Stanton Financing Guide

Peter owns a successful business that is growing quickly. Like many businesses, Peter’s company has good commercial and government clients that buy regularly from him. And since Peter is really good at his business, his clients have been purchasing more and more products from him. His business appears solid.

But some cracks are starting to appear in the foundation. He’s been close to missing payroll twice. He’s delaying supplier payments. Even worse, he chose not to bid for a major government contract because he couldn’t afford to. That’s true – he couldn’t afford to bid for new business. He was afraid of having to add more employees and buy more materials.

How can that be?

Like most business owners, Peter extends terms to his clients. They usually pay him in 30 to 45 days. But, since Peter runs a small business, his suppliers demand that he pay them in 10 days. Plus employees need to be paid every two weeks.

In summary. Peter has clients that want to pay in 45 days and suppliers/employees that want to be paid in 10. Since the company does not have a lot of money in the bank, the math doesn’t work.

Is there a solution? Yes, Peter should consider factoring his invoices to fix his cash flow. Factoring will provide him with the necessary cash to pay suppliers and employees, while eliminating the 30 to 45 day wait to get paid.

Invoice factoring works as follows:

1. You deliver the product or service and invoice your client

2. You send a copy of the invoice to the factoring company for financing

3. The factoring company advances you up to 90% of the invoice. You get immediate funds

4. Once your client pays the invoice, the transaction is settled

With factoring, Peter will be able to meet his current obligations. His company will also have enough cash on hand (or liquidity) to bid on new job proposals, allowing him to grow the business and take it to the next level.

Commercial Capital LLC

Looking for a factoring company? We can provide you with a factoring financing quote. Please Marco Terry at (866) 730 1922 for a free quote or go to our commercial finance website for more information.

Last year, I was approached by a small group of people who had recently quit their jobs at a company that manufactured commercial food processing equipment. They became disillusioned with their employer due to lack of efficiency in production, marketing, and a general atmosphere of disorganization. The leader of the group felt they could “build a better mousetrap” if they went out on their own. Each member of the group was adept in the operational side of the business. They enjoyed good relationships with the company’s customers, who were also frustrated by missed deadlines, broken promises, and even incomplete orders. The group leader covertly talked to some of these customers (medium to large sized food manufacturers) about buying from their new company. Several firms seemed excited about the prospect and made verbal committments to buy equipment from them. Needless to say, the group of four wanted to move forward with forming a new manufacturing company. Now they needed start up financing.

Although these people knew the business from the operational end, they were all lacking in several key areas. None of the group understood accounting, cost structures, cash flow, or anything related to finance. This posed serious problems for me, whom they counted on to get them the money they needed to get going. To make a long story short, I worked with them as best I could, but became frustrated quickly when we tried to put together a business plan and accompanying schedules to give to the lender. I depended on them to give me relevant information relating to their business because I knew nothing about the industry. Unfortunately, they simply didn’t know as much as they should about the adminstrative and financial segments of the business, and it showed. They were turned down from two leasing companies, and were then rejected for an SBA loan. Despite the difficulties, they still would have gotten the SBA loan if the potential customers had signed off on buying committments, but they didn’t.

The moral of this story is to have your ducks in a row for all apspects of your business. What would have happened if they had gotten financing? Unless they would have hired some top flight in-house financial officer, I think they would have ended up in deep trouble.

Some helpful tips for developing a business plan:

1. Be conservative with your sales projections. It’s easy to get caught up in the glamour of lofty sales forecasts, but you should assume it’s not going to be rosy the first few years. Make sure you have a solid basis for your projections.

2. Don’t view it as a mere formaility to get a bank loan. Look at it as a blueprint for the life of your business. Writing an effective business plan means doing a lot of soul searching and research. What market entry challenges will we have? What is the most effective means of marketing our products? Which suppliers provide the best value for our raw materials? The answers to these questions (and many more)must be well thought out.

3. Carefully analyze the strengths and weaknesses of your management team. Part of the business plan involves giving biographies of the main players. Writing this section should disclose if the main parts of your business are in good hands: sales, marketing, accounting & finance, adminstration, and operations. If you find you are lacking in any of these areas, start looking for the people you need.

4. Don’t wait until the last minute to start writing. Schedule plenty of real work hours over the course of several weeks. The main reason is because of this: if you tell an a loan officer or investor in person about your idea, he/she will say “Sounds interesting! Send me a business plan tomorrow.” In other words, they’ll already expect it to be done. You obviously won’t be able to crank out a 40-page document overnight, complete with research and financial analysis.

5. Before you send your business plan to anyone, proofread the executive summary carefully. You will probably not get the financing if you have typos in the executive summary. The fewer mistakes you have, the more professional you’ll look.

You’ve probably read statistics regarding the failure rate of new businesses. No one can say for sure how many failures occurred because the key players didn’t do their homework up front, but my guess it is a majority. Don’t let it happen to you!

Kent Harlan has been a CPA since 1984 and has provided consulting, accounting and financial services to several industries. He is the owner of Ozarks Capital Funding, LLC, a Springfield, MO based company offering financing in the areas of accounts receivable factoring, equipment leasing, asset based lending, and healthcare provider financing. He is also an active member of the Missouri Society of Certified Public Accountants and has written numerous articles for the Springfield Business Journal and The Asset
Website: http://www.ocflink.com

If there were only two reasons for a business to fail they would be poor financing and poor management or planning. You can’t over-emphasize the importance of financing your business. Financing the business is not a one time activity as some might think. It is necessary whenever the need arises such as when expanding, modernizing etc. At this stage you need to understand the importance of exercising extreme caution and plan the utilization of capital. A wrong decision here can haunt your for the life of your business.

Are You Sure You Want To Raise External Funds?

For start-ups, it’s understandable that you need to raise capital through loans. But what about expansions and upgrades? Make sure that external financing is an absolute must before you apply. It is critical that you organize your finances at transitional stages but only after you make sure that you can’t do it yourself, either permanently or for some time. Equally important are the criteria of risk, the cost of not financing and how well it contributes to specific and overall goals of the company.

FINANCING TYPES

Equity Financing: Equity financing involves selling off of your shares (mostly partially) in return for cash and giving away that portion of ownership and rights to profits. Equity financing can be sought from private investors or venture capitalists. This brings about proper capitalization opening access to debt financing. Equity finance doesn’t need to be returned like loans unless your partner wants to withdraw.

Debt Financing: Debt financing is loan financing against some kind of guarantee of repayment. The guarantee can be collateral, a personal guarantee or a promise. Lenders restrict the use of debt finance to inventory, equipment or real estate. You need to properly structure the debt and the rule of thumb for doing so is giving long term debt for fixed asset loans and short term for working capital. The reason is that fixed assets generate cash flow over their lifetimes and have the benefit of lower interest rates as opposed to working capital loans.

Sources of Finance:

You can choose finance sources depending on your circumstances and the amount required.

1. Family and Friends: Small and short-term working capital requirements can be financed quickly through your own resources or through family and friends. The benefit here is the absence of the interest component (mostly.) This method of raising finances is handy even in early stages of business. You should be mindful, though, that disputes over money are the main reason that close relationships turn sour.

2. US Small Business Administration: This is the most prominent source for debt financing. The SBA doesn’t lend money directly but organizes and guarantees loans through various lenders and sources under its umbrella. Local governments, banks, private lenders, etc. disburse loans immediately to businesses approved by the SBA. SBA loans are available for various business purposes and at the lowest interest rates available.

3. Venture capital: Raising venture capital is organizing financing through selling shares whose value equals the finance you require. Essentially this means selling a portion of the ownership and control rights. It is essential that a proper valuation of your business’s worth is made before the deal is done.

Financing a business shouldn’t be hard provided you have established your credentials as a good manager, have collateral/assets, a convincing cash flow statement, genuine need, a proven track record, good credit history and a robust plan. This should not just save your business from collapsing but also allows it to grow and succeed.

Tony Jacowski is a quality analyst for The MBA Journal. Aveta Solutions – Six Sigma Online ( http://www.sixsigmaonline.org ) offers online six sigma training and certification classes for lean six sigma, black belts, green belts, and yellow belts.