Funding a start-up or early-stage company is tough. You know there’s money out there…but where? How much will you need? Are banks an option? And what’s the best funding arrangement for your particular situation?
Here are some frequently asked questions and – we think – reasonable answers to help you get started. Good luck!
How Much Cash Do I Need?
To start and operate a company effectively, and to give your business a reasonable chance of succeeding, you need to think about two categories of money:
1. Start-up Funds
2. Working Capital
Start-up costs are made up of mostly one-time expenditures. Obvious examples include equipment, supplies, raw materials, vehicles, and down payments on lease or rental agreements. But don’t overlook legal and consulting fees, insurance payments, and licensing and registration fees.
Tip: Remember that many not so obvious costs associated with a company’s start-up phase – like those associated with researching a business opportunity, or visiting potential suppliers – are tax deductible. Always consult your tax adviser regarding these matters.
Working capital represents cash needed to cover regular monthly expenses including payroll, payroll taxes, vendor payments, rent, utilities, advertising, and any other normal cost of running your business.
Tip: It’s easy to underestimate your monthly working capital requirements. Add at least 25% to what you originally think you’ll need.
To start and grow a business, plan to have enough cash available to cover 100% of your start-up costs and at least 12 months of working capital. Your financial adviser can help you construct reasonable estimates and present the information in spreadsheet format.
Can I Get a Bank Loan?
Maybe. It’s getting easier than it was a couple years ago, but it’s still harder than it was six or seven years ago.
But take heart in this: In a year-to-year comparison, loans to small businesses from big banks (assets greater than $10 billion) were up more than 20%, according to data acquired by Biz2Credit.
If you decide to approach a bank regarding business start-up funding, make sure you are prepared to discuss dozens of details about your company. You’ll also need professionally prepared financial statements (for the company and for you). And of course, be prepared to talk about how much you’d like to borrow, how the money will be used, how your cash flow will repay the loan, and what you can put down as collateral.
Tip: Even with the positive trend regarding big bank lending noted earlier, you still should consider applying to community based banks. They tend to have a better appreciation for how your company might fit with the local economy and business climate.
Every bank has its own requirements regarding what kind of information is needed. You’ll likely be given a standard application packet along with a list of required documents.
What About a Small Business Administration (SBA) Loan?
Many business owners are unaware that the SBA mostly functions as a backer or guarantor of loans made by commercial banks and other lenders.
SBA sets certain parameters and rules for the loans (they’re changing constantly) and then its partner banks award and manage the loans to growing companies. Basically, the SBA helps the bank manage its risk pertaining to the possibility of a certain percentage of loans defaulting.
Tip: When going the SBA loan route, try to find a “preferred SBA lender” bank. These banks can pre-qualify your loan in-house, which can save time and paperwork.
Bottom line: Applying for an SBA loan is very similar to applying for a conventional loan at a commercial bank. In some cases, the lending restrictions are looser and the fees can be higher, but it’s very much like a conventional loan.
Oh, and you’ll have to agree to personally guarantee that the money borrowed will be repaid, so be prepared to pony-up some personal collateral.
How do Angel Investors Operate?
If your company has a great story and a strong entry into a market, you might be able to attract the attention of an angel investor, or even an entire network of angel investors.
Angel financing comes from individuals who Invest their own, private capital into a company in exchange for a share of ownership in the business or debt that can be converted to an equity stake sometime in the future. Have you seen the TV show Shark Tank? The deal evaluation process is actually sort of like that.
The practice has been around for years, but has attracted more attention recently as players in the angel arena have stepped in to fill the void for financing situations too small (generally less than $10 million) to attract the attention of private equity and investment banking firms.
Angel investors often invest in industries where they have had personal experience, so if you’re in the sheet metal business, find an angel retired from that field. Where to look? Talk to your financial people – your accountant, your stock broker, and your banker. You can also try the Angel Capital Association, which lists investors by region and provides other useful information.
Can Invoice Factoring Help Start-Ups and Growing Companies?
Very often, the answer is yes.
In an invoice factoring transaction your customer’s credit standing and payment history – not yours – are what matters. So in many cases, even if your business is just starting out, a factoring arrangement can help.
Other advantages of factoring include:
- Speed. Instead of waiting 30, 45, or even 60 days to be paid on an invoice, you can receive cash in just a couple business days.
- Improved cash flow management. Knowing exactly when funds are coming in allows you to make better decisions regarding running and growing your company.
Factoring adds no debt to your balance sheet. Who needs more debt, especially when you’re just starting out?This lets you concentrate on more productive areas of your business.
For more specific information on how factoring can help your company, contact MP Star Financial.
MP Star Financial’s invoice factoring services can help ensure you have cash flow needed to effectively run your company. Call MP Star Financial for more information at (800) 833-3765, extension 150.