Posts tagged "loan"

When Should You Plan to Access Capital?

July 24th, 2017 Posted by Blog Post, Business Plan 0 thoughts on “When Should You Plan to Access Capital?”

access to capitalSometimes, you need access to capital – a cash infusion to make your dream a reality. Hard work isn’t always enough. Don’t let that prospect scare you because there are options. It is up to you how well you prepare for them.

Micah Dickson, Small Business Community Lender with Fifth Third Bank was a recent guest on the Business is ART podcast entitled “Access to Capital.” We talked about a few do’s and don’ts when it comes to seeking funding for your business or startup.

Some of the highlights from that episode are summarized here. You can listen to the show in its entirety on iTunes, through the TrueChat app or at the Business is ART page on the TrueChat website.

What are some capital funding options?

There are a variety of sources to which you might turn for a cash infusion, including:

  • Your bank account, retirement account, and other assets
  • Your friends and family

If you are like many entrepreneurs and business owners, you will likely exhaust those options first. But then what? Again there are multiple options, including:

  • Crowd Funding
  • Crowd Lending
  • Commercial/Small Business Loan
  • Private Equity Investor (PE)
  • Venture Capital Investor (VC)

Crowd Funding and Crowd lending can be very effective. Within the parameters of the Crowd Funding or Lending service provider, you can define what donors and lenders receive in exchange for providing you with cash.

But just like selling your products, there is a huge marketing and PR game you have to play in order to attract people and entice them to give, which can be a downside.

What is the least expensive kind of traditional external capital?

Of the three traditional forms of external funding (bank loan, PE and VC), the loan is the least expensive option.

Some may mistakenly believe that PE and VC options represent “free money.” Not true. VC and PE options may very well be the best options for you and your business, but they come at a price.

Typically, that price comes in two forms: control and ownership. When a VC or a PE gets involved, they typically will take some control of the business direction. They are investing in you as well as the business, so they aren’t likely to take total control, but they will at least influence direction. That theoretically is a good thing, unless you insist on total control.

The PE and VC also take some percentage of ownership, so you will no longer own the entire business. They are going to want their money back, plus a significant chunk of cash on top. That may come from selling the business, selling their share of the business, or receiving significant portions of the revenue or profits generated from the business. At the end of the day, this can be very expensive to you.

The bank, on the other hand, wants one thing: to be paid back with interest. That’s it. You maintain 100% of ownership and control.

The downside is that there may be more hurdles to accessing capital through a bank because a bank wants to be very sure it is going to get its money back. The bank wants as close to a sure thing as possible, so it is going to scrutinize more deeply and look for more existing capital and assets from your business and from you personally.

A PE or VC, on the other hand, is placing more of a bet. They know not all of their bets will pay off, which is a primary reason they demand so much more in terms of control, equity, and payback.

When should you start planning to access external capital?

Before you need it.

Assume that at some point you will need access to capital, even if you never will or think you never will. Then prepare for it by doing the following:

  • Take care of your personal credit – it will matter
  • Prepare and maintain a business plan – it will be required
  • Create a team of trusted advisors, then seek their on-going advice – accountant/financial advisor, attorney, insurance agent, business consultant/coach, advisory board

If you do these things, not only will your business run more smoothly and successfully, you will be better prepared – by far – should the time come to seek a cash infusion.

Bootstrapping or Investors: Which is Best for Me?

June 3rd, 2016 Posted by Business is ART, Entrepreneur, Owner 1 thought on “Bootstrapping or Investors: Which is Best for Me?”

Photo courtesy

If we all had rich relatives who were quick to give their money away, starting a business up would be relatively easy. For most of us, that’s not the case.

But if it takes money to make money, as the old saying goes, where do the funds for your business come from?

The two most common ways to fund a startup business are to A: bootstrap it or B: get investors.

To know what’s best for you, you need to understand the pros and cons of each.

Advantages of Bootstrapping

Bootstrapping is really just a fancy word for self-funding. Arguably the biggest advantage is that you retain full control of your business. No shares are sold. You owe nothing to anyone but yourself.

If the business doesn’t work out, sure, you’ll have lost your money, but you won’t lose someone else’s money with it, which is generally a good thing.

Many people who bootstrap also find themselves to be more focused. You don’t have excess capital, so you need to stay as lean as possible. Additionally, you don’t spend any time tracking down and dealing with investors, so you can stay 100% focused on your business.

The Downside of Bootstrapping

While bootstrapping can be easier to get going and comes with less risks, it has its limitations. Specifically, in the realm of cash-flow. If you’re the one funding your business, you’re limited by however much (or little) money you have.

If you take on more work to bring in more money to put towards your new business, that’s time taken away from doing actual work on the new business. Many find the balance of working on the old to fund the new to be a bit tricky.

By bringing on investors, you might be able to gain the funds needed to pursue your business 100%…

Advantages of Investors

Bringing on investors can bring in a much needed surge of finances that can be used to grow your business exponentially faster. Not only does it get you money, but investors can often bring additional connections, personal knowledge and other resources to the table.

Of course, investment money comes with its own price.

Disadvantages of Taking Investment Money

Investment money might appear to be free money at first, but make no mistake, that money comes with strings attached. What those strings are depends on the agreement you make with the investors. It could be shares or voting rights or a certain rate of return.

Regardless, once you take on an investor or two, the business and its success no longer belong to you entirely. And sooner or later, that investment money will run out. You now have a deadline by which you have to achieve success as defined by the investors.

It can be a lot of pressure added to your business, to say the least.

What About Both?

It’s not uncommon for a business to start by bootstrapping and eventually move to bringing on investors. In fact, it’s typically easier to find good investors if you have some semblance of a business started.

It’s also good for you because that generally means you’re bringing in some level of revenue, and the investment money is specifically to grow your business bigger, faster, rather than making it work in the first place.

What’s Best for My Business?

The best option for you depends on a number of factors, ranging from “how much money do you have for bootstrapping” to “what investor opportunities are theoretically available to you”.

Whatever route you go, you’ll need a plan. To learn more about the ART of business, check out my book or contact me directly. I’ve worked hands on with businesses in all different stages.

Plan Canvas is a community and a powerful software for improving your odds of business success and personal fulfillment.

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