Chapter 9: Shaking the Money Tree – Locating Hard Cash

1. Learning Objectives: Discover your risk tolerance Determine your credit situation Explore credit card usage and risks for your business Understand inherent risks in borrowing from friends and family Scour the lending arena for money to fund your new business Introduce strategies for approaching bankers Become familiar with the programs & services of SBA and SBDC Explore vendor financing Understand the dynamics of crowdfunding Learn how to access angel financing Explore the venture capital market & the changes occurring within Chapter 9: Shaking the Money Tree –Locating Hard Cash

2. Before Committing Money • Committing your own money is essential for all entrepreneurs • Lenders & investors will make sure you commit before they do • Most ventures are self-financed in the start-up phase • Determine your risk tolerance and that of your family members & partners

3. Credit Reporting Agencies: What Do They Know About You? • If your credit report does not pass you will not get a loan • Clear up credit problems before searching for capital • Credit Karma keeps track of your credit score for free • Cautionary Steps – how much money are you willing & able to personally commit?

4. To Receive a Copy of Your Credit Report and Scores • Equifax http://www.equifax.com • Experian http://www.experian.com • Trans Union Corporation http://www.transunion.com

5. Credit Scores Made Simple • Payment history on account (35%) • Amounts owed (30%) • Length of your credit history (15%) • New credit (10%) • Types of credit in use (10%)

6. Concerns That May Need to be Addressed • Costs of continuing existing or purchasing new health insurance • Apply for additional credit cards or increased limits • Consider applying for a personal line of credit • Explore the possibility of a home-equity loan or line of credit • Check into borrowing for your 401(K) plan

7. Additional Thoughts to Consider as You Explore Your Bottom Line • Income stream: What can you count on from your business? • Profit from sale of business: What is the potential profit if the business is sold? • Profit life cycle: How long will it take for your business to move from start-up to a profit position? • The rule: Your business should provide you with two sources of financial return: an income stream and growing equity. Just income is not enough. No income means nothing to live on.

8. More than 90% of start-up capital comes from self-financing, family & friends Most new ventures begin with bootstrapping Banks usually fund established businesses SBA & micro lending institutions can benefit new ventures Crowdfunding platforms are growing with the passage of the JOBS act Venture capital usually comes once you have a proven product in a highflying market Shaking the Most Fruitful Branches First

9. Consider the following when selecting credit cards: Payment Dates Annual Percentage Rate (APR) Annual Fees Maximum Credit Limits Additional Fees Grace Periods Mileage Points or Other Incentives Late Fees Self-Financing: Your Money & Your Credit

10. Family & Friends • Parents are a major source of start-up capital but many potential problems • Consider their emotional ties to money • Make sure you are not affecting their lifestyle • Consider asking them to cosign loans instead • Consider putting up collateral • Consider waiting & saving your own money instead of borrowing

11. Borrowing From Family & Friends – Ways to Alleviate Difficulties • Put everything in writing • Make it a business loan, not a personal loan • Include a provision for repayment in case of emergencies • Discuss the company’s goals with your family & friends • Make clear to relatives & friends the difference between a loan & equity in the firm • Discuss your fears for potential problems & encourage lenders to discuss their issues

12. Banks • Bankers tend to choose the safest deals • Chances of a bank loan increases after being in business for several years • Consider a small, local community bank • Microlending programs may be available • ACCION: Capital Available for Struggling Entrepreneurs • Check out Kiva& the Opportunity Fund

13. Lenders’ Expectations • Solid Business Plan with projections • Experience & Background in the Industry • Assets to live on for 6-12 months • Personal financial commitment & Possibly a cosigner • Second salary in the family • 2 – 3 years of successful operations • Projected income statements • Detailed explanation of how funds will be used • Compelling product or service with strong marketing • Capacity to repay the loan • Solid relationship with the potential borrower

14. Strategies for Working with Your Banker / Make Your Banker a Member of Your Team • Seek your banker’s advice on pulling your Business Plan together • Comparison shop for money • Ask your banker questions • The more successful you become, the more you need a close banking relationship • Small Business Development Centers • Action Step 42: Befriend a Banker

15. SBA Programs • Program: Basic 7(a) Loan GuarantyFunction: SBA’s primary & most flexible loan guarantee program • Program: Microloan, 7(m) Loan ProgramFunction: Provides loans of up to $50,000 for up to 6 years • Program: 7(a) Express & Pilot ProgramsFunction: Offers streamlined loans with a turnover in as little as 36 hours mostly to military & borrowers from distressed communities • Program: Certified Development Company, a 504 Loan ProgramFunction: Provides long-term fixed-rate financing to acquire fixed assets for expansion or modernization

16. SBA Programs • Other Major Avenues of Government Assistance: • Small Business Investment Companies • The Small Business Innovation Research Program • STTR Program • Community Development Financial Institutions • SBA/Bank Financing Checklist • SBA Loan Application Checklist • Global Village: Export Loan Programs

17. Vendor Financing • Probe vendors & suppliers for the best prices & terms available • Vendor info is the starting point for negotiations • Action Step 43: Designing a Vendor Statement Form • Your vendors’ verbal promises become written promises • Be firm, pleasant & tough • Determine the standard terms in the industry • Use a lot of open ended questions during negotiations

18. Angels with Money • People willing to invest as individuals or part of an angel investment group • Search out potential investors • Individual angel financing is appropriate for $20,000 to $2 million • Angels primarily come in during the seed stage • Many individuals have joined together to form groups • Kaufman Foundation has formed the Angel Resource Institute (ARI) • Visit ARI and Angel Capital Association websites

19. Venture Capital Firms & Social Entrepreneurship Funding • Venture Capital Firms usually do not invest in start-ups • Most prefer second stage when a proven business needs a large infusion of cash • Are you Ready for Venture Capital? • The Seven Forces Disrupting Venture Capital • Amazon, Angel Investors, AngelList • Kickstarter, Crowdfunding, Y Combinator • “New Venture Capital”, Secondary Markets • Social entrepreneurs need to seek various funding sources

20. Action Step 44: Prepare to Meet Your Lenders • Part A: List potential lenders & investors • Begin with family & friends • Move on to business acquaintances & institutional lenders • Part B: List reason why lenders & investors should risk their money on you • Part C: Check out the popular crowdfunding sites • Part D: Test your pitch with you colleagues • Part E: Go out & meet with potential lenders & investors – shake additional branches of the money tree

21. Think Points for Success • Your banker may be a doorway to the world of money. Use that door. • Conserving capital is essential in the beginning and prudent at all times. • Take as little capital out of your business as possible. • In dealing with bankers and vendors, use lots of open-ended questions. • Become operational as fast as you can. • Aim for your break-even point and strong cash flow as soon as possible.