small businesses:

[chaptername].score.org

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MENTORING LOCATIONS

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[Local mentoring locations will be provided on this slide.]

Please make note of this information in your manual.

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PROCESS ROADMAP

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One-on-One Mentoring

“Go or No-go” decision &�next steps with mentor

Mentoring/Build Business Plan

Session 1:�Startup Basics

Session 2:

Business Concept

Session 3: Marketing Plan

Session 4:�Financial Matters

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WORKSHOP BENEFITS

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Helps you develop your feasibility plan
Takes you through the decision-making process
Provides you with the information to help make a “go or no-go” decision on your business idea
Has the core information to create a complete business plan for bankers and investors
Gives you the key directions you need to get started

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AGENDA

Funding and sources
6 C’s of credit
What bankers want
Borrowing strategies
Go/No-Go decision/Next steps

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WHY BUSINESSES NEED FUNDS

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Business outcome	Action examples
Grow business – drive sales	Open a new location Launch a new product Increase digital marketing
Increase production or�service capabilities	Automate/add equipment Upgrade software/technology Train additional staff Replace a worn-out delivery van
Boost profits	Shift sales from in person to ecommerce Take advantage of volume purchase discounts to lower costs Increase staff productivity
Manage cash engaged in�the business	Consolidate debt Build inventory for busy seasons Handle seasonal cash requirements Secure funds for one-time/unplanned expenses

Session 5: Funding Options

Any discussion of financing starts with why businesses need funds.

What business outcome do you want? There are four common outcomes that lead to seeking funds.

Some businesses are looking to grow and drive sales. That may mean funds to open a new location or launch a new product.

A second reason may be to increase production or service capabilities. Expansion could mean adding equipment or upgrading technology. You may need to hire and train additional staff. Sometimes you need funds to replace vehicles.

A third reason - boost profits. You might invest in a new ecommerce site to lower your cost of sales. Or you may take advantage of a volume discount offered by a supplier. Maybe there’s a new software that can boost staff productivity and lower costs.

Finally, you may need funds to manage the capital in your business. You might borrow to consolidate debt or buy inventory for your busy season. Maybe you need funds for one-time or unplanned expenses. And there could be other business reasons for borrowing.

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BUSINESS OUTCOMES

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What are the business outcomes you are seeking and the actions you can take to reach them?

Business outcome	Actions my business could take	Fund with �existing cash?
Grow business – drive sales	�	yes no
Increase production or �service capabilities	�	yes no
Boost profits	�	yes no
Manage cash engaged �in the business	�	yes no
Other		yes no

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WHERE TO FIND FUNDING

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Sources of funds	Pros	Cons
Business cash reserves	Inexpensive, low risk source of funds Flexibility to use profits and retain control of the business	Accumulating reserves can take time Limits cash availability for emergencies or other needs
Equity investment �by owner	Primary source for startup/early-stage businesses Quick access to funds	Requires additional cash from owner �personal funds May create personal financial stress
Equity investment from external source	No repayment schedule Potential industry experience and connections from investors	Owners may give up control and future profits Investors expect a higher return
Borrowing	Often lowest cost form of outside financing Owners retain control, equity, and profits	May not be available for new business or those without�sufficient equity Business/personal assets at risk if not repaid

Session 5: Funding Options

Where do you find the funding you need? Start by making sure you are using the funds you already have. Those are your business cash reserves. There’s no additional cost and no loss of profits or ownership when you use cash reserves. Not a lot of small businesses have substantial reserves built up, but if you do, they’re a great resource. Caution: Don’t use up all of your emergency or rainy - day funds—you may need them some day.

Next is equity. Equity owners get a share of the profits of the company. There’s no fixed payment schedule—they are repaid from future profits or the sale of the company. You can sometimes find equity faster than going through a borrowing process.

Owners often put personal funds into their business as equity to cover cash needs. If you’re the sole owner, ownership doesn’t change when you invest, and the business gets the cash it needs. But be careful not to overextend your personal funds.

If you use an external equity source, you will likely give up some ownership including a share of future profits. Investors expect a high return on equity—higher than the interest on a loan. You may get investors who have contacts or industry expertise.

You can borrow. You keep control and profits, and it’s a lower-cost source of funds. Your business will need to make regular payments, and if you can’t pay, your business and personal assets may be at risk. Borrowing is not usually an option for new businesses or those who haven’t built up equity (equity is assets less any debt.)

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WHICH IS BEST FOR YOUR BUSINESS?

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Business cash reserves vs. equity vs. borrowing – Which is best for your business?

How much do you have in business cash reserves? ___________________________________________________________

What plans do you have to use them? ______________________________________________________________________

Do your profits support reinvestment in the business? ____ Does your current cash flow meet your needs? ____

What plans have you made to secure more equity? ___________________________________________________________

Who will provide it (e.g., owner, investor, etc.)? _______________________________________________________________

How much debt do you have now? _______________ Do you have plans to borrow more? _______________

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SELECT THE RIGHT TYPE OF FINANCING

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�	Business credit card	Business loan	Business line of credit
Best for	Everyday purchases, rewards based on spending, or very short term borrowing.	Financing major purchases or one-time cash needs	Recurring or seasonal cash flow needs
How you access funds	Available up to a limit and �tied to a card for purchases; may be able to transfer balances for a fee	Typically, funds at one time after your loan closing	Available to draw up to your line limit; how you access will depend on your lender.
How do payments work	Pay a minimum amount monthly and incur interest charges or pay entire balance to avoid interest.	Balance reduces over time as payments are tied to loan maturity or amortization term.	Lenders may offer interest only payments or a percent of the balance plus interest.
Interest rates	Interest typically variable (floats) and often higher than bank loans	Typically, fixed rates locked in when you close your loan	Interest typically variable (floats)
Collateral	Typically, unsecured	Can be secured or unsecured. Larger loan sizes may require collateral.	Can be secured or unsecured. Larger loan sizes typically require collateral.
Check	Have Need	Have Need	Have Need

Business lease – allows the business to use the property owned by the lessor. May have an option for the user to purchase the property. Often used for commercial real estate, office equipment, and business vehicles.

Construction loan – a type of real estate loan where the balance increases as a project is completed until a point where the loan is paid off or converted into a commercial mortgage.

Small Business Administration (SBA) guaranteed loan – a type of financing offered by lenders where the SBA guarantees a portion of the loan. Often a way for borrowers to obtain longer terms or flexible funding if they do not meet conventional borrower qualifications.

How to select the right type of financing

Session 5: Funding Options

Let dig into types of financing, starting with debt.

The first is business credit card. It’s one of the easiest types of credit for businesses to get. It’s great for everyday purchases and usually offers rewards. You get a set limit and only pay variable interest that floats on revolving balances. It is typically unsecured and is often priced at a higher interest rate than other loans.

Next is a business loan. Perfect for one time needs. You make regular payments of principal and interest. The rate is fixed at closing. The loan can be unsecured or secured by collateral—an asset of value that your pledge to the lender in case you can’t pay your loan.

A business line of credit is similar, but you draw up to a limit. It is designed for when your needs fluctuate. Your payments vary depending on how much you have drawn, and interest is typically variable. Secured and unsecured types exist.

Let me mention three other types.

Business lease where you make payments to someone who owns property like commercial real estate, office equipment, and business vehicles. Sometimes you have the option to buy.
Construction loans let you draw funds for a project. When completed, you can convert it to a mortgage or pay it off. F
Small Business Administration (SBA) loans can provide financing for borrowers in newer or riskier businesses that might not qualify for a business loan. Often a way for borrowers to obtain longer terms or flexible funding if they do not meet conventional borrower qualifications.

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OTHER FUNDING SOURCES

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Other

funding �sources

Family and

friends

Equity

investors

CDFI

Online

lenders

Peer-to-peer

Crowdfunding

Dept of

Community

and Economic

Dev.

Dept of

Ag. and Rural Dev.

Fintech

Session 5: Funding Options

There are a variety of other funding sources to provide debt or equity.

Many businesses secure equity investments from family or friends, particularly at the startup state. Angel investors for early-stage companies, venture capitalists, and other private equity can all provide funds in return for ownership and a share of your profits. There are equity investors who can help your business with advice, experience, or contacts. Remember that equity investors may be with you for a long time.

Community Development Financial Institutions serve community businesses and can lend to small businesses.

There are newer types of lenders, as well.

Online lenders target companies that might have a harder time borrowing. They make fast decisions, are more lenient on credit ratings, and usually charge higher rates.
Peer-to-peer lending sites like Funding Circle and CircleUp serve harder to lend to businesses. There’s no support or advice—it’s all about the funds.
Crowdfunding Also known as crowd financing and crowdsourced capital, crowdfunding is an alternative method for raising financing for a�business idea that gives business owners access to a broad swath of potentially interested investors via the internet. donation, charity, social or rewards-based crowdfunding allows individuals to donate money to a business startup idea in return for rewards such as early access to products or services, limited-edition products�or premiums. In the case of nonprofits, funds are used to support a cause.�

Websites such as Kiva (www.kiva.org), Kickstarter (www.kickstarter.com) and IndieGoGo (www.indiegogo.com) are portals for these kinds of campaigns.

● credit-based crowdfunding, also known as peer-to-peer lending,

offers opportunities for a “crowd” of supporters to connect and lend working

capital. Benefits can include lower interest rates and creative repayment terms.

Websites such as Prosper.com (www.prosper.com) or Lending Club

(www.lendingclub.com) facilitate this kind of crowdfunding.

● equity-based or investing crowdfunding allows entrepreneurs to

source seed capital from a number of investors, including non-accredited

investors, without a public offering. This form of crowdfunding allows new

business owners to access a larger number of investors. Crowdfunding is

evolving rapidly, so consult the proper advisors if considering this option

We’ve covered a lot. Any questions? Anyone used these other funding sources?

Fintech: Fintech refers to companies that use advanced technology to improve financial decision-making. It encompasses a wide range of financial services from mobile payment apps to online lenders. For startup businesses, fintechs offer various financial opportunities.
Dept of Community and Economic Dev –Local economic development programs may offer financing assistance.
Dept of Agriculture and Rural Dev. - If you are located in a rural area or starting an agricultural-related business, there may be special loan programs available to help you. The SBA also has loans targeting rural entrepreneurs.

[To dig into any of these other funding sources in more detail, use the next two pages to guide the discussion. If no questions/follow up needed, skip the next two pages.]

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OTHER FUNDING SOURCES

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Description	Consider
Family and friends	Can be easier to obtain than other alternatives May offer lower interest rate and more flexible repayment terms Can add strain to family and friend relationships
Equity investors �(angel investors, venture capitalists, outside investors)	Provide funds in exchange for ownership share in the business Typically, no payments— investors are seeking a share of the profits and proceeds from any ownership sale Some investors are experienced business owners may can provide practical advice and may want input into business decisions Finding the right investor can be a long, involved process
CDFI �(Community Development�Financial Institutions)	Typically serve community businesses—small businesses, microenterprises, nonprofit organizations, commercial real estate, and affordable housing Financing for businesses that spark job growth and employee retention in hard-to-serve markets Tailored for smaller and early-stage businesses

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OTHER FUNDING SOURCES

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Description	Consider
Online lenders	Fast decisions on loans and quick funding�(sometimes within days) Predictable monthly payments More lenient on credit criteria with less�documentation required	Typically, higher interest rates May be difficult to find for large loan amounts
Peer-to-peer (P2P) lending sites �(e.g., Funding Circle, CircleUp)	Borrowers with lower credit ratings may qualify May offer lower interest rates than other options Fast application processing No interaction between lender and borrower	Mostly used for personal loans, but growing use�for small business loans May require substantial personal information to determine loan eligibility
Crowdfunding �(e.g., Kickstarter, Fundable)	Works best for funding new products Requires an excellent marketing campaign�and social media savvy	A strong social media following helps secure funding Minimal cost to try (but considerable time investment)
Fintech	Refers to companies that use advanced technology to improve financial decision-making. It encompasses a wide range of financial services from mobile payment apps to online lenders	It may be easier to get your loan approved by a fintech company, but interest rates may be higher, and loans may be due sooner. Fintechs offer various financial opportunities

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OTHER FUNDING SOURCES

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Description	Consider
SBA guaranteed loans through banks	A percentage of the loan is guaranteed by �the Small Business Administration Banks are more willing to take a risk on your�business
Dept. of Community and Economic Development	Local economic development programs may offer financing assistance
Dept. of Agriculture & Rural Development Service	If you are located in a rural area or starting an agricultural-related business, there may be special loan programs available to help you. The SBA also has loans targeting rural entrepreneurs

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FUNDING/LENDING NEED

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What funding sources or lending products do you think your business may need in the future?

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SOURCES OF CAPITAL: WEBSITES

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SBA guaranteed loans:

www.sba.gov

Federal Government Grants:

www.grants.gov

Chapter to add local organization here

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FINANCING FROM THE BALANCE SHEET

Sometimes you can get financing based on the value of assets in your business or the value of items you are using the loan to buy. These include:

Accounts receivable financing/factoring
Bank line of credit
Equipment leasing
Chattel mortgages
Plant improvement loan
Conditional sales contract

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Session 5: Funding Options

Sometimes you can get financing based

on the value of assets in your business

or the value of items you are using the

loan to buy. These include:

● accounts receivable financing:

Also called factoring, this is a means of

obtaining financing based on the value of

your accounts receivable.

● bank line of credit secured by real estate or another hard asset: This is a preestablished

amount of credit you can use

as needed. A line of credit can offer more

flexibility than a loan and is simpler to obtain. It

is typically based on 75 percent of your current

accounts receivable or 50 percent of the value of

your inventory.

● equipment leasing: Instead of buying business equipment, consider

leasing to conserve cash. Many leasing companies offer financing.

● chattel mortgages: In a chattel mortgage, you obtain a loan to buy an

item and use the item itself as collateral for the loan.

● plant improvement loans: You may get a loan to improve your building

or facility by putting up the property itself as collateral. The loan will typically

be limited to 75 to 80 percent of the property’s market value.

● conditional sales contract: This allows you to finance the purchase of

an item; the vendor still owns the item until you have paid the full amount.

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WHAT LENDERS LOOK FOR

Lenders and banks look for:

Good credit
Management expertise and commitment
Feasible business plan
Adequate owner equity
Sufficient collateral

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Session 5: Funding Options

VCs, angel investors, friends, family, and fools all look for the same information.

The bank will be expecting the business information, but also personal financial information:

A completed personal financial statement—a personal Balance Sheet. Get the blank form from a bank or download it from www.SBA.gov. Fill it out in draft form first and review it with an accountant or SCORE mentor to correct any errors.
Three years of personal tax returns.
Details about any major collateral assets or debt obligations.

�All of these items on this slide are very important, but bullet point two may be the most important of all. What depth of experience does the client have in managing the type of business they plan to own and run? Intelligence and theory are one thing. Pragmatic, real world “been there, done that” experience is quite another.

Group Discussion: What questions come to mind? Discuss. May hold some questions for next slides.

Total Time: 10 minutes

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6 C’S OF CREDIT

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Character
Capacity
Collateral
Capital
Conditions
Cash Flow

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CHARACTER

Trustworthiness
Personal and business credit history
Integrity
Quality of references
Experience in the business
Impression you make on the lender or investor

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CAPACITY

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Is your company able to repay the amount borrowed?
How soon can you generate positive cash flow?
When will you show a profit?
How large will the profit be?
Can the profit be sustained?

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CAPITAL

The money you have personally invested
Your ability to save money and accumulate growth in owner’s equity

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CONDITIONS

Terms of loan:

Intended purpose of loan
How much is requested
Length of loan

Local economic climate of industry

Local economic climate of business

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COLLATERAL

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Additional Forms of Security:

Secondary source of repayment
Third-party guarantee
Tangible assets
Property
Equipment
Accounts receivable
Inventory

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CASH FLOW

Where is the money coming from to repay the debt obligation?
Where will all the money go?
How much of a “cushion” should I keep?

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CREDIT SCORE & REPORTS

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A FICO score of 700 or greater is desirable.

Your personal credit report available for free from: www.annualcreditreport.com

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WHAT BANKERS WANT

To apply for a loan, be prepared to provide any of the following:

Cover letter of introduction
Summary of financial needs
Business financial statements (3 years)
Business tax returns (3 years)
Projected cash flow statement (1 year)
Collateral (business and personal)
Personal tax returns (3 years)
Personal financial statements
Résumé

The lender will also ask:

Are there any legal claims, liens or judgments vs. you or your business?
Are any assets pledged?
Are your tax returns and payments up�to date?
Do you have life insurance? If so, what is�the face value or cash value?
What are your monthly household income and expenses?

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MEETING THE BANKER

Getting Your Foot in the Door

Know your financial SWOT

Strengths
Weaknesses
Opportunities
Threats

Use your “strengths” for your:

Elevator speech
Abbreviated presentation

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THE BORROWING PROCESS

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Identification - �deciding you need a loan

Application - �an official request �for credit

Underwriting - �making a credit decision

Decision - �approve or decline

Processing - �appraisals and final requirements

Closing - �signing and funding

Repayment

Session 5: Funding Options

Who here has been through a borrowing process for their business?

Let’s look at what happens as you apply for a loan.

Here are seven steps:

Identification – you decide you need a loan
Application – fill out the forms and submit documentation requesting a loan. The more you know what you want and how it will help you, the better off you will be.
Underwriting – that’s the process of the bank evaluating your application. The evaluator is not me or the “front line” person who meets with you. It is a separate team who looks objectively at the application to see if it meets the bank’s lending criteria.
Decision – Approve or deny.
Processing – You may have to appraise your equipment or property. The bank may require additional diligence to verify all the parts of your application. This process can take days or weeks, especially if there is a property appraisal involved.
Closing – time to sign the documents to receive funds and accept the repayment terms. You will need your down payment ready at this time.
Repayment – pay attention to the payment schedule. Set the payments up in your cash flow forecasting and set alerts so your payments won’t be late.

Any questions?

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NEXT STEPS AFTER A FINANCING DECISION

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Four steps to prepare for your next financing

Build a record of making payments on time. Update your cash flow planning and monthly payment reminders to include loan payment(s) and other regular obligations or put all your payments on automatic draft.
Address any business issues or deficits that could keep you from securing credit.
Build your track record of sales and profit growth to support future borrowing.
Continue to build the equity value of your business—a strong balance sheet and capital structure position you for future financing.

Session 5: Funding Options

If you’ve just been notified that your funding request has been approved, congratulations! Be ready to execute loan agreements and start getting your down payment funds together.

If your request was declined, you can ask the lender for a written statement of the specific reason(s) for your denial. Ask the lender for alternative lending solutions to fit your business. Offering more collateral or a larger down payment might change the decision.

However this request turns out, you should always be thinking about your next request. The steps to building or keeping strong credit are straightforward:

Make payments on time. Use reminders, alerts, and automatic drafts so you don’t miss any payments.
Fix any business issues or financial weakness that keep you from getting a loan.
Keep building your business and its ability to consistently generate profits.
Create business equity and value. A strong balance sheet with room for debt can be attractive in future financings.

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KEY POINTS ABOUT BORROWING

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By understanding these points, you can put your small business in position to get the funds you need to sustain and grow your business

Borrowing requests should drive meaningful business outcomes.
Borrowing, along with equity and cash reserves, are the primary sources of business funding.
The best type of financing for your business (credit card, loan, or line of credit) depends on your situation and what you want to accomplish.
Lenders focus on six considerations when assessing a loan request: character, capacity, capital, conditions, collateral and cashflow.
Understanding the borrowing process and setting the right expectations can lead to a smoother experience and a more positive outcome.
Putting your borrowing profile in writing can help you and a lender understand the fundamentals of your business and your borrowing needs.

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WORKSHOP REVIEW

Any Questions on the Sessions?

Session 1 – Startup Basics�Session 2 – Business Concept�Session 3 – Marketing Plan�Session 4 – Financial Matters�Session 5 – Funding Options

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SMALL BUSINESS READINESS SELF-ASSESSMENT

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Total score should not be more than 10. Assign more points to indicate agreement, less if you do not agree.
Topic	Question	Points
Idea Feasibility	My product/service is servicing an unmet need.
Idea Feasibility	My product/service could be expanded to gain additional customer groups.
Market Identification	I know who my potential buyers are.
Market Identification	I have a clear value proposition for my potential buyers.
Implementation	I know what it will take to start my business.
Implementation	I know what it will take to run my business.
Funding	I understand what it will take to obtain funding.
Funding	I have a plan to fund my business start.
Personal Readiness	I am ready to work hard to achieve my business goals.
Personal Readiness	I understand the challenges ahead and have a plan to tackle them.
Total Points:

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SIMPLE STEPS FOR STARTNG YOUR BUSINESS

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Session 1: Startup Basics

SIMPLE STEPS FOR STARTING YOUR BUSINESS

Congratulations! �You have completed the Simple Steps for Starting Your Business Series!

Session 1 🡪 Startup Basics

Session 2 🡪 Business Concept

Session 3 🡪 Marketing Plan

Session 4 🡪 Financial Matters

Session 5 🡪 Funding Options

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WE CAN HELP YOU

We can help you:

Further research your idea
Complete your feasibility plan
Finalize your financial forecast
Develop your business plan
Prepare your loan package
Launch your business
Grow your business

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THANK YOU!

Best wishes to you in your business endeavors!

Set up a meeting with your SCORE mentor.
Help us to help others by completing an evaluation.

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HELP US, HELP YOU

Please complete our workshop survey:

On a scale of 0 - 10, how likely is it that you would recommend this workshop to your friends and colleagues?
What is the primary reason for the answer you just gave us?
What is the most important improvement that would make you rate us closer to a 10?

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NEED HELP?

Find a SCORE office near you:�www.score.org/findscore
Email SCORE: contact@score.org
Website: www.score.org

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