Get Financing Now: How to Navigate Through Bankers, Investors, and Alternative Sources for the Capital Your Business Needs

By Charles Green

"Every entrepreneur should read this book, ideally before they start their next business. The insights into finance and financial planning should help the entrepreneur not make many of the mistakes I did!"
Jim Beach, Director of Education at The Entrepreneur School and author of School for Start-Ups

"An exhaustive and invaluable resource for companies seeking funding at any stage of their life cycle."
Donald J. Mullineaux, DuPont Chair in Banking and Financial Services, Gatton College of Business and Economics, University of Kentucky

“Get Financing Now is a must for every entrepreneur starting a business or growing a business. . . . Although an easy and enjoyable read, the information and insight Charles Green provides isn’t sugar coated. It is relevant and timely in today’s economic challenging times. It seemed that every page had at least one ‘golden nugget’ that an entrepreneur could literally ‘take to the bank.’”
Karen Rands, strategic advisor to entrepreneurs regarding access to capital and coordinator of an Atlanta based angel investor group

”Charles Green’s new book Get Financing Now is a real-world description of what small-business owners must know to fund startup or growth, and improves the probability for small-business owners to get the funding they need.”
Jerry Chautin, national business columnist, former entrepreneur, SCORE business mentor and SBA’s 2006 national Journalist of the Year

“Charles Green is a change agent for entrepreneurs in the field of acquiring financing and capital. He has written the premier guide to help entrepreneurs through the changes needed to acquire capital in the new marketplace thrust upon us by the great recession. I highly recommend Get Financing Now.”
Larry Tyler, author of Romancing the Loan

"A fantastic read! To the point and explains business terms for laymen—helps grasping the concept easily. Love it!”
Colethea Jenkins, Build Grow and Enjoy

• Language: English
• Publisher: McGraw-Hill Education
• Release date: Jan 13, 2012
• ISBN: 9780071780322

Book preview

GET FINANCING NOW

GET FINANCING NOW

How to navigate through bankers, investors, and alternative sources for the capital your business needs

CHARLES H. GREEN

Copyright © 2012 by Charles H. Green. All rights reserved. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher.

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CONTENTS

A Note About the Text

Acknowledgments

Introduction

Part 1 Business Finance Fundamentals

Chapter 1 Why Do You Need Business Capital?

Chapter 2 How (Im)Mature Is the Business?

Chapter 3 Dynamics of Third-Party Funding

Chapter 4 Paying the Freight—Understanding Financing Costs

Part 2 Basics to Becoming Fundable

Chapter 5 Prepare to Disclose Everything

Chapter 6 Business Details

Chapter 7 Owner Details

Chapter 8 Too Little vs. Too Much Money

Part 3 Financial Reporting for Rookies

Chapter 9 Financial Information Makes or Breaks the Deal

Chapter 10 Projecting Reasonable Operating Results

Part 4 Best Sources for Start-Up Capital

Chapter 11 The First Dime

Chapter 12 Better Funding Sources

Part 5 Best Sources for Equity Capital

Chapter 13 Equity Financing

Part 6 Best Sources for Debt Capital

Chapter 14 Bank Financing

Chapter 15 Government-Guaranteed Loans

Chapter 16 Microloans

Chapter 17 Lease Financing

Chapter 18 Working Capital Financing

Part 7 Declined? Where to Go Next

Chapter 19 Get to the Bottom of No

Index

A NOTE ABOUT THE TEXT

This book has many references to sources of business capital as being either lenders, funders, or investors. For clarification, the term lenders refers to banks or other lenders, and the use of the term is for information applicable only to debt capital providers. Funders refers to either lenders or investors, and the use of the term is for information applicable for either debt or equity capital. Likewise, the word investor is used only when referring to information applicable specifically to equity capital providers.

This publication is intended to provide readers with useful information that may assist them in financing a business using one of many strategies suggested here. This information is general in nature and is not intended to provide specific advice for any individual or business entity without qualification. While the information contained herein should be helpful to the reader, appropriate financial, accounting, tax, or legal advice should always be sought from a competent professional engaged for any specific situation.

ACKNOWLEDGMENTS

There are many people I wish to thank who contributed to the production of this book, including the friends, peers, and advisors who provided ideas and encouragement. My special gratitude goes to Stephanie and Gene, who had to endure the project with me from concept through finished book.

I appreciate many colleagues who contributed time to answer my questions, review portions of text, or set me straight on some of the finer points about their area of finance, accounting, business law, or the English language, including Barbara Benson, Marvin Bryant, Kevin Clingman, Frank Dinsmore, Barry Etra, Darryll Gillard, Michael Horton, Dar’shun Kendrick, Bill Moore, Critt Murphy, Marilyn Pearlman, Karen Rands, Erica Sandberg, Benjamin Suggs, and Kyle Walters. These consultations provided clarity and more accuracy to this work.

And I want to pay a special tribute to my dad, Joseph Henry Green (1919–2005), who taught me how to count money and the value of entrepreneurship.

INTRODUCTION

Small business is the category still used to classify more than 99 percent of all business entities in the United States. Representing about 40 percent of all commercial sales, 50 percent of the U.S. gross domestic product, and over 55 percent of the nongovernment workforce, small business is really big business.

This sector is credited for having created two out of every three new jobs in the United States for the past two decades, yet obtaining capital financing continues to be a challenge for most small business owners and entrepreneurs.

The first seven years of the new millennia were seemingly the most robust of any age for capital creation. During this period a combination of excessive financial deregulation, new product innovation, the unprecedented ease of global portability of money, and a surge of optimism created a capital market that swelled to titanic proportions.

As a result of what former Federal Reserve Chairman Alan Greenspan termed irrational exuberance, the financial markets simply had too much inventory for their own good. This condition evolved into a case of too much money chasing too few deals, the classic source of inflation, which metastasized around bad residential mortgages and home development during that cycle.

In their zeal to take advantage of all that funding and grow their business books, many bankers lowered borrower qualifications for people who normally shouldn’t have qualified for financing (so-called liar loans). Suddenly, everybody became a real estate investor, notwithstanding the fact that many were barely able to pay for their own homes. The borrowing terms and upside reward promises seemed too good to be true. In fact, they were.

Weak loans were pooled with high-quality mortgages in a dizzying array of multitiered securities called collateralized debt obligations (CDOs), purportedly balanced between the lower and higher grades. These CDOs were sold to investors around the world enhanced with a derivative insurance called credit default swaps that were supposed to serve as a hedge for the subprime risk component.

The first wave of mortgage defaults began in 2007 when the most egregious mortgage producers started failing because they could no longer sell their loans. By the second quarter of 2008, Wall Street began teetering from a liquidity crisis as the market for CDOs dried up and major credit default claims began to unexpectedly hit insurers.

The commercial banking sector began choking on a similar variety of problems. Community banks (those with under $1 billion in assets) bet heavily on more land speculation, residential development, and commercial construction than could possibly be absorbed in one good economic cycle. Banks in Sunbelt states that had enjoyed bulging population growth, such as California, Arizona, Texas, Georgia, and Florida, were hit particularly hard.

The financial system finally crashed in September 2008 primarily under the weight of failing residential mortgages and the CDOs that funded them. Several major commercial and investment banking companies either failed or were forced into a quick sale, including Bear Stearns, Lehman Brothers, Wachovia, and the venerable Merrill Lynch. Major survivors like Morgan Stanley and American Express quickly sought refuge in the more regulated commercial banking system.

Concurrently, as new home construction and home resales fell off sharply in late 2007, a global recession emerged that affected virtually every business sector. In the United States, 15 million jobs disappeared, and the unprecedented millions of home foreclosures that followed ensured the real estate market crash would last for the foreseeable future.

After several healthy years following the 1990s S&L crisis, the crash caused hundreds of bank failures starting in late 2007. Many of the survivors were severely weakened by capital depletion from either a devalued loan portfolio or the lack of sufficient revenues. As the business sector became too weak or too timid to borrow money, most banks’ primary sources of revenue were severely curtailed.

Small business capital financing evaporated almost overnight for most entrepreneurs. According to Federal Deposit Insurance Corporation chair Sheila Bair, more than $2.7 trillion of credit lines collapsed during this period, which made business growth and economic expansion virtually impossible.

The federal government’s stimulus efforts through the Troubled Asset Relief Program (TARP), the Small Business Jobs Act, middle-class tax cuts, and the expansion of U.S. Small Business Administration (SBA) program loan limits to $5 million have all contributed to soften the blow, but there is still much work to be done. To get the U.S. and global economies back on track to a more encouraging growth rate will require more business. Capital financing for that growth is far from certain.

Still, most entrepreneurs are yearning to monetize the opportunity they envision. Whether it’s grilling steaks, selling art, developing software, or dry cleaning clothes, what they share in common is a need for business capital to launch and grow their enterprise.

To address this challenge, this book will teach readers how to navigate the more challenging and restrictive economic environment that business owners face to find capital financing. Negotiating funding is an art, and business owners should not harbor unrealistic expectations based on how easy it may have been in the past. There are new rules in effect today in every financing category.

The essential information and strategies needed to be fundable have not changed. What’s different is the climate in which business owners must now search for funding, how funding sources are more sharply delineated, and how most capital providers’ funding profiles have become narrower and more distinct.

Too many small business owners needing funding will unwittingly agree to outrageous terms just to acquire the money and get their business going. They enter a financing arrangement without really considering the true costs of funds. Sometimes such a leap works out well, even if it’s unnecessarily expensive or restrictive. Sometimes things don’t go so well.

This book encourages and helps small business owners to first look inward to better define their financial needs and clarify their business goals. It will suggest how to utilize other viable strategies or avoid costs to finance their operation without external funding.

When that is not feasible, I have clearly defined the two distinct sources of business capital, equity and debt; explained their significance and sources; and offered strategies with which to approach either. Understanding the most appropriate kind of financing according to a company’s circumstances and limitations is vitally important, because it will preserve the precious time devoted to the search.

In Part 5, Best Sources for Equity Capital, I cover the full range of options, including angel capital, venture capital, private placements, and even offer some general information about public offerings. To be clear, many of you reading this book will have few options for third-party equity due to the nature of your business and its lack of scalability. My hope is to reduce the time wasted by chasing the wrong rainbows.

But don’t overlook the fact that most of Part 4, Best Sources for Start-Up Capital, is also about equity—your own.

In Part 6, Best Sources for Debt Capital, I provide the definitions of and keys to negotiating various debt products with many sources, including banks, government guaranteed lenders, leasing companies, and working capital finance companies. In addition, I hope to draw more attention to microlending, which might become a very important source of funding for your business due to its ability to offer higher risk gap financing as well as start-up funding.

If nothing else, I hope you will adapt better business practices and financial discipline as a distinct and effective financing tool. Finding a comfortable zone between asleep at the wheel and being a spendthrift is essential to managing your business responsibly and utilizing your resources better to realize their value and opportunity.

The lessons, suggestions, and guidance offered here are not written in the abstract by a casual observer but by an active participant in the process. My finance education continued past college through 30-plus years of experience, ranging from commercial lending to venture capital to organizing a new bank. Through the various positions I held, often I was either seeking debt or equity financing from banks or investors.

This book is an effort to share the lessons from those experiences to enable entrepreneurs to accelerate efforts to capitalize their ventures and move forward faster. My tutoring was crystallized in many diverse locales, including automotive repair garages, retail stores, construction sites, children’s day-care centers, thread mills, convenience stores, chicken farms, truck terminals, restaurants, motels, marinas, testing laboratories, machine shops, and hundreds of other business facilities.

In other words, the very places in which entrepreneurs provide a variety of goods and services to our greater economy. These places are where someone employed capital, labor, and raw materials to deliver economic output to satisfy another party’s economic demand.

And, there were less pleasant places that served as a classroom for my lessons about the downside risks of entrepreneurship: liquidation auctions, depositions, bankruptcy court, and even the courthouse steps on foreclosure day. I had to become familiar with writs of seizure, sheriff’s sales, and the rules of dispossession.

Capital providers have not always risen to the challenges presented by the information age fast enough to provide sufficient funding for opportunities created by utilizing new technologies or meeting consumer service demands. Broad funding gaps remain as entrepreneurs pursue many service and web-based businesses. Even some small manufacturing companies still don’t have reliable external funding streams.

These conditions will change soon, as the market discovers rich opportunities in meeting these credit needs, particularly as technology assists in the delivery of capital.

Finally, as we all approach the new postcrisis capital market, it’s more vital than ever for business owners to get serious about gaining a greater understanding of their own financial conditions. Through most of my career, a majority of my clients could not even read their own financial statements!

How do you know whether your results are really good or really bad? Trust me, your bank balance is only one of many measurements, and it can be misleading. Your funder (or prospective funder) knows and will base its response to your requests on the metrics contained in your numbers. If you don’t know what the funder will find, you may foreclose on future opportunities with it.

I have taken on this absence of business financial literacy as a mission and an opportunity in my own work, founding the Small Business Finance Institute, which aspires to create education channels to teach these kinds of skills to entrepreneurs—those who have been in business for many years or those planning to make that leap. Watch our progress at www.SBFI.org.

In this book you will find different illustrations that demonstrate how to evaluate financial results, project future activities, or create other vital information needed in the process of managing your business or finding funding. A functioning version of all of these worksheets is available at www.SBFI.org.

Part 1

Business Finance Fundamentals

1

WHY DO YOU NEED BUSINESS CAPITAL?

Sorry, we can’t help you. Your expectations are out of line with our guidelines. It’s unlikely you are going to find that much money at this stage of your business.

All funders have uttered one of these three sentences on a majority of all the proposals they have ever considered, although maybe they delivered the message with gentler phrasing. Financing is strange territory for many upstart entrepreneurs, who expect that they can ask for and receive the entire sum of money they think they need for their big idea or fledgling enterprise.

Business owners frequently ask investors or lenders for an obviously inappropriate sum of capital based on either a lack of acumen to determine their real capital costs or failure to recognize the financial risk any funder is going to require that the owner share. Closing the information gap about this financing reality will advance the owners’ capital search faster than any other exercise in the early business stages.

As in most of life’s transactions, there’s a distinct difference in business financing between what we want and what we can get. We all want world peace but often settle for a cease-fire. We want to win the big Lotto but are happy to get just a few bucks with a scratch-off card. In business it’s great to imagine someone would put up all the money to pay for the pursuit of a terrific idea, but the reality is that that probably won’t happen.

Capital owners employ funding within established risk parameters with the expectation of a specified return on investment. Risk is determined within stringent guidelines that are intended to avoid expensive losses of capital. The capital owners generally have the experience of previous disasters or the aversion to taking chances beyond a defined boundary with the funds they manage. These experiences and boundaries will define their appetite for risk and, as we have learned from the Golden Rule: Those with the gold make the rules.

Business owners must recognize that the ultimate financial risk of any financing transaction is always going to be borne by them. Likewise, most of the financial rewards of a very successful enterprise will flow to the business owner as well. It’s a risk vs. reward world.

Once business owners reconcile themselves to the idea that they must acclimate their capital needs to someone else’s standards and accept the brunt of transaction risk for the enterprise and the capital provider, then they come around to asking themselves: Why do I really need capital?

The quick answer to that question might be because I don’t have it. More often than not, that answer is not entirely true.

Many business owners initiate efforts to acquire capital from a third party because it is perceived to be simpler and less risky than using their own resources. Depending on one’s financial position, appetite for risk, and general business optimism, the personal risk is generally inversely related to the ease of accessing third-party capital.

If business owners are laden with significant cash resources relative to their capital request, the pursuit may be effortless but certainly with significant risks. If the search is a complicated process with many roadblocks to navigate, it’s because the request reflects that the capital source is evaluating more risk.

Entrepreneurs often seek to use third-party capital because it seems easier to make spending decisions with someone else’s money. Compare that to situations where they may have been tempted to purchase something frivolous with a credit card that they would have immediately dismissed if the purchase required payment in cash.

People seem to consider risk as a matter of possession. Spending another’s money while maintaining control of one’s own seems to invoke a sense of immunity from the possibility of adversity.

This pseudo immunity may be encouraged by the false presumption of reasonableness on the part of capital owners if things don’t turn out as planned. Others have misperceptions or blind faith in the murky protection offered in bankruptcy and falsely believe that the courts will provide them with a universal get-out-of-jail-free card in the event of financial catastrophe. Sometimes that faith is disappointed.

Anyone operating within the reasoning described in the previous paragraph needs to do some serious soul searching before seeking business capital. The personal risks are very real, and the failure to make judicious choices can have a long-term impact on one’s lifestyle, economic future, and even family.

Self-discipline, good business sense, and patience are the best attributes to exercise in order to build a successful business enterprise. Hopefully those attributes will help owners recognize the wisdom in employing their own resources where possible to avoid handing over control of their futures to third-party funders.

Tempering the amount of external funding acquired should be one of the primary goals of all small business owners. Doing so would mean that business achievements would be created with internally generated funding that ultimately eliminates external debt. Only then can businesses realize their greatest sustainability and owners truly control their own destinies.

Obviously, many businesses could not organize or function without external capital financing, and there are many good, necessary reasons to employ it for expansion and growth. However, business owners should understand the negative attributes of third-party funding and seek it only with full recognition of the potential consequences.

Define Funding Needs in Concise Terms

Once a business owner has pondered all the reasons to acquire business capital from other sources, the owner must communicate those needs to the capital source in concise terms. The definition of what is needed and why is the most important information the funder initially seeks in order to qualify interest in a deal.

Business capital is distributed by a large number of sources that individually address only a narrow set of market needs. There are investors and lenders for every purpose, including those that exclusively fund to real estate, equipment, business acquisitions, working capital, and numerous other commercial purposes. But even these broad categories are subdivided into many niche markets that continue to be defined as the economy evolves. Some niches expand due to the creation of new funding sources or to the newly developed expertise of the financiers.

For example, there are some real estate funders that choose to invest funds only in residential property mortgages. Other funders focus only on home-equity lines of credit, owner-occupied commercial properties, investor-owned properties, industrial properties, condominiums, vacation properties, restaurant properties, undeveloped land, land developments, construction projects, foreclosed properties, and even properties obtained through tax foreclosures.

Obviously it’s necessary for the owner to thoughtfully define the purpose for which money is needed in as much detail as possible in order to determine the appropriate funding source. As important is the requirement to provide the funder a thorough explanation and justification as to where and when the capital needs to be disbursed.

Clearly a business seeking funding to buy a new building has an obvious business purpose needing less explanation. But additional clarity is required to define each party’s expectations of the extent that funding will be injected by each participant. If both parties assume such details based only on their preferences or self-interests, there will be some confusion at the closing table when one party is surprised to learn of its greater-than-expected obligations in the transaction.

For example, do the owner and funder agree that the closing costs are to be considered part of the acquisition cost? The answer will directly impact the size of the loan from the money source and equity contribution from the owner.

Detail Every Dollar Requested

When obtaining business capital from a third party, sometimes owners have difficulty acclimating to the fact that the funder will assert restrictions as to how the funds will be used. In fact, the proceeds from most term debt financings will be spent via direct payments from closing to the agreed expenditure.

When preparing a loan proposal the owner should carefully consider the entire capital requirement to ensure that the external funding request reflects an accurate sum of the money needed. Under- or overestimating true enterprise needs can present problems for both the business and funder.

Chiefly, an inaccurate proposal signals to the funder that there could be a management issue to consider. If the owner can’t get a handle on the cost of business needs, how can the funder hope to meet those needs?

Intentionally overestimating the project costs leads the lender to suspect that the business is either building a funding cushion in the transaction or not actually injecting the owner’s agreed-upon portion of the funding. Either would increase the funder’s risk and raise questions about the owner’s projections or character.

Underestimating the cost might lead the funder to conclude that the owner is incapable of assessing the required capital budget and hence will also disappoint the funder with estimates of other deal components, such as revenues, expenses, and profits.

It’s very important to carefully evaluate the true costs that need external financing and ensure the funding proposal closely mirrors these needs. Best management practices dictate that every prospective cost and expense be identified to assure all parties that the comprehensive costs of the transaction and operation have been projected as accurately as possible.

For example, purchasing a $500,000 building cannot be viewed as merely a capital cost of $500,000. The business will incur additional costs to perform due diligence and the closing transaction according to the contract conditions or financing qualifications. Hopefully all of these costs are identified not only ahead of entering into the purchase contract but definitely before seeking third-party financing.

Due diligence and real estate closings cost money. All of these expenses must be accounted for as the owner assesses the cost of owning the building before the property is actually purchased.

And what about the building costs after the acquisition? What will the business have spent to prepare the property for occupancy? Will there be architectural fees, builder’s fees, or painter’s fees? Certainly there will be utility deposits, telephone system installations, new stationery, movers, network designs, signage, public relations, and many other direct costs associated with relocating to the new site.

Recognizing the full costs of such a business decision on the front end enables the business owner to make better decisions and execute a strategy with more success. Providing the funder with a detailed explanation of these impact costs and how they will be covered will assure the funder that management has the acumen to plan a safe course for business operations.

This level of planning also protects the business by considering the full effect of such a decision ahead of commitment, which allows for reconsideration if financing capacity is insufficient or the business cost is too great.

A very detailed cost examination is vital, even for the most routine business strategies, to ensure the funder that management is in command of the financial impact of implementation, that the business is capable of managing operations or expansion successfully with adequate resources (subject to funding), and that the project has a strong potential to contribute to the business’s success.

Do Your Homework (Your Funder Will)

Once the business owner identifies the various costs facing the business plan, it is necessary to tie down the actual figures with exact detail. Mostly for the owner’s own benefit but particularly before presenting to a funder, it is important to extend the costs to know to the penny what the total costs will be.

To protect the integrity of the calculations, it is important for the owner to obtain cost quotes in writing from the various vendors, professionals, or other parties to whom such expenses will be paid. Inclusion of this kind of documentation in the financing proposal gives weight to the projections and builds others’ confidence in the due diligence the owner performed.

This process is labor intensive for sure but will save much frustration once spending starts, since there is a commitment in hand. A written estimate removes ambiguity and shows the extended costs, including add-ons such as sales tax, delivery, and installation. Such hidden costs can increase the final expense 5 to 15 percent, which is disruptive if unexpected, particularly on larger cost categories.

Minimize Where Possible, Maximize When Necessary

When seeking financing, there is a tendency among business owners to ask for as much money as they can with a straight face, under the auspices of get it while the getting is good. Other business people may challenge that notion.

Owners should start and end with the amount of funding that they alone have determined is actually needed. They should resist the temptation to accept all the money that may be thrown at them, since it may cause them to fall prey to other businesses (other funders) achieving their own objectives at the owner’s expense.

Too often business owners start with what can we get rather than what do we need? There is a huge difference. One the one hand, they have a plan, and it may be more conservative to grow the enterprise deliberately with internally generated funding. Accepting external funds may (or may not) accelerate that pace, may (or may not) drive the enterprise to greater results, or may (or may not) cause owners to lose everything for a shot at faster or higher results.

Think about the different views of the word affordable. Depending on one’s risk appetite and financial discipline, one party may believe something is affordable only if there is cash on hand to pay for it today. Another may take a more conservative view that affordability requires more analysis of a larger financial scope, which may assess the investment value and what return will be gained from the expense.

Still others may assess affordable as just being able to make financing payments today.

Affordability should be assessed on enterprise liquidity over and above a defined contingency reserve and the retention of earnings over time. When considering financing strategies, the financial payoff should be tangibly higher and obvious to predict.

Spending everything one earns is