|
| Starting and Financing Your Business
Your Business Plan: When you begin thinking about starting a business, begin thinking "written business plan". A business plan is a good idea for any business, but if you require financing, it's mandatory. Financial lenders won't consider your idea without seeing your plan. The format of your plan is not too important, but it should cover:
what you want to do,
why you will succeed,
where you will conduct business,
what your background is,
who your competition is,
how you will make your product and at what cost,
how you will sell your product and at what price, and
how much money you project making and needing.
Financing Your Business: Every business requires capital to begin or expand operations, purchase inventories, and cover costs. Because none of it is free, your best source of capital is from your own savings, personal assets, and business' earnings. The next best source is money from your family and friends (sometimes irreverently referred to as the 3fs: friends, family and fools). These people are usually more forgiving about getting paid on time, demand less collateral to cover the loan, and are less likely to take it if you cannot repay them.
Unless you have money or can talk a "3f" into giving you some, you need to decide whether you want to raise money by borrowing it (debt) or selling part of your company (equity). Equity and debt financing both have advantages and disadvantages.
First, let's discuss debt. There are various types of debt financing for your business. Conventional loans from banks are the most common, but government guaranties and revolving loan funds are other possibilities. No matter which type you pursue, every lender will consider the 5 C's of credit analysis before lending you money: Condition, Cash flow, Character, Capacity, and Collateral. Condition is whether the bank is in a position to loan to your sector of the economy and whether it foresees long-term demand in that sector. Cash flow is the ability of your business to repay the loan out of operating cash flow. Character is your personal and business credit history of fulfilling financial obligations. Capacity is the demonstrated history of you and your partners to manage and grow the business. Collateral is your ability to secure the loan with other assets if you do meet your payment obligations.
Banks make different types of conventional loans and the terms of a loan are generally dictated by what the money is used for. For example, loans for inventory are usually short term and loans for property, land and buildings are usually long term. Spend some time shopping around for loans and choosing a banker. You may have a great bank, but it may not be strong in your industry, or the conditions might not be right for them to loan to you. And always remember to bring your personal and business financial information and your business play with you when you talk to a banker.
The Small Business Administration (SBA) offers a variety of special loan programs to help small businesses. The great majority of SBA loan work, however, is guaranteeing loans (SBA 7a program) rather than loaning money. Most commercial banks are qualified SBA lenders. They can process loan application for you and have loan guarantees approved by the SBA. The guarantee assures the bank or lending institution that if a borrower defaults on the loan, the government will cover the bank's losses up to 75% of the loan value of loans over $100,000 and 80% on loans under $100,000. Loan guarantee fees range from 2 percent (loans under $80,000) to 3.75 percent on loans over $500,000. This program obviously reduces the risk to the bank. Loans are still through the bank; they are just guaranteed by the SBA for a fee.
Over the last decade, the SBA 504 loan program has become popular with lenders and businesses. This program allows 90% financing of business expansions, but it is limited to fixed asset acquisition of land, buildings, and equipment. The SBA sells bonds to fund up to 40% of a project, the bank loans you 50%, and you put 10% down. The advantage to your business is receiving low, fixed rate financing, while the advantage to the bank is reduced risk.
The United States Department of Agriculture (USDA) has a guarantee program very similar to the SBA for businesses in areas with a population of less than 50,000 people, such as most of Grays Harbor. Most commercial banks are qualified lenders and can process loan applications and have loan guarantees approved by the USDA. This guarantee program guarantees 80% of the loan from $200,000 to $5,000,000. The loan guarantee fee is 2% less than current SBA fees.
Over the last decade, with small business loans from banks being harder to obtain, revolving loan funds (RLFs) have become an important source of financing for entrepreneurs, particularly in rural areas and for women and minority business owners. These funds also provide technical assistance, which can be crucial to a new business. In Grays Harbor County there are two revolving loan funds. They are the Olympic Microloan Fund and Cascadia Revolving Fund. The Olympic Microloan Fund provides loans to businesses operated by low and moderate-income individuals and to existing businesses that are expanding to create jobs for low and moderate-income individuals. The maximum loan amount from Olympic is $25,000. The Cascadia Revolving Fund provides financing to small businesses located in distressed areas. The maximum loan amount from Cascadia is $150,000.
A final source of debt financing is industrial revenue bonds (IRB). IRB's are available to smaller manufacturing and processing companies for land, buildings and new equipment. Working capital cannot be financed through this method. IRB's are issued through state and local financing authorities. The advantage to the borrowing company is that this type of financing permits the company to borrow at tax-exempt rates, which provide a great savings in interest costs over conventional financing means. But issuance costs generally restrict the attractiveness of IRB financing to projects larger than $1,500,000. However, there are programs that make tax-exempt financing available for equipment purchase projects as small as $250,000.
Now for equity financing. Equity investors become owners of your business. They don't require a set payback schedule; rather they share in the business profits and growth in equity. There are different types of equity investors.
The simplest is the "friendly investor" - a relative or friend - who gives you money and takes a share of the business in stock. They are the least costly and least demanding.
Another is the wealthy individual, or "angel", who provides funding for startups as a means of increasing wealth or satisfying a personal interest in your product.
Then there are venture capitalists, who professionally manage funds that they accumulate from small groups of investors who seek high-growth ventures that will result in substantial return.
And finally, there is the stock offering (IPOs) that make your stock available to a large number of investors.
A word of warning: Funding received from angels and venture capitalists almost always carries with it a substantial burden. Their sole objective in investing in your business is to sell it within 3 to 5 years in order to realize a substantial return. They will require positions on your board and chairmanships of key committees and they will watch operations closely. They have good reason. They know that of the 10 companies that they carefully choose for investment, 3-4 will fail, 5-6 will get along, and 1-2 will do well. They will stop funding the 3-4 poor ones as quickly as possible, sell the 5-6 mediocre ones to recover their costs, and initiate an IPO (initial placement offer) for the 1-2 successful one in order to generate a high return for their fund and money to loan to new companies.
Here is a summary of possible options for financing your business and capital needs:
Conventional
Government Guaranty Loan Programs
Revolving Loan Funds
Industrial Revenue Bonds
Tax-exempt debt financing for large land, buildings and new equipment deals
Equity
Friendly investors
Angels
Venture capital
Stock offerings
Manufacturing and technology companies locating in Grays Harbor County can tap into a variety of tax incentives. Grays Harbor County offers a sales and use tax exemption on buildings, equipment and machinery used in manufacturing. A qualified manufacturer can have sales tax exempted on the entire amount invested in construction and installation. This exemption program also includes tax on construction labor, equipment installation and equipment replacement parts with a life over one year. If a manufacturer leases property and buildings, they can take advantage of program savings passed on from the property owner.
Manufacturing and technology companies locating in the county are also eligible for a credit against the state Business and Occupation (B&O) tax. They can claim a $2,000 credit for each new employee or $4,000 for each employee whose wages and benefits exceed $40,000 per year. Companies can also claim up to $5,000 of B&O tax credits for employee job training. The credit is worth up to 20% of total approved training costs.
|
GHEDC Homepage