Small Business Start Up Capital Access Primer and Key Steps

Start Up Handbook series part 2  Capital Access Primer and Definitions

  This is part two on Capital Access of a ten part series for start ups and new entrepreneurs. Part one entitled Making it Legal addressed Establishing a Legal Entity – Understanding the Advantages and Disadvantages of the various types of Legal Entities Part two will provides insights on: 

• Financial Services Needed – Addressing the issues and the options
• Do You want to Access Capital?  What you need to Know
• Your Personal Credit Score –  What you need to know and what you can do about it.
• Preparing an Income Statement for Your Business
• Do You Need to Raise Capital?
• How to Access Capital for Your Growing Business
• Check your credit score. Address the issues. Use a 680 credit score as your goal

Major credit issues  that adversely  affect your credit standing are:

• Bankruptcies
• Foreclosures
• Short sales
• Loan modifications

Other Factors that Impact  Your Credit:   

• Past Delinquencies -35%
• Debt and Ratios  – 30%
• Average Age of File -15%
• Mix of Credit Types – 10%
• Inquiries  – 10%

And Then What?

• Improve your elevator pitch
• Establish a relationship with a business banker before you need to access capital
• Attend networking events, interview lenders. Open a business account
• Prepare a strategic plan that includes an action plan (A traditional business plan is not required)
• Create a team that meets periodically to review your progress and problems.

The team would include

• Owners and senior management
• Your  attorney
• Your accountant
• Your marketing specialist
• A mentor or a coach  and possibly an advisory board

How Bankers Look at Borrowers – Being Bankable -How to Establish a Relationship with a Banker Whether you are applying to a bank for a line of home equity credit, a line of credit for business working capital, a commercial short-term loan, an equipment loan, real estate financing, or some other type of commercial or consumer loan, many of the same basic lending principles apply. The most fundamental characteristics a prospective lender will want to examine are:

• Credit History of the Borrower
• Cash Flow History and Projections for the Business
• Collateral that is Available to Secure the Loan
• Character of the Borrower
• Loan Documentation

When reviewing your loan application, lenders look for good credit, a feasible business plan, adequate owner equity and sufficient collateral. Perhaps most important, they look for management expertise and commitment. What real world experience do you and your key partners or employees have in managing this type of business? Here is what you’ll need for a bank loan application:

• Cover letter of introduction
• Summary of financial needs (Source and Use of Funds)
• Business financial statements (Not less than 2 years)
• Business tax returns (Not less than 2 years)
• Projected cash flow statement (Not less than 12 months)
• Collateral (both business and personal)
• Personal tax returns (2 years)
• Personal financial statements
• Résumé

The lender will also ask:

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

TIP: Your credit score is crucial to your startup’s financial success. Since your new business does not yet have a track record, banks will consider your personal credit score in making lending decisions or opening business accounts. Vendors, suppliers and potential partners will also assess your personal credit score before extending credit or doing business with you. THE SIX C’S OF CREDIT – SOMETIMES REFERRED TO AS THE THREE C’S OF CREDIT) 1. CHARACTER / CREDIT

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

2. CAPACITY

• Ability to repay the amount borrowed
• How soon you can generate positive cash flow
• When you will show a profit
• How large the profit will be
• Whether the profit can be sustained

3. CAPITAL

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

4. COLLATERAL

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

5. CONDITIONS

• Terms of the loan, including:

1. –Intended purpose
2. –Amount requested
3. –Length of loan

• Local economic climate of industry
• Local economic climate of business

6. CASH FLOW

• Where the money to repay the debt will come from
• How the loan proceeds will be used

TIP: How much money will lenders expect you to put into your business? A good rule of thumb is that owners should contribute a minimum of 25 to 30 percent of the required capital. Banks won’t finance 100 percent of your business; they seek a risk cushion and want to know that you, too, have skin in the game. Opening Up Business Account (s) and Merchant Service One of the most basic tasks when starting any small business is to set up a business bank account. Having a separate account for your business is a good idea for a number of reasons, and the process of establishing the account is usually quick and easy—if you take a little time to pull together the necessary documents before dealing with the bank The documentation needed to set up the account will depend on how your business is organized: (sole proprietorships, general partnerships, LLCs, and corporations). Accounts you will need: A  Business Checking Account: A Merchant Service Account:  will enable your business to accept credit cards, debit cards, and other types of electronic payment. A merchant services account is established with an organization (generally referred to as a payment processor or a merchant acquirer) that has relationships with the various organizations that allow the processing of electronic payments when your customers want to pay for goods and services. Establishing a merchant services account and executing a merchant processing agreement are the first steps to get you started with credit card processing. Before you open a merchant account, it’s important to know which account is right for you, and how the right payment processing solutions can help you manage and grow your business.  Shopping for the Best Lender Knowing Your Needs:  Before you start shopping around for a financial institution, consider why you need one in the first place:

• Are you looking for specialized services, such as investment help or a small business loan?
• How much cash flow will be moving in and out of your business account?
• Is your “business” even a business yet?
• What sort of incentives or special services are offered by the bank to make the most of your profits?
• What else might your small business need in the next 10 years?
• Might you be expanding and need a loan in the future?

Comparing Features: Search for banks that specialize in what you need, and call them to request specific information, including additional services, fee structures, and interest rates. In addition ensure the bank has good online banking infrastructure and extensive local network with multiple and close locations for face-to-face assistance. How to Prepare a Projected Income and Expense Statement for the next 12 months Getting Started———— ( We will refine the income statement in a later session.) Also called the income and expense statement or profit and loss (P&L) statement, the income statement is the financial picture of business results over a period of time. It is used for creating a period projection, or an estimate of how you expect your business to perform from year to year. The income statement is required annually, but usually prepared monthly or quarterly, with the final report for the year being the annual summary that is filed as part of the business’s tax return. Businesses are required to pay taxes in quarterly installments, based on the proportion of total annual profit earned in each quarter. This form is also intended to help you calculate your startup expenses, payroll costs, sales forecast, cash flow, income statement, balance sheet, breakeven analysis, financial ratios, cost of goods sold, amortization and depreciation for your small business: INCOME STATEMENT:  The income statement is laid out in a precise fashion. COMPONENTS OF AN INCOME STATEMENT TOP SECTION SHOWS REVENUES

1. Gross revenues  – By Type – Can have many different items and categories
2. Adjustments to revenues  – returns – adjustments
3. Cost of goods sold (COGS) (Variable Expenses relating to sales)

BOTTOM SECTION SHOWS EXPENSES Operating Expenses By Category ( Fixed Expenses) This series ongoing series  handbook prepared by Marjorie Weber was prepared will also be part of the Miami Bayside Foundation to qualify small business owners for the Miami Bayside Foundation loan program. Related articles: Small Business Start Up Part 1: Small Business Start Ups Making It Legal A Smart Strategy to Working Capital Is Not Complicated Small Business Capital, Digital Lenders and Angels Four Basic Principles for Raising Capital