Financing Archives - BOLLYWOOD SURKHIYAN

Top Sources for Financing Your Business

Are you a fresh entrepreneur? Are you looking for funding ideas for your business? Here are a few ideas which will help you to fund your business:

Angel Equity – If you want to get your company to make some real progress then find a person who is an executive in the respective industry to invest in your company. He should be ready to give you venture credibility compared to other companies and start-ups.

Smart Leases – Taking fixed assets on lease basis helps preserve cash for working capital i.e., to cover up inventory and so on. It is usually tough to get financial help for an unconfirmed business.

Bank Loans – Banks are similar to supermarket of liability financing. Banks usually provide short-term, mid-term and also long-term financing according to your requirement. They provide funding for all kind of needs such as equipment, working capital, and also real estate. With this you can of course generate sufficient funding to cover the interest payments and also give back the principal amount.

State and local economic development authority – The state or local economic-development organizations may enticingly charge low rate of interest while providing funds along with a bank.

Customers – Taking advance payments from clients and assuring to provide them service assuming the conditions are not too burdensome and can provide you the funding you require. At a comparatively low cost, you can keep growing your business. But also remember advances exhibit a certain level of commitment.

Vendors – You can take funding from your vendors or suppliers. In this way your financers do not control your business but you do. Make sure to subject yourself to a handful of authoritative supplies.

Family and friends – Friends and family can be the most indulgent investors if you are lucky enough. They will not ask you to pledge your house and some might even agree on low interest rates.

Small Business Innovation Research (SBIR) Grants – Clearing through all the paper-work process and SBIR grants is a great method to seizure your intellectual idea into great money.

Tax Increment financing – TIF grants are generally geared to the development of real estate in a few areas. These grants can be as high as 20% to 30% of the price of the project depending on the area.

Internal Revenue Service – IRS does not do funding. It helps you to reduce your expenses. It evaluates if you can use your profit to expand your business if you pay high amount of taxes.

Bootstrapping – Most of the billion dollar entrepreneurs do not rely on financers for funding so that they can control their business and not their investors.

How to Calculate Liquidation Preference in a Startup Business Venture Capital Financing Term Sheet

What is liquidation preference?

Liquidation preference refers to preferred shareholders’ rights to receive a certain amount for the preferred shares they hold in preference to common shareholders in the event that the company goes into liquidation.

The scope of liquidation preference varies between different term sheets. Some may be extremely favorable to investors, some may be less. However, the purpose of liquidation preference is such that in the event a company goes into liquidation, preferred shareholders will always get something back for their preferred shares before common shareholders get anything. In other words, they will always get more than common shareholders. It is possible that common shareholders will get nothing if the company does not even have enough assets to settle the preference amount.

Example A:

Venture Tech Ltd. has 5,000,000 common shares outstanding.

In a Series A financing, Investors A invests $2,000,000 in return for 2,500,000 Series A Preferred Shares (i.e., purchase price per share = $0.8).

The term sheet of this Series A round provides that:

In the event of a liquidation event, the preferred shareholders will be entitled to receive in preference to common shareholders an amount equal to 2 times the purchase price per share, plus declared and unpaid dividends (the “Initial Payment”). After the Initial Payment has been made in full, any assets remaining shall be distributed to the preferred shareholders (on an as-converted basis) and common shareholders on a pro rata basis.

NOW, Venture Tech Ltd. goes into liquidation and the sale price is US$6 million.

Assuming no declared and unpaid dividends, and all other senior debts, e.g., employees’ wages, secured debts, etc., have all been settled:

How much will the preferred shareholders get?

They first get US$0.8 x 2 = US$1.6 for every preferred shares they hold.

Therefore, the Initial Payment is US$1.6 x 2.5 million = US$4 million.

This gives US$2 million ($6 – $4 million) remaining, which shall be distributed to the preferred shareholders and common shareholders on a pro rata basis.

Therefore, preferred shareholders will get a further US$2 million x 2.5 / 7.5 = US$666,666.

I.e., a total of US$4,666.666.

The common shareholders will get a total of US$2 million x 4 / 7.5 = US$1.333,333.

Total = US$4,666,666 + US$1,333,333 = US$6 million

Example B:

Following example A above, let’s say this time the sale price is US$10 million.

They will get a total of $4 million (the Initial Payment) + $6 million x 2.5 / 7.5 = $6 million

The common shareholders will get a total of $4 million.

Example C (company favored):

Let’s give it a twist. This time everything is the same as above except that the total amount the preferred shareholders will get for each preferred share they hold is capped at 4 times the purchase price per share.

In other words, they first get 2 times the purchase price per share in preference to common shareholders (i.e., the Initial Payment as in Example A and B). All remaining assets will then be distributed among them and common shareholders until the preferred shareholders have received 4 times the purchase price per share (plus unpaid but declared payment, and the Initial Payment). All remaining assets thereafter will be distributed among all common shareholders on a pro rata basis.

NOW, let’s do the math:

Putting aside the sale price, since the maximum total amount the preferred shareholders can get is capped at 4 times the purchase price per price, they in any event will get no more than 4 x $2 million = $8 million (however high the sale price may be).

What is the break even point for the sale price?

Let y be the break even sale price:

(y – 4) (2.5 / 7.5) = 8 – 4

y = 16

Therefore, the break even sale price is US$16 million.

Therefore, the sale price must be at least US$16 million for the preferred shareholders to get US$8 million. If the sale price exceeds US$16 million, they will still get only US8 million, since the maximum amount they can get is capped.

That’s why by setting a cap on the liquidation amount the preferred shareholders can get is company-favored.

Small Business Start Up Financing

The number one question I get asked as a small business start-up coach is: Where do I get start-up cash?

I’m always glad when my clients ask me this question. If they are asking this question, it is a sure sign that they are serious about taking financial responsibility for start it.

Not All Money Is the Same

There are two types of start-up financing: debt and equity. Consider what type is right for you.

Debt Financing is the use of borrowed money to finance a business. Any money you borrow is considered debt financing.

Sources of debt financing loans are many and varied: banks, savings and loans, credit unions, commercial finance companies, and the U.S. Small Business Administration (SBA) are the most common. Loans from family and friends are also considered debt financing, even when there is no interest attached.

Debt financing loans are relatively small and short in term and are awarded based on your guarantee of repayment from your personal assets and equity. Debt financing is often the financial strategy of choice for the start-up stage of businesses.

Equity financing is any form of financing that is based on the equity of your business. In this type of financing, the financial institution provides money in return for a share of your business’s profits. This essentially means that you will be selling a portion of your company in order to receive funds.

Venture capitalist firms, business angels, and other professional equity funding firms are the standard sources for equity financing. Handled correctly, loans from friends and family could be considered a source of non-professional equity funding.

Equity financing involves stock options, and is usually a larger, longer-term investment than debt financing. Because of this, equity financing is more often considered in the growth stage of businesses.

7 Main Sources of Funding for Small Business Start-ups

1. You

Investors are more willing to invest in your start-up when they see that you have put your own money on the line. So the first place to look for money when starting up a business is your own pocket.

Personal Assets

According to the SBA, 57% of entrepreneurs dip into personal or family savings to pay for their company’s launch. If you decide to use your own money, don’t use it all. This will protect you from eating Ramen noodles for the rest of your life, give you great experience in borrowing money, and build your business credit.

A Job

There’s no reason why you can’t get an outside job to fund your start-up. In fact, most people do. This will ensure that there will never be a time when you are without money coming in and will help take most of the stress and risk out of starting up.

Credit Cards

If you are going to use plastic, shop around for the lowest interest rate available.

2. Friends and Family

Money from friends and family is the most common source of non-professional funding for small business start-ups. Here, the biggest advantage is the same as the biggest disadvantage: You know these people. Unspoken needs and attachments to outcome may cause stress that would warrant steering away from this type of funding.

3. Angel Investors

An angel investor is someone who invests in a business venture, providing capital for start-up or expansion. Angels are affluent individuals, often entrepreneurs themselves, who make high-risk investments with new companies for the hope of high rates of return on their money. They are often the first investors in a company, adding value through their contacts and expertise. Unlike venture capitalists, angels typically do not pool money in a professionally-managed fund. Rather, angel investors often organize themselves in angel networks or angel groups to share research and pool investment capital.

4. Business Partners

There are two kinds of partners to consider for your business: silent and working. A silent partner is someone who contributes capital for a portion of the business, yet is generally not involved in the operation of the business. A working partner is someone who contributes not only capital for a portion of the business but also skills and labor in day-to-day operations.

5. Commercial Loans

If you are launching a new business, chances are good that there will be a commercial bank loan somewhere in your future. However, most commercial loans go to small businesses that are already showing a profitable track record. Banks finance 12% of all small business start-ups, according to a recent SBA study. Banks consider financing individuals with a solid credit history, related entrepreneurial experience, and collateral (real estate and equipment). Banks require a formal business plan. They also take into consideration whether you are investing your own money in your start-up before giving you a loan.

6. Seed Funding Firms

Seed funding firms, also called incubators, are designed to encourage entrepreneurship and nurture business ideas or new technologies to help them become attractive to venture capitalists. An incubator typically provides physical space and some or all of these services: meeting areas, office space, equipment, secretarial services, accounting services, research libraries, legal services, and technical services. Incubators involve a mix of advice, service and support to help new businesses develop and grow.

7. Venture Capital Funds

Venture capital is a type of private equity funding typically provided to new growth businesses by professional, institutionally backed outside investors. Venture capitalist firms are actual companies. However, they invest other people’s money and much larger amounts of it (several million dollars) than seed funding firms. This type of equity investment usually is best suited for rapidly growing companies that require a lot of capital or start-up companies with a strong business plan.

Ideas for Financing a New Embroidery Company

Because the area of financing can be confusing, yet crucial to the success of any business endeavor, let’s look at some do’s and don’ts of financing as pertains to the embroidery industry.

The “Do’s and Don’ts”

Do your homework.
Do a market research study for your area.
Do all of the work necessary to create a comprehensive business plan.
Do decide which equipment best serves your needs to complete the business plan.
Do spend about 1,500 hours preparing projections and proposals.
Do contact every financial institution within a 2,000-mile radius.
Do send up offerings to whichever heaven you prefer.
Don’t let the seemingly endless process deter you from your goal of owning your selected equipment.
Don’t take it personally when, after reviewing all of your thoughtfully prepared work, they hand you your hat and coat and boot you through the door.
Don’t take no for an answer!

Welcome to the wonderful world of financing. Once you have decided on the type of embroidery equipment, the direction of your new venture and the location for your shop, then comes the how. The how is the money part.

There are three ways to purchase equipment:

Cash
Finance
Lease

Even if you are in a position to pay cash, sometimes it’s more prudent to hang onto as much cash as possible and finance anyway. This provides more back-up capital for the start-up period. What lenders are really looking for is as much stability as possible in a prospective loan customer.

Here’s another reason to consider holding back some cash: You may need an operating loan a few months down the road, and if everything. you have was already applied toward the machine, there won’t be any cash reserve to reassure the bank.

Unless the financial institution has a lot of experience dealing in the embroidery business, it will know nothing about re-sale values, and will discount your equipment’s worth severely upon consideration for a loan.

So, if you can’t-or choose not to-pay cash, you still have two possibilities: finance or lease. These options also have their own advantages and disadvantages. Let’s start with the advantages of financing. First, you own the equipment (or at least that portion of the equipment that the bank doesn’t own.)

You create an equity interest in the machine and therefore add to the asset column on your balance sheet. With each payment, that equity increases. You also create a liability on the balance sheet, but with each payment the liability decreases. At the end of a three- or four-year period, you own the equipment outright, so 100 percent of its value goes to the asset column. Naturally, there has been some depreciation on the equipment, but it rarely approaches its value at the end of the finance term. In our business, equipment maintains an extremely high value over the years. So do try to own the equipment whenever possible and practical.

Another advantage of financing is that generally you can find lower interest rates from banks and credit unions than from leasing companies. In many cases, leasing companies borrow money from the same lending institutions that you might approach. In order for the leasing company to make money, it adds a percentage to the interest rate of the transaction. Even in cases where the leasing company is so large that it is using its own money, the interest rate is often about the same as that charged by smaller leasing companies. It is possible to shop around for more favorable interest rates on leases if you currently own a business, and have operated it for at least two years. If you have sterling business credit, you may be able to obtain a fairly good rate from a company that does its own funding, rather than one that brokers funds on your behalf.

Some advantages of leasing are lower entry costs, tax benefits (ask your accountant), and the fact that it is sometimes easier to qualify for a lease program than to qualify for conventional financing for such a large amount. The disadvantages are higher interest rates and, sometimes higher payments. Also, at the end of the lease period, you don’t automatically own the equipment. Let’s look at these factors more in-depth.

One of the biggest advantages of leasing is lower entry costs. Whereas a bank is typically looking for a 20% or 30% down payment, a leasing company is usually looking for the first and last payments, and maybe one additional month’s payment as a security deposit.

In some cases, a deal with which a leasing company is not comfortable can be strengthened by an additional capital deposit. For example, what if instead of providing first and last payments, plus an additional month’s payment as security, you offer a security deposit equivalent to six monthly payments? Or maybe one year’s payments? An easy way to provide such a security deposit is to post a certificate of deposit from your bank. If you have such an investment, you can pledge it to the leasing company as security on your lease, and still earn and receive the interest. The leasing company is covered, your security requirement is minimal, and you still receive the interest.

One concern here is that in some cases, when pledging a large amount of money on a lease, the transaction becomes a purchase rather than a lease and may be treated differently from a tax standpoint. The primary reason that you would want the lease to be viewed by the IRS as a true lease, rather than a financed arrangement, is that monthly lease payments are deductible as a business expense. Loan payments are not deductible-only the interest paid each year is deductible. Of course, on an outright purchase, there are different tax benefits, such as investment tax credits. These can be significant, however they must be repaid when the equipment is sold because the sale results in a capital gain. This is a complex area, and each situation is different. Talk with your accountant about which avenue best suits your situation. If you don’t have an accountant, consider consulting one on such major issues as this.

At the end of the lease term, you have the option of turning the equipment back to the leasing company, or paying from $1 to 10 percent of the original cost of the equipment (or its fair market value) to purchase it. Be careful here, because if the purchase residual is too low, the IRS may look at the transaction as a financed arrangement or purchase, rather than as a lease.

Another point to remember is that we are talking about leasing embroidery equipment-not automobiles or farm equipment. Some leasing companies specialize in certain types of business and know the resale value of equipment.

You are going into business with every expectation of succeeding, but the bank or leasing company is looking at it from the viewpoint that if you should fail, it must limit its exposure on the downside. How much can it get for the machines if you can no longer make the payments? A leasing company that doesn’t know embroidery equipment might assess a re-sale value on a machine at 10 cents on the dollar, whereas a company experienced in this business would use a valuation of 50 cents on the dollar.

If your proposed equipment package includes digitizing equipment, you should ask about the prospective leasing company’s policy regarding software. Most leasing companies place a limit on the dollar amount of software value in a deal. This varies widely, but software value is usually limited to between 20 and 50 percent of the total lease package.

No matter what you do, make sure that you are well prepared when you approach a financial institution about a loan for your machine. Be sure you can confidently answer all questions. Those questions will undoubtedly include some of the following: Do you have a business plan? What experience do you have in owning a business? Why do you think your business will be successful?

There must be some sort of general rule in the banking or leasing business that no matter how many documents the customer brings to a first and second meeting, a loan cannot be transacted until the customer has been to the office at least three times! Kidding aside, there is no alternative to being prepared, and it may take a lot of legwork to find the deal that works for you.

Other sources that are emerging in the world of finance are government programs and the economic development council (EDC) programs. Do not overlook these possible sources of machine financing. Small Business Administration loans administered through the banks can be difficult to qualify for, but those who qualify are rewarded with low interest rates and favorable terms.

There are other programs available in some areas from regional or municipal economic development councils that are referred to as Revolving loan Funds. Here’s how they work: The borrower is required to provide from his own funds in the amount of 15 percent of the transaction total. The balance of the deal is split between the EDC and a participating bank. The bank usually loans its half at 2 percent over the prime interest rate, while the EDC provides its funds at 2 percent under prime. Here, you just may have the ultimate deal. Your down payment responsibility is only 15 percent, and you are borrowing at prime. (Donald Trump can’t borrow at prime!) Terms are usually 4 or 5 years and there is no prepayment penalty for early payoff.

Financing your own equipment may not be fun, but it is a necessary part of getting into the embroidery business. Be resourceful, and investigate all of the avenues available before jumping into a deal that might not be right for you. The long-term financial wellbeing of your new business is at stake. Take some time to find a arrangement that works best for you, so that the equipment you eventually buy will be a true pleasure to own.

Angel Investors and Alternative Financing

It is extremely important to keep your financing options open. Prior to looking for angel investors, you should look at programs offered by the Small Business Administration. Angel investors are the life blood of small business investment. In limited instances, these private investors will syndicate their investment with other funding sources if the investment is large but not large enough for a venture capital firm. Not every business needs a capital investment. Writing a business plan for your company is a difficult process.

There are many industries that are less risky and therefore more attractive to angel investors. If you business is profitable then a SBA loan may be a better fit for you. Popular industries amount angel investors include auto repair businesses, medical businesses, law firms, and other companies that are always in need. When seeking private investment, you will need a well developed cash flow analysis. In some instances, your certified public accountant can handle issues as it relates to incorporating your business in the state for a business friendly state. If you qualify for a bank loan, then using angel investor may not be in your best interest.

Only extremely large businesses, with values in excess of $50 million, are appropriate candidates for an initial public offering if you are seeking an extensive amount of capital. As an alternative to seeking equity investors you may want to look into specialized white using programs. Your lawyer should have a number of documents prepared for you in regards to raising capital as you are going to need to comply with any and all applicable securities laws.

When writing your business plan, either for an angel investor or any other type of funding source, you should always include a yearly budget as part your financial forecasts. There are many quality sample business plans available online that can assist you with this process as you are seeking financing.

Technology-based businesses are highly prized by angel investors that may qualify you for alternatives to private funding sources. It is imperative that you work with a properly qualified attorney when you are looking for private funding sources. It should be noted that most private funding sources that provide equity usually do not provide loans. Technology businesses are highly favored by venture capital firms, and this may be a better alternative if you need a large capital investment. Hard money may be an alternative for you as it relates to raising money from outside funding sources.

Working Capital Financing – Why Asset Based Lines of Credit Work

How can Canadian business owners and financial mangers secure working capital financing and cash flow financing for their business at a time when it seems that access to business financing provides significant challenges?

The answer is that a potential solid solution exists by the name of an ‘asset based line of credit ‘otherwise what we call a ‘working capital facility’. What is this type of financing is it new to Canada, and more importantly – how does it work and what are the benefits and risks?

Although asset based lenders tend to be specialized independent finance firms many business people are surprised to find that deep in the bowels of a few Canadian bank there exists small, somewhat boutique, divisions who specialize in asset based lending. Ironically they are many times competing with their peers down the hall in more traditional commercial corporate banking.

The most active assets these firms finance tend to be ongoing receivables and inventory, but in many cases, utilizing an expert advisor or partner you can structure a facility that also includes a component of equipment and real estate.

Generally speaking a good way to think of an asset based line of credit is one that for a temporary period, typically a year or so in our experience, allows you to margin up and get higher advances on receivables and inventory. That translates into more cash flow and working capital.

One of the main attractions of an asset based lending facility (insiders call it an ABL facility) is that your firms overall credit quality doesn’t play the largest role in determining if you can get approved for this type of financing. As its name suggest, financing is on your ‘assets ‘! And doesn’t really focus on debt to equity ratios, cash flow coverage, loan covenants, and outside collateral. Business owners who borrow from Canadian chartered banks on an operating or term loan basis are of course very familiar with those terms – in some ways we could call them ‘ restrictions ‘

Most lawyers and accountants will tell you that any type of business borrowing should in fact be entertained only with a respected, trusted and credible business financing advisor who can guide you through the roadblocks and pitfalls of any commercial financing arrangement. Missteps in business financing can lead to long term negative effects around such issues as being locked into a facility, giving up too much collateral, or being locked into pricing that isn’t commensurate with your overall asset and credit quality.

What are the key issues you should consider when considering such a financing facility? Primarily they are:

-Advances rates on each asset category (A/R, inventory/equipment)

– How is pricing defined (asset based lines of credit and ABL lending is general is more generous in overall facility size, but you should ensure you are only paying for what you use

– Contractual obligation – in a perfect world (we know its not!) you should be focusing on the ability to pay out at any time, or at a minimum with some form of nominal breakage fee

– Ensure that the asset based lending facility, which generally costs more, will allow to you remain or focus on profitability; we spend a significant amount of time with clients on how that can defer the additional costs of Abl facilities by several different strategies

So whats the bottom line. As always it’s simple – consider asset based lending and an ABL facility as a solid alternative for financing your business. Work with a trusted advisor as this type of financing is generally either mi understood or not too well known in Canada. Be selective in structuring your facility around issues that work best for your firm re benefits derived.That’s solid business financing sense.