Inside Small Business | Small Business & Home Business Marketing

“Small Business Challenges: Financing Your Business”

Part One in a Three Part Series on overcoming small business challenges
By Ed Gillooly, Managing Principle of HIRE Finance

On one hand, most small businesses (76% according to Arthur Andersen) say they can find adequate financing for their business, and yet one of the biggest reasons experts cite for business failures is insufficient capital.

This dichotomy can easily be explained: most small businesses simply don’t do enough planning to accurately measure the amount of financing they need. So when they are “caught short� and the need for capital is immediate, they are in no position to get it. They end up surprised by the need for more cash, and can’t credibly answer how they got into the situation or how they’ll get out. If the business owner has less than stellar credit or is over-leveraged, what might have been a “bankable� situation can wind up ending the dream of owning a business.

Banks (and lots of other sources) are in business to finance you. They NEED to make loans to make money. But requesting a loan without doing your homework is the sure fire way to be labeled “High Risk!” To be successful, you must be prepared and organized. You must know exactly how much money you need, why you need it, when you’ll need it, and how you will pay it back. That information can only come from a detailed financial plan.

Your financial plan should contain your projected financial statements – Balance Sheet, Income Statement, and Statement of Cash Flows – for the next year (minimum) to three years (ideal). If you’ve been operating the business, you should also provide any historical financial statements on your results to date. While many business owners rightly decide to let accountants or consultants help to develop their projected financial statements, they cannot be accurate and useful without the participation of the business owner.

When it comes to financial planning, “it’s all about the assumptions.� You want to build a plan that documents the assumptions that you’re making about the business. Ideally, it should be done in a way that allows you to easily adjust them based on feedback from your financing sources, as the business changes over time, or as your insight into operations grows. Too many plans end up with the legendary “hockey stick� revenue growth without any direct link or logical increase in expenses. What’s the average sale? What’s your close rate on prospects? How many appointments does it take to close the sale, and over how much time? These are just some of the assumptions that have to be answered – and “costed� - into your plan’s expenses to ensure your plan is reasonable. Your accountant can’t answer these questions without you.

You also want to develop the plan in a way that supports analysis of our business moving forward. Do you have more than one product or service? Does your plan develop information on the net profit of each product? Which are the stars and which are the dogs? No financier likes to “feed the dogs.� Neither should you!

Who will ultimately finance your business depends in large measure on the amount of financing needed, its relation to your investment in the business, whether it’s a long term or short term requirement, and the purpose of the loan. All that being said, start with banks first. They typically have the most ways in which to finance your business and can be very valuable to an entrepreneur, especially early in the life of the business. Many banks can provide you with equipment leasing options in addition to short and long term loans, for example, which can be very helpful to capital-intensive operations.

Even if your financial plan indicates you won’t need capital for years, the time to start a banking relationship is immediately. The key word is relationship. Share your financial plan with them, as well as the outlook for your products and services, and what you think you’ll need in the long term. Update them on the progress against your plan as you go along – every three months or so. This gives the bank an opportunity to see how you operate as a businessperson, and to give you valuable feedback along the way. If you find yourself in need of cash to cover an unanticipated event, you won’t be an unknown commodity to them, and you’ll have a much better chance of success than someone who comes in “cold� with a loan proposal. And if you decide to be more aggressive by growing your business with borrowed money, they’ll know your original plan and how you’re exceeding it.

Ed Gillooley is Managing Principal of HIRE Finance, a Philadelphia-based consulting firm that provides entrepreneurs the financial know-how to grow their businesses. For more information, please visit www.hirefinance.net. He can also be reached via email at ed@hirefinance.net

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Finding Financial Opportunities through Networking

By Nancy Michaels

If you view networking as nothing more than a way to meet people who can further your own business goals, you probably won’t get very far. When approached with purpose and thought, networking is an excellent way to build mutually beneficial relationships within your and your clients’ industries.

In March of 2003, I was featured in an article on building effective business alliances in Entrepreneur Magazine. The reason? I had bid on lunch with Bruce Nelson, former CEO of Office Depot, in order to win his trust and business. All proceeds went to a charity I believe in, Count-Me-In, which champions the cause for women’s economic independence by providing access to business loans, consultation, and education, and my $1050 investment landed me my largest client to date.

Here are some networking tips you can put to use right now that will help win business.

1. Show up – See and be seen in places that make a difference

Woody Allen once said the key to success is in showing up. How true. If you go back and look at your biggest wins in business, I can guarantee you’ll track them to being at the right place at the right time and following up. It’s great to belong to professional organizations that give you moral support, however, if your clients aren’t hanging out at these meetings, you might be better served joining your client’s professional organization and becoming actively involved. Professional organizations outside your industry are where you’re most likely to meet people who will need your services. It’s not enough to simply join and attend a monthly meeting. Get yourself on a committee where you will make an impact, meet potential clients and gain new referrals. You’ll make a positive and memorable impression and your target market will begin to know and trust you.

I worked with an interior decorator that received a lot of business from attorneys. I suggested she join the Massachusetts Bar Association to network with potential clients. She ended up being the only interior decorator of the group and had no competition. Also, for instance, a caterer who is active with the local chamber of commerce is likely to meet people who plan corporate parties and events. This caterer is more likely to gain clients through the chamber than through a caterer’s association. Another benefit of professional organizations is that they often sponsor functions during non-business hours specifically for the purpose of networking.

2. Do your homework – Before and after

Before a gathering, find out who will be there and familiarize yourself with the backgrounds of the people you will be meeting. The information will arm you with relevant conversation starters while demonstrating your interest in the lives and careers of others. Try to meet two to five new people and listen more than talk. Ask lots of questions so that when you leave, you will have a pretty good idea of people’s needs. After the function, keep in touch with your new contacts by sending a card with a personal, handwritten note.

3. Take a risk and ask someone to lunch

It makes sense to break bread with folks who you could benefit – an editor from your client’s industry trade journal or a potential client. If you don’t ask, you’ll never know. If all else fails, do what I do. Offer to donate $1000 to the charity of their choice for 90-minutes with you over lunch. That’s a much more difficult offer to turn down. It also shows you probably have something wonderful to share with them that will benefit their business. Lunch with Bruce Nelson was certainly the most expensive meal I ever had, but it led to my biggest client and was well worth it.

4. Dine in the right spot

I recently had lunch in a New York City restaurant with Geraldine Laybourne, the CEO of Oxygen Media. The restaurant she chose was like sitting in a TV station lobby and watching as nearly every person came in to take their seat was a celebrity. I met Barbara Walters, saw the head of AOL, a writer for the New Yorker, etc. It was like participating in a who’s who of media. When I return to NYC, you can guarantee I’ll be dining in the same place. I’ve got a good feeling my lunch date will be happy to join me there.

5. Make a specific request

It’s always wise to ask an existing client out to lunch as well. I continue to make contact with my clients well into the relationship. At times I’ve asked them a specific favor, such as, “Would you be willing to send a referral letter to my prospects as I look to grow my business?” Usually, I offer my advice and council on how they can improve their business. I want to be perceived as their trusted advisor and friend.

6. Always be willing to return the favor

Whenever you ask clients for a favor, make it clear that you’re willing to do the same for them - in whatever way they deem appropriate. After asking a client of mine to send a letter out to my prospect base that sang my praises, I offered to return the favor and he took me up on it. About a month after the letter went out, his assistant called me and said, “It’s pay back time” and asked me to attend a fundraising breakfast for a local politician for a $1000 contribution. It served to be an outstanding place to network and it showed that I could be trusted with my commitment to him to return the favor.

7. Use technology to help you along

Stay connected with your customer and prospect base by having the right technology tools available. Whether it’s a BlackBerry, your cell phone or a Palm Pilot, you need to be able to make connections while you’re on the road or simply away from your office. Updating your web site and utilizing e-mail (not as a replacement for face-to-face contact, though) can help you stay connected.

8. Remember that relationships take time

Once you have the meeting and greeting part of networking down, remember to follow up with your new contacts. Advertising experts say consumers need to see a product six or seven times before they connect it with its ad. As entrepreneurs, we need to use the same strategy to promote our business. Having face-to face and frequent contact with a customer or prospect can set you apart from your competitors. Send articles, books, and announcements that may be of interest to them. Remember their birthdays, their kids names, send them thank you notes, celebrate unexpected holidays and keep them in mind at all times when servicing them. Keep them informed of your expertise in your field and in their industry, as well as accomplishments within your company. They’re more likely to give your name to others if they feel like you’ve got the expertise and they hear from you often. Over time, you’ll build a life long relationship by showing your value and commitment to them.

9. Leverage your relationships through endorsement marketing

After you’ve established a strong network, leverage it through an endorsement marketing campaign. An endorsement takes the testimonial one giant step forward by going directly from a satisfied client to a prospect. Ask your best client to sign off on an endorsement letter on their letterhead to your list of prospects. Send out a follow up letter from you two weeks after the endorsement letter to the same prospects, including three other testimonials and something of value, such as an article you’ve written. Send a grand finale letter two weeks later, referencing the initial letter and including a call-to-action.

10. Create a raving fan list

Sit down and write out a list of players in each of your client’s industry - whether you know them or not. What’s your plan for contacting each and every one of them, so they can join your list of raving fans? Don’t forget elder leaders within your client’s industry, editors of trade journals, prospects you’d like to have as clients, and other vendors or service providers that you can align yourself with. Why not initiate contact with this group of people and begin to develop relationships that could be key to your success within that industry?

The key to never making a cold call is in creating a method in which you draw people to you - it’s having charisma and notoriety that causes the phone to ring. Your job is to get out there and develop the relationships with key players in your client’s industry in order to attract those inbound calls and clients.

Nancy Michaels, is the author of five books on small business marketing, including Perfecting Your Pitch. She is also the Founder and President of Grow Your Business Network, which works with companies that want to reach the small business community and with small business owners who want to sell more products and services. She can be reached at nmichaels@impressionimpact.com. Visit her web site at growyourbusinessnetwork.com for more information on cultivating new business on a budget.

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Raising Capital

By Small Business Association

Raising capital is the most basic of all business activities, but it may not be easy; in fact, it is often a complex and frustrating process. However, if you have studied and planned effectively, raising money for your business will go as smoothly as possible.

Finding the Money You Need

There are several sources to consider when looking for financing. It is important to explore all of your options before making a decision.

Personal savings: The primary source of capital for most new businesses comes from savings and other personal resources. While credit cards are often used to finance business needs, there are usually better options available, even for very small loans.

Friends and relatives: Many entrepreneurs look to private sources such as friends and family when starting out in a business venture. Often, money is loaned interest-free or at a low interest rate, which can be beneficial when getting started.

Banks and credit unions: The most common sources of funding, banks and credit unions, will provide a loan if you can show that your business proposal is sound.

Angel Investors and Venture capital firms: These individuals and firms help expanding companies grow in exchange for equity or partial ownership.

It is often said that small businesses face difficulty borrowing money, but this is not necessarily true. Banks make money by lending money. However, the inexperience of many small business owners in financial matters often prompts banks to deny loan requests. Requesting a loan when you are not properly prepared suggests to your lender that you are a high risk.

To successfully obtain a loan, you must be prepared and organized. You must know exactly how much money you need, why you need it, and how you will pay it back. You must be able to convince your lender that you are a good credit risk.

Terms of loans vary from lender to lender, but there are two basic types: short-term and long-term.

Generally, a short-term loan has a maturity of up to one year. These include working capital loans, accounts receivable loans and lines of credit.

Long-term loans have maturities greater than one year but usually less than seven years. Real estate and equipment loans may have maturities of up to 25 years. Long-term loans are used for major business expenses such as purchasing real estate and facilities, construction, durable equipment, furniture and fixtures, vehicles, etc.

SBA loan programs are intended to encourage long-term small business financing, but actual loan maturities are based on the ability to repay, the purpose of the loan proceeds, and the useful life of the assets financed. However, maximum loan maturities have been established: twenty-five years for real estate; up to ten years for equipment (depending on the useful life of the equipment); and generally up to seven years for working capital. Short-term loans are also available through the SBA to help small businesses meet their short term and cyclical working capital needs.

Approval of your loan request depends on how well you present yourself, your business, and your financial needs to a lender. Remember, lenders want to make loans, but they must make loans they know will be repaid. The best way to improve your chances of obtaining a loan is to prepare a written proposal.

A well-written loan proposal contains:

General Information

• Business name, names of principals, Social Security number for each principal, and the business address
• Purpose of the loan - exactly what the loan will be used for and why it is needed
• Amount required - the exact amount you need to achieve your purpose

Business Description

• History and nature of the business - details of what kind of business it is, its age, number of employees and current business assets
• Ownership structure - details on your company’s legal structure

Management Profile

• Develop a short statement on each principal in your business, provide background, education experience, skills and accomplishments.

Market Information

• Clearly define your company’s products as well as your markets.
• Identify your competition and explain how your business competes in the marketplace.
• Profile your customers and explain how your business can satisfy their needs.

Financial Information

• Financial statements - balance sheets and income statements for the past three years. If you are starting out, provide a projected balance sheet and income statement.
• Personal financial statements on yourself and other principal owners of the business
• Collateral you are willing to pledge as security for the loan

When reviewing a loan request, the lender is primarily concerned about repayment. To help determine its likelihood, many loan officers will order a copy of your business credit report from a credit-reporting agency. Therefore, you should work with these agencies to make sure they present an accurate picture of your business. Using the credit report and the information you have provided, the lending officer will consider the following issues:

• Have you invested savings or personal equity in your business totaling at least 25 percent to 50 percent of the loan you are requesting? Remember, no lender or investor will finance 100 percent of your business.
• Do you have a sound record of credit-worthiness as indicated by your credit report, work history and letters of recommendation? This is very important.
• Do you have sufficient experience and training to operate a successful business?
• Have you prepared a loan proposal and business plan that demonstrate your understanding of and commitment to the success of the business?
• Does the business have sufficient cash flow to make the monthly payments?

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