Most Important Business Questions – Business Financing?
Published February 18, 2011 | 
How can you finance the business and make debt work for you?
You might not realize it, but you have a few choices, including Aunt Sally, credit cards (risky) angel investors, and venture capital (if you’re onto something special), bank loans (good luck) and lastly the most expensive route, equity. The bottom line for you is bootstrap the business if you can. Finally, it is very important to always remember to accurately match the schedule of cash inflows from your assets and the outflows to cover your liabilities. Make a mistake and the disparity can hurt badly.
Approach debt with great caution
A rule for even strong and financially healthy businesses to exercise is great caution when it comes to the consideration of debt. Preferable to the assumption of large debt amounts in hopes of encouraging major growth, think just the opposite. In other words, consider a debt load that will be much more manageable even if the economic and market environments take a turn for the worse. 
Start with determining payment amounts you can have the funds for and that still gives you some room if sales decrease like the markets experienced beginning in 2007 and lasting for several months.
After establishing positive circumstances and your financial projections are sound, consider next what form of debt might work best for you. In general, the rule is fixed-rate loans are traditionally attractive in view of the fact that any possible interest-rate movement is taken out of the debt-term equation. It goes without saying that makes growth, cash-flow and loan repayment planning a great deal more reliable.
Understand that even though long-term debt-equity might seem the most obvious choice, you should investigate revolving lines of credit in addition. 
They really provide much greater flexibility in terms of cash-flow management by accessing cash and subsequent repayment. You should be cautioned that lines of credit are best suited to businesses with a consistent cash cycle and a focal point on using the funds for a very specific purpose. Without consistently predictable cash cycles, keeping payments current can prove uncertain.
Is now a good time to go into debt?
Looking at the market in comparison to past years, the fact is that it’s a buyer’s market for small businesses eyeing some form of debt-equity. But you should take time to shop aggressively and compare loan costs, interest rates and other associated terms and provisions. 
Especially, small businesses should begin with local, community-based banks, whose loan terms might be particularly appealing, in addition to these lenders’ interest in supporting local small businesses.
But control yourself, keep debt to a minimum, and search diligently to find the most affordable agreement you can and make certain that the debt you take on is manageable. If you feel like you have the financial stability to service the new debt, then, yes, it is an excellent time to make debt work for you.
Twitter News Alert! Twitter to Raise $100 Million in New Funding!
Published September 24, 2009 | 
That’s right! $100 Million in funding based on a recent valuation of $1 Billion for the wildly popular micro-blogging platform, in spite of the fact Twitter has yet to implement a revenue model, although potential revenue streams are being developed as part of a model under work.
WSJ – Breaking News: Twitter to Raise $100 Million from Insight, T. Rowe Price, and Other Investors
Mashable – WOW: Twitter to Raise $100 Million in New Funding
Power in Understanding Investors
Published September 2, 2009 | 
Each day we are asked by Entrepreneurs about investors that might be interested in their business projects, that are poor candidates for lender or bank funding for reasons from collateral issues, to equity injection issues, to new market issues, all of which can greatly increase the amount of risk exposure to the point where banks are not in the fundamental position to approve even limited funding, if any at all, and many Entrepreneurs have a limited understanding and knowledge of just what investors are all about.
An investor is someone who places money into a business usually receiving an ownership or partnership stake in the business, and they are looking for high growth industries and markets and experienced management teams, and investors also undertake a great deal of risk since most of the money they provide is unsecured, therefore in many cases they seek very aggressive rates of return on their money.
It must be remembered and considered by Entrepreneurs that an investor is undertaking a lot of risk, therefore they may want a substantial share of ownership in your company, but just as important, investors typically don’t want in forever, usually after three, five, or seven years they want to exit the business, and if you have a problem with giving up ownership in your business then you’re going to have a very big problem in securing outside investment.
It’s important to understand the kind of money investors provide your business, which is typically not a loan and therefore not debt-based capital. In other words, since they are not providing your business with a loan, equity-based capital is placed in your business, and equity is money provided to your business in exchange for an ownership stake in the project.
Clearly, some advantages of equity are that equity capital can be much more flexible than debt, since there are no collateral requirements for equity capital, and repayment terms and conditions can be tailored to the needs of the business. Usually, payments to investors can be put off until the business exceeds break-even or reaches a certain level 
of profitability, so needless to say, this can really help the cash flow of an emerging business, and also equity capital can be a great way of raising large amounts of money for your business.
Advantages of having investors, are investors contribute to the credibility of a startup or growing business through their scrutiny, certification, and investment, and investors can also draw upon their own reputations and contacts to help the startup secure customers, employees, suppliers, and so on. Indeed, most Entrepreneurs that are recipients of venture capital indicate that the advice and mentoring they received from their investors was worth more than the money itself.
It is just as important for Entrepreneurs to know the disadvantages of equity which can come at a very steep price, while a debt-based bank loan might run you say 6% to 10%, an investor or venture capitalist seeks much higher rates of return around 20% to 
40%. Also, as stated earlier, equity investors generally want to share the business so you’ll have to give up some ownership (difficult for many Entrepreneurs to come to terms with), and while these investors don’t want be involved in running the day to day operations of your business, they usually want a seat on the board of directors where they can influence the decisions of the management team.
When determining when equity-based capital should be used, it is important know equity capital is well suited for startup and later stage growth businesses that require large amounts of working capital, or involve a new product launch, and banks are most assuredly not fond of lending working capital to a business, especially if they are in the startup phase. The reasoning is simple, that when a dollar is spent on payroll or advertising, it is gone forever and cannot be liquidated by the bank should the borrower default on the loan, so instead, this is the domain of the equity investor, and the investor is willing to take on more risk, for more reward of course.
When defining the types of investors in general, outside investors fall into three broad groups, Seed Capital from friends and family, Angel Investors, and Venture Capitalists, and these three groups differ with respect to the type of deal they are looking for, the size of the deal they want to do, and their specific motivations behind the investment, and Entrepreneurs need to understand and become familiar with each group, the deals they look for, and motivations specific to each investment.
Where to Find Investors
Published February 26, 2009 |
Finding an investor is as much a people process as it is a business process, with your success ultimately boiled down to how many contacts you have or how many you are willing to establish, and if your rolodex is not that big, then you have to accept the fact that your odds are longer and the time it will take to find an investor will be increased.
Most angels and venture firms target certain industries, so you obviously stand a much better chance of making a match if your business fits into their categories of interest, and you need to also talk to some of their portfolio companies to see how much control the firm wanted and how supportive they were when the business experienced any problems.
Most investors and venture capital firms invest their funds within their local market territory, they do this so they can effectively monitor and assist the businesses they have invested in, so therefore seek out firms that are closest to your business, and use your proximity to your advantage when profiling your business to any investors.
Talk to professional services providers you know such as accountants, brokers, financial advisors, consultants, Small Business Development Centers, and attorneys, since these professionals should have many high net-worth individuals and investors spread throughout their client-base, if it does not break any confidentiality policies ask the professionals for an introduction, and if it does break such policy, provide the executive summary of your plan to the professional and see if they could pass it on to potential investors, thereby maintaining their anonymity.
Statistics show that only one in a thousand business plans that show up “cold” on a venture capitalist door ever get funded, but on the other hand, there is a one in five chance of getting funded if the investor has an established relationship with you and your business, so talk to investors way before you ever start raising the money, approximately two to three months prior, and provide them with a short plan which could be your executive summary and keep them up to date on your progress.
Angel investors many times self-organize themselves into regional clubs or groups, in general these clubs tend to cluster around major metropolitan areas or broad regional clusters, so be sure to ask your local economic development director, chamber president, or Small Business Development Center director for the existence of such clubs or groups. The directory at Inc. Magazine Directory of Angel Capital Networks is a collection of regional angel investment clubs.
There are many websites that provide directories of venture capital firms, but remember you will probably have the best luck with firms closest to you, so try keyword searching the Internet for “venture capital” along with the name of the largest city in your regional area, and also visit http://www.vfinance.com for a comprehensive listing of venture capital firms.
How to Obtain Venture Capital – Part 2
Published February 22, 2009 | 
Venture capital can be divided into three distinct stages which include early stage, expansion, and acquisition/buyout financing. Early stage or “seed financing” is a relatively small amount of capital provided to an inventor or entrepreneur to prove a concept and to qualify for “startup” capital, and startup financing is provided to companies completing product or service development and initial marketing. These companies are generally in business for less than one year, and have not yet sold their product or service commercially, while “first stage” financing is provided to companies that have expended their initial capital and require funds to initiate full scale manufacturing or servicing.
“Second stage” financing is working capital for the initial expansion of the company that is providing services, or is producing and shipping product, and has growing accounts receivable and inventories, and “third stage” financing or “mezzanine” financing is provided for major expansion of the company whose sales volume is increasing and that is breaking even or profitable, and “bridge” financing helps IPO driven companies to obtain short-term financing that will be repaid when the IPO occurs.
“Acquisition” financing provides funds to finance an acquisition of all, or a portion of another company, and “management/leveraged buyout” financing enables an operating management group to acquire a product line or business, from either a private or public company, and the acquisition maybe for the purchase of selected assets or stock.
The venture capital process roughly breaks down into six phases and they include the qualification of the deal (1 to 2 weeks), performing due diligence (2 weeks to 4 months), deal structure and negotiation (2 weeks to 2 months), approval process (2 to 6 weeks), monitoring (2 to 6 years), and the exit.
The results of the negotiations is documented in what is called a “term sheet”, which is a document summarizing the details of a potential venture capital investment which serves as the basis for a final business agreement, and it usually takes a few weeks to negotiate a term sheet, after which an attorney then takes the term sheet and turns it into a 50 to 100 page legal document.
The approval process involves a full partner review and documentation creation, and the documents then go through two to three draft revisions to get it right over a four to six week period, which can cost about $10,000 to $25,000 to complete a basic set of documents.
A partner of the venture capital firm is usually assigned to monitor your company’s performance and achievement of milestones, and they usually will take a seat on your Board of Directors and will request certain visitation rights, and in addition they will usually request a copy of your financial statements and define other information rights that they deem necessary.
A venture capital firm will usually want to exit out of your business around the fifth year if not sooner, and there are three ways they can get out including your company been sold, where the investors get their money out when the assets are sold off, your company can be taken public when there is a market to sell their ownership shares, and your company can be re-capitalized, where you buy out the investors using the cash flow from your business or with debt financing.