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Today’s Sayings
Given a choice between building your business on large debt or facing a
firing squad, choose the firing squad. There is a chance the firing squad may
miss.
In business today, too many executives spend money they haven’t earned, to
buy things they don’t need, to impress people they don’t like.
Identifying Sources of Financing
Understand sources and implications of finance
Understand how to contact and deal with finance sources
Understand differences between equity and debt
Review government finance programs
How to Formulate Financial Strategy
1. Start
with opportunity--not the need for cash
2. Formulate business strategy appropriate to
capture the opportunity
3. Define the cash need:
a. Assets
b. Working capital
--determined by free cash flow
burn rate -- out of cash -- time to close
4. Then formulate financing plan
Determine Capital Requirements
First do a marketing plan
sales and profit goals
marketing and sales plans
USP vs. competition
Construct financial proformas
P&L’s, balance sheets, assumptions
cash flow analysis
Understand Ent. vs. Int. Needs and Sources
Intrapreneurs compete internally
other managers
other projects
Entrepreneurs have more choices (sometimes) and risk
all possible sources of debt and equity
possible to create I-relationship with corporate financial sponsor
New Venture Financial Issues
Determine what stage you are in
prestart, start-up
early stage, mezzanine
Determine the quality of the borrowing base
the big idea - USP
assets
cash flow
receivables
Craft Fund-Raising Strategies
Personal objectives and needs
hobby businesses
side-line businesses
your livelihood
EMPIRE building
Friends, family, relatives
Debt vs. equity sources
Questions to answer
How much control do you need?
Who do you want to marry?
How are you going to spend the money?
How will you maximize the capital?
Better to bootstrap or use OPM?
Are you prepared for the capital hunt to become a full-time occupation?
Finding the right sources of financing is a lot like choosing between two
blind doors
-with Tigers behind each.
R Hirasawa
Equity Tigers
Investors have a universal motive - to make money
Investors are always interested in knowing specific exit strategies
What is most important to an equity investor?
Equity Tigers
Friends, Family, Relatives
Private Investors
Angels
Venture Capitalists
Corporate Investors
Business Plan Statistics from a Venture Capitalist
4 out of 5 are discarded within 15 minutes
Of the remainder, 4 out of 5 are read for an hour and then thrown out
Of the remainder, 3 out of 4 are turned down after meeting with management
Of the remainder, 1 out of 3 will be funded
The better you see the risks through the eyes of the investor,
the better your chance of funding.
Different Investor Types
Nervous
Back seat drivers
Investors who like their hands held
Investors with hidden agendas
Your ideal investor
Angels
Usually do not like start-ups
Make high (>40% annually) returns
Take an active interest
Concerned most with quality of management
Like businesses they are familiar with
Invest on average about $50k apiece per venture
Debt Tigers
Lenders share your business risk for a set fee
Will only loan to those they consider trustworthy
Love qualified guarantors
Do not really care about your business. They will secure their loan to
eliminate their risk
More on Debt Tigers
They like to see that you have a large retirement account balance
They will only loan to those who appear not to need it
They will never come through on their first commitment
Debt Tigers
Personal loans
FFR, credit cards, home equity
Debt Capital
trade credit
commercial banks
finance companies, savings and loans
factors
leasing companies
insurance companies
Factors that reduce available capital
Compensating balances
Discounted interest (in advance)
Lags in check clearing
Securitization formulas
Factors that increase costs
Points
Application fees
Commitment fee
Due diligence costs, legal costs, UCC filings
Prepayment fees, termination fees
Monitoring and audit fees
Unused line fees
Float days
Do not overlook combining both debt and equity
Government Tigers
Federal
SBA
grants
State
Local County, City
Much of the decision of equity vs. debt is tax driven
Advantages of Equity
More flexible
can adjust rate of return
owners cannot force company into bankruptcy
owners are less likely to sue over complaints
Possibility of ordinary tax losses (debt losses of individuals may be capital
losses)
Capital gain treatment for appreciation
Roll over of gain possibilities
Advantages of Debt
Increases leverage for owners
Deductibility of interest
Dividends are double taxed
Non-taxability of principal repayments
Justification for accumulated earnings
Debt losses are ordinary losses if business debt
Indicators of Debt
Unconditional promise to pay
Higher priority than equity
Debt to equity ratio
Convertibility
Proportionality
Documentation and actions are very important
The 4 C’s of Borrowing
Credit history of borrower
Collateral to secure loan
Cash flow history and projections
Character of borrower
Don’t approach your best prospects first. Call on your long shots and
practice giving your presentation to them.
When you are rejected for financing:
find out why
ask for suggestions of other sources that you should pursue
Other sources of money
Equipment leasing offers a variety of ways to make bad capital investments
You always pay for the flexibility in a lease
How much should you ask for?
Always ask for more than you need
Never ask for more than you need
To get money you need to:
Have the ability to project, and then perform to plan
Differentiate between fact and assumptions
Have the ability to deliver. Plans cannot keep changing.
Have a story built on correct facts and have a reasonable probability of
being executed (the story, not you)
The legal documentation
Read and understand the impact of every word in your document
Do not waste time with non-sensical revisions
Be prepared to spend a lot of time with lawyers
Do not sign until it says what you want it to say
Don’t forget the due diligence process!
Time runs a close second to cash on every entrepreneur’s list of scarce
resources. Do not waste valuable time thinking about raising venture capital or
debt until you convince yourself that your venture will generate substantial
wealth. A successful financing hunt will normally take at least 6 months from
start to finish. You must have both a good opportunity and a substantial desire,
or the process will eat you alive.
Sobering Thought
More than 80% of the fastest growing companies were financed solely by the
founder’s personal savings, credit cards, second mortgages, customer advances,
extended terms from vendors, and other bootstrapping techniques.
Final Thought
Most entrepreneurs overlook the very best source of cash - the cash they
already have
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Michael Goldman & Associates, L.L.C. - Consulting
& CPA Services 
