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Posts Tagged ‘Raising Capital’


Angel Capital and Small Businesses: Less Money, More Companies

November 11th, 2010 :: mhaubrich

By Maria Valdez Haubrich

What’s going on with angel financing these days? GigaOm.com recently reported on some key trends that might give entrepreneurs reason for optimism about this sector of small business financing.

The Center for Venture Research at the University of New Hampshire has released a study of the first 6 months of 2010. During that time, the study found, total angel investments declined by 6.5 percent (to $8.5 billion) as compared to the same time frame in 2009. However, while they’re investing less money, they’re investing it in more firms: The number of companies receiving angel investments grew 3 percent to 25,200.

It seems angels are also looking to invest in later-stage companies as opposed to startups. Just 26 percent of angel investments went to seed and startup stage investments. This is down from 35 percent last year and 45 percent in 2008.

Last, but not least, more angels are holding back from investing altogether. “Latent angels” (angel group members who haven’t made an investment) rose to 65 percent, a steep increase from 54 percent last year and 36 percent in 2008.

What does it mean for you? Investors are becoming more cautious and hedging their bets. Instead of investing in riskier startups, they’re more willing to put their money into companies that have shown some staying power and are ready to grow.

Where are angels investing? Here’s the breakdown:

  • Healthcare and medical device and equipment: 24 percent
  • Biotech: 20 percent
  • Software: 12 percent
  • Industrial/energy: 11 percent
  • Retail: 9 percent
  • Media: 5 percent

Banks to Increase Lending to Midsize Businesses

October 25th, 2010 :: Rieva_L

By Rieva Lesonsky

Commercial lending to midsize businesses is projected to grow this year, according to data from bond-market advisory firm CreditSights reports CFO.com. After two years of a credit crunch, why are banks now announcing new plans to focus on commercial lending?

The collapse of the housing market is one reason—obviously, banks have lost much of the residential mortgage business that once dominated their portfolios. Second, the passage of the CARD Act, which has restricted banks’ ability to profit from consumer credit cards, has banks looking elsewhere for a way to make money.

Commercial lending, which accounted for as much as 40 percent of banks’ portfolios in 1960, fell to just 15 percent in 2010 as banks relied on consumer credit for much of their business. Now, banks are turning back to commercial loans, which offer them higher margins and terms, says CreditSights, as well as a chance to cross-sell other services to the businesses that borrow.

The Federal Reserve’s July survey of senior loan officers showed that banks were already loosening their standards on many types of commercial loans. Many had also stopped downsizing companies’ existing lines of credit.

Currently, banks are focusing on lending to companies in industries with high growth potential, including health care, technology and energy. But some are focusing on other areas, such as manufacturing. In addition to major banks such as Wells Fargo, U.S. Bancorp and PNC Financial Services, larger regional banks are also getting into the game—so you may want to investigate what’s going on with banks in your area.

Will the change in lending standards be good or bad news for smaller companies? So far, one expert cited by CFO.com says, it’s bad news—banks are becoming more aggressive in their approach to small companies that have outstanding loans or lines of credit and show signs of cash-flow problems or management weaknesses.

If that sounds like your company, you better get your ducks in a row. If it doesn’t describe your business, the change could be good news for you in the long run. With more banks looking to midsize businesses as a way to make money, it could be just a matter of time until the wealth trickles down to smaller firms.

Financing A Business: Using Equity vs. Debt

November 16th, 2009 :: Gary Honig

At various times in the life of a company there are going to be requirements for outside capital in order to grow the business. Choosing which type financing vehicle is best for your company is very important. Deciding whether to seek equity capital or debt financing is the first step. Usually companies trying to get equity capital are very early stage with little or no real assets, while companies on their way to a steady growth curve use debt financing.

The equity route

As the owner of a business idea, plan, or company – you hold ownership to a subjective value called equity. The equity of any type of property whether intellectual or physical is the value someone is willing to pay for it minus any liability attached to it. In business that could mean the value of an entity today measured in time and money invested versus the value in the future measured by comparable growth.

Once the owner and investor determine the “valuation” of the equity, the owner can then sell parts of the equity in order to raise capital. There are a variety of methods you can raise equity capital (Seed, Angel, Venture) and you should learn the pluses and minuses for each. An equity capitalist is interested in picking a company that shows great potential. They are expecting that there will be significant growth due to their involvement. That could mean that the company will grow tenfold within five years.

Debt Financing

Securing capital through debt financing does not entail “selling” your equity, but instead works by “borrowing” against collateral assets. Debt financing is only available to business owners who have something of value that the lender can instantly liquidate. The debt finance company is not interested in becoming a partner, instead they are in business to make money from their money, letting you use it for periods of time.

Like equity financing there are a variety of methods available to raise debt financing. Traditional banking will always be the least costly source for your financing, but remember bankers are not in business to take on risk. When they ask for three years of company tax returns it’s because they want to see a steady reliable set of profitable growth numbers. Borrowing from the bank relies on two variables, the collateral that secures the loan, and your ability to repay the loan. You might have enough collateral, but if your business is losing money, the bank can’t expect you to handle the added expense of loan payments.

Many early stage companies turn to private commercial financing which is better suited to deal with riskier issues. Factoring companies use the loans you make to customers (invoices for finished work) as the collateral for their funding. Here the emphasis will be the creditworthiness of your customers rather than the credit of your company. Equipment leasing companies will allow you to purchase new equipment and pay for it over time, usually three to five years.

Finally,

When seeking outside capital, whether equity or debt, remember that certain sources are familiar and like to work with particular industries. Take the time to look around and be sure that the source you are considering is well-aquatinted with your type of business.

Founder Institute comes to Washington, DC

November 5th, 2009 :: Steven Fisher

You might have heard of TheFunded.com site created by Adeo Ressi, which was very controversial at first because entrepreneurs and CEOs could share details in an anonymous way of how the venture firms and other investment sources treated them or how they are to work with in an investor relationship. Currently, it has about 12,000 members in the community has become a valuable resource for helping entrepreneurs find the right match when they are looking for an investor and know what to expect.

Because of his work with building startups and with this site, Adeo created the Founder Institute, which is in the same vein of TechStars and LaunchBox Digital, among others that have a program for startups and give them mentorship and access to investors in exchange for equity or something similar. From CrunchBase “TheFunded Founder Institute is a start-up incubator focused on grooming entrepreneurs into CEOs. Founded by Adeo Ressi, The Founder Institute is located in Silicon Valley and began its first program in late Spring 2009.”

It goes on to describe its mission: “The Founder Institute is a four month training program for both new and seasoned entrepreneurs. The Institute prepares founders to lead the next generation of world-class technology companies across a wide range industries, from the biotech to the internet. Weekly company-building sessions are guided by experienced CEOs, and they are held in the evening to allow participants to keep their day job or develop their companies during business hours. All of the program stakeholders, from the participating founders to the experienced CEO Mentors, share in the upside generated by the companies formed during the program. Participants also enjoy free services from three dozen Institute Partners, fundraising opportunities at fair market value, and a teamwork-oriented environment to build a company”.

After launching 54 companies in this summer’s Bay Area Semester, the Institute is now opening its doors to the Washington DC area for the Winter of 2009. Applications have already begun, and Institute sessions will begin in December. It will run in Washington, DC from December 1, 2009 – March 23, 2010. They recently had an informational meeting on October 13 at George Mason University. There is still time to apply for acceptance into the program so if you have a great startup, you should give it a shot!

Out there raising captial? See how Mint CEO did it from seed round to acquisition

November 2nd, 2009 :: Steven Fisher

Are you out there raising money? Have you raised money for your business in past? Well, it is hard to find good advice on how it is really done and even harder to get the details on how someone else did successfully and then sold the company.

This is why when I came across this post on TechCrunch about Mint CEO Aaron Patzer’s 45 minute presentation on building startups from the ground up I had to share. In the video below, Aaron shows how he raised and spent money, and generated revenue, throughout the lifecycle of Mint, from the very beginning to the $170 million acquisition. Michael Arrington points out that “if you are an aspiring startup entrepreneur, you’ll want to watch that more than a few times. The candid disclosures and advice he gives is rarely seen in Silicon Valley”. He is so right that I can’t even begin to tell you. The video is below and the presentation is farther down the post.

Mint CEO Aaron Patzer on Startups from Techcrunch on Vimeo.

In the presentation below Aaron shows historical slides from early presentations to investors and compares those to the actual results. Here is the presentation and it is truly revealing and from personal experience VERY accurate. This is an approach and model that every startup should study closely. Not only because they have a good model but because they built this and sold it which many are never able to accomplish.


Startup Building 101

7 Ways To Be More Attractive To Lenders

October 12th, 2009 :: Gary Honig

It’s always said that access to funds is the life blood of any company. Going out and securing outside financing to help grow a business is an important step in the life of an emerging organization. Keep in mind, the process of commercial borrowing is best done in preparation for needing the capital, rather than when the request is made in a dire situation. Here are some necessary tips to keep in mind when preparing to seek a loan.

    1. Bookkeeping – install accounting software so you can produce up to the moment financial reports including Balance Statement and Profit Loss Statement. These reports will give the Lender a snapshot of the current financial condition of the company. It also assures that you know enough about accounting to understand the internal cash flows.
    2. Customer Credit – show you have a process in place to check the credit of all your customers. Learn how to avoid issuing credit for more than they are qualified. Sales to customers are what business is all about. Knowing the difference between a solid customer and a bad credit is crucial to long term stability.
    3. Borrowing Amount – know how much capital the business requires to operate. Whatever the business does, whether provide a service or sell a product, you must be aware of the profit margin on these activities. You should have a solid business plan in place with budgets where you can determine the potential short fall and take precautions through financing.
    4. Purpose – your business plan needs to be able to show a purpose for using the capital. This must be very specific. The more details you can provide on where the loaned money will be employed, the better the Lender can determine the viability of your plan. By admitting potential problems and offering contingency suggestions, your business plan will have added dimension.
    5. Repayment – in the business plan, give a reasonable timeline for the repayment of the loan. Preparing cash flow performance will show the road map to ultimate success and profitability. Again, incorporating contingency budgets will help to mitigate potential risk.
    6. Team – make sure the owners, managers have strong bio’s and thorough knowledge of the industry. The Lender must have confidence that the operators of the business plan can perform based on their experience.
    7. Loan package – do your homework, and put all this together with your business plan into a binder so a lender can easily see who, what, where, how this company will deal with a loan. By being pro-active through the entire process you will become a more attractive prospective client to a Lender, and therefore will have some bargaining leverage with regards to the terms of the loan. It’s always a good idea to get involved with a professional to help you through the process.

Issuing Bonds as an Investment Alternative

September 11th, 2009 :: Steven Fisher

Recently, I was on the airplane and picked up BusinessWeek/SmallBiz magazine that someone had accidentally left behind. I was flipping though it and I came across this really interesting article on how small businesses are using bonds as an alternative investment vehicle than loans or venture capital.

I know, you think bonds=boring, but hear me out. That is what I thought but this headline caught my eye:

“Small companies can issue low-interest Industrial Development Bonds, or IDBs, to buy land or equipment or build new facilities”

You didn’t exactly have me “at hello” but you had my attention and I wanted to read more.

In the past, small businesses had two routes – loans or investment capital. But for many small businesses who are not in the “venture capital radar” or don’t want to give up a chunk of their company that they have already worked very hard to get on a good growth track. Loans are also an alternative but many look at it as debt that has too many strings attached to it. So what is left? In this case, bonds.

Because of the credit crunch many people have had a hard time raising capital or lines of credit that they usually would be able to get and this bond investment vehicle has become a nice alternative.

Here is the heart of the opportunity taken from the article:

“By using a little-known set-aside in the public finance world called an industrial development bond, or IDB, small companies with strong track records can gain access to as much as $10 million with rates as low as 3%—similar to what large corporations get in the commercial paper market. (Up-front fees range from $70,000 to $200,000, but total costs are still about 20% to 30% less than conventional bank loans.) And while IDBs were designed to be used specifically by small manufacturers, the definition of “manufacturer” may surprise you, as the American Recovery & Reinvestment Act expanded it to include technology companies that manufacture software or other intellectual assets.”

There is a catch (isn’t there always?):

“The proceeds from such bond issues can be used to buy land or manufacturing equipment, and to build new facilities. To ensure that IDBs contribute to economic development and therefore deserve their tax-exempt status, companies that issue them must promise local finance authorities that they will hire a predetermined number of employees over the life of the bond.”

Still I would give the article a full read and see if this might be a good alternative for you.

Great Resources for Funding Your Business

September 9th, 2009 :: Steven Fisher

You probably have figured out by now that I am resource and tip junkie. If there is anything that will help me run my business better and learn from others so I don’t make the same mistake, I am all in.

I recently came across this web site from Microsoft as part of the “Startup Zone“. This section of the site is an amazing list of blog posts, links to templates and great articles on raising capital. This is not limited to the venture capital side of fund raising but covers raising capital from banks, angels and government. It also includes great stuff on writing your business plan, building a financial model and doing your pitch.

You can find it at http://www.microsoftstartupzone.com/Resources/Pages/Get_Funding.aspx and I would take a few hours and dive into this stuff. You will learn a ton.

Primer on Small Business Loan Types for Growing Your Business

May 15th, 2009 :: Steven Fisher

We all know that the credit markets are tough these days. The Small Business Success Index (SBSI) revealed that small business owners rate their efforts to raise capital at a “D+” grade. The last six months have been brutual for large and small businesses because of the credit freeze that occurred when the economic crisis reached its height in late 2008.

Reading Business Week today I came across the article “Snipping Credit Lines for Small Businesses” banks are according to bank executives “suspending lines of credit is certainly an efficient way to reduce the risk on a bank’s balance sheet”. Many companies are still getting credit and if you are out there you should understand exactly all types of loans that are available to your small business. Common loans that banks will offer to startup and small businesses are:

  • Working capital lines of credit — Used for day-to-day operations. Credit line offers are usually short-term, about 90 days, but can go up to several years with regular annual reviews. Interest rates are variable.
  • Credit cards — A revolving credit card can be a good cash management tool.
  • Equipment leasing — Banks usually require a history of operations before lending money for leasing, or leasing through a subsidiary company of the bank.
  • Letters of credit — The bank acts as an intermediary, promising to pay the seller if all conditions are met. Important for reducing risk for a business practicing international trade.

Small business loans can be used for most business purposes:

  • The purchase of real estate to house the business
  • Construction, renovation or leasehold improvements
  • To purchase furniture, fixtures, machinery, or equipment
  • For the flooring of inventory and for working capital.

Credit Sunrise has some excellent definitions of these small business loan types. So good in fact we captioned the section for you:

Operating Line

Operating loans are also called working capital loans, line of credit or overdraft protection. They are loans that fluctuates with the day-to-day cash flow needs of a business. The maximum amount you may borrow for an operating line is primarily based on accounts receivable. Cash businesses such as restaurants and retail stores generally do not qualify for an operating line. Inventory is not generally financed (but exceptions are made frequently)

Term Loan

A term loan is a loan that has monthly principal and interest payments. The outstanding principal amount decreases each month. Generally, term loans are established to assist in financing long term assets such as computers or equipment. The amortization period should closely match the useful life of the asset purchased (a term loan for computers should have an amortization period of not more than 3 years). Most term loans have an amortization period of 5 years or less (but there are exceptions).

SBA Loan (USA)

This is a loan where the Government partially guarantees repayment to the Bank. SBA loans are used when the business is slightly outside a Bank’s standard lending criteria. A business must qualify for financing through a bank (using regular banking guidelines) and gain further approval from the SBA prior receiving any money.

  • SBA’s 7(a): Used to assist most types of small business loans up to $1 million including: equipment, real estate, working capital or purchasing existing businesses. In most cases the SBA will guarantee no greater than 75% of loan value and a maximum amortization of 6 years. SBA loans are targeted at existing and growing businesses; it is difficult to finance a start up business through this product.

  • SBA’s MicroLoan: Targeted at very small and start up companies to purchase computers, equipment and materials required to launch a business. You may borrow up to $25,000 for up to 6 years. Interest rates do not exceed prime plus 4%.

  • SBA’s 504: Used to purchase real estate for businesses that are likely to increase the level of employment at the company. The guarantee value may be as high as 90% of the appraised value of the property.

  • SBA’s Fastrak Loan: Some large, national Banks are able to approve loans up to $100,000 without consulting the SBA. The SBA may guarantee up to 50% of the loan value.

SBL Loans (Canada) renamed CSBFL

These loans are similar to SBA loans in the United States where the Government provides a guarantee. Maximum loan value is $250,000 where the chartered Bank’s approve the loan without consulting a Government agency. These loans are targeted to both existing and start up businesses.

While the program is more flexible on paper we notice the following guidelines.

  • Uses of funds: To purchase computers, equipment or renovations (cannot finance working capital)

  • Repayment: Maximum 5 years (3 years for computers)

  • Personal guarantee signed by the owners: 25% of the loan value

  • Percentage of assets financed: Up to 90% of the asset value depending on the type of asset being purchased and strength of the business. It is rare for a restaurant to receive financing greater than 50% of the asset value.

  • Costs: 2% upfront fee to the Government, legal fees, and interest rates cannot exceed prime plus 3%.

Lease

The requirements for a lease are similar to a term loan as the risks to a financial institution as identical. There can be tax benefits applied to leasing. Leased goods are generally owned by the financial institution or a 3rd party. The amortization period should closely match the useful life of the asset purchased (a lease for computers should have an amortization period of not more than 3 years). The value placed on an asset varies depending on resale value and the type of asset leased.

Corporate Visa Expense Cards

Corporate Visa Expense cards are held under the name of the business for use by employees. A company should ensure that all authorized cardholders have a clean credit history. Typically, established companies have unsecured Visa cards where the assets of the company and personal net worth of the owners are pledged as security. Start up companies and companies with minimal assets should expect to secure the Visa cards through hard security such as cash.

Merchant Account

Merchant Visa risk applies to unsigned Visa drafts such as taking orders through the Internet or telephone. Risks occur to financial institutions due to fraud. Shop around, many Banks do not require security for Merchant Visa and many E-Commerce Internet sites have online applications for an account.

Mortgage

This is a term loan secured by a building on a piece of land. The maximum amortization period varies greatly between Banks – from 10 to 30 years. Your business must still meet standard lending criteria such as debt serviceability. In general, a business mortgage is more complicated and more expensive than your personal mortgage; many Banks will require you to pay for a full property appraisal, environmental audit, and legal fees in additional to regular Bank fees.

If you want to read more from them check out http://www.creditsunrise.com/types_ln.htm

As the economic situation improves, so will access to credit which will have a chain reaction on business of all sizes but especially small businesses. They will be able to hire more people, expand operations and start growing again. If you are on the market now for or will be in

DISCLAIMER:  THIS ARTICLE DOES NOT GIVE FINANCIAL GUIDANCE.  PLEASE CONSULT A FINANCIAL EXPERT BEFORE PURSUING ANY OF THESE FINANCIAL INSTRUMENTS.  THE INFORMATION CONTAINED IN THIS ARTICLE MAY OR MAY NOT BE APPLICABLE TO YOU.