Dear Dan: My partners and I have a killer business concept and a polished business plan, but we’ve struck out trying to raise money from friends and family. How do we look for angel investors? — Need an Angel
Dear Need: A recession can be a great time to start a business. The cost of everything from supplies to office space and professional expertise is down, and new market opportunities open up. But finding startup capital can be another matter.
“I love it when a plan comes together”
Those words are by the late, great George Peppard -AKA “Hannibal” Smith of the A-Team. Now, if your sensibilities are offended by the combination of A-Team and cycling metaphors, please go no further than this line. But if you’re curious about how the business-support community works in a collaborative fashion to make things happen, step this way, please!
One of the toughest things in starting a business is, well, figuring out what it's going to cost you to start. It's tough because startup costs are a moving target, easy to underestimate and almost always subject to change.
I like the one-sentence startup guide that I was given by Tom Emerson, director of the Donald H. Jones Center for Entrepreneurship at Carnegie Mellon University in Pittsburgh. "Start out with nothing and sell half of it for several million dollars and you'll be on your way," he tells me in a phone interview. I imagine he had a big grin on his face as he spoke.
For small businesses, especially start-ups, it is very difficult to qualify for business loans since traditional lenders such as banks require adequate security.
Here are some alternative means of arranging financing for your new small business.
Just because the economy is tight and banks are clamping down doesn’t mean that there are no alternative business funding options for you.
Here are a few financing alternatives and business funding solutions that can help you secure the funding you need for your small business to succeed.
In this tight lending climate, entrepreneurs may be tempted by an investor’s offer of cash, even if it comes with strings attached.
Vlad Shmunis, the founder of RingCentral, an Internet company that serves small business owners, has an answer to that offer: Think carefully before you accept it.
Mr. Shmunis said that when he was trying to raise money for his start-up company eight years ago, the venture capitalists he approached would not invest unless he changed his business model. Instead of serving small business owners, they wanted him to aim at private consumers.
“We had a fairly solid vision of what we wanted this company to be,” he said, adding that he had built a previous start-up by selling software to small businesses and knew he could find strong demand in that market. But the investors did not agree. “Many V. C.’s just follow the leader, and for a time it was in vogue to just fund consumer-based plays.”
His complaint is echoed by other entrepreneurs. They tell of putting years into finding a business strategy that works and how their success attracts a professional investor. Then, while negotiating the terms of his involvement, the investor asks for changes. He might want to move a company’s headquarters or fire the chief financial officer. Or he might ask to replace one product line with another.
Especially in this weak economy, entrepreneurs may feel pressured to comply. And many times, complying is the smart thing to do because investors usually have more industry experience than the entrepreneurs they finance. Some entrepreneurs also cling to irrational ideas. But agreeing to such requests just because an investor offers cash is not always the best thing for the business, experts said.
“Often the investor’s advice isn’t the right advice; maybe it’s not fully informed,” said Winston J. Churchill, managing partner at SCP Partners, a private equity firm based near Philadelphia. “An entrepreneur has to be very careful from whom they take money, and what the person’s experience is.”
Mr. Shmunis said he gave up on finding an investor after a series of discouraging conversations. Instead, he said, he tapped his savings account, rented a tiny executive suite and worked without a salary for several years. Luckily for him, the investors were wrong: RingCentral now has almost 80,000 small business customers, each paying up to $100 a month in subscription fees. When he was finally ready to take money from investors two years ago, Mr. Shmunis raised $24 million — on his terms.
Many entrepreneurs, like Mr. Shmunis, prefer to finance their businesses themselves rather than tie their futures to a partner who now has a say in how the company is run. A few, however, learn their lesson the hard way.
Jason Brown said he was 26 years old in 1984 when a group of venture capitalists offered to buy into Cotton Comfort, the small chain of clothing stores he founded in Dallas six years earlier. The group, which included established investors, knew about his chain because they owned malls where he leased space, and they were impressed by how quickly he had increased sales.
Mr. Brown said he was wowed by their offer of $5 million, and agreed to give up a 46 percent stake in return for their money and management experience. But Mr. Brown said the investors tried to expand too rapidly by making large investments in the company’s headquarters and manufacturing equipment. When the economy slowed down in the late 1980s, Cotton Comfort could not pay its bills.
One smart solution is to hire a part-time, or "floating," chief financial officer (CFO). An experienced part-time CFO can look at small business financials with the eye of a well-trained surgeon. He or she can create cash flow statements and revenue projections, negotiate with vendors, collect receivables, and implement a strategy for reducing bad debt. A superb CFO can create near-magical spreadsheets, often dubbed "dashboards," which allow users to punch in numbers to see how one cost changes net profit and cash flow. If you're planning to raise capital, a CFO can also help you with the business plan, projections, and tax issues.
If you plan to approach a bank for a credit line, you'll be in better shape with clean financials. It's also wise to have your CFO with you during bank meetings. The same holds true if you're hoping to "exit" your business via an acquisition, particularly if your likely acquisition candidate is a public company.
While it's good to have checks and balances in place by keeping your bookkeeping, accounting, and CFO services separate, if you're not happy with your bookkeeper or accountant, a CFO service may be able to make informed recommendations for both. But be sure to ask if the CFO service gets a referral fee. That may be okay with you, but full disclosure says a lot about the people you are hiring. If your company grows to a point where it needs a full-time CFO, your part-time CFO service may offer recruiting services for a finder's fee (or not), help you read through résumés, interview candidates, and negotiate salary.
Many of the temporary CFO companies focus on middle-market and even Fortune 1000 companies and specialize in "interim" CFOs. Smaller companies may find it more advantageous to work with local, sole proprietors.
One such firm is Beyond the Bottom Line, which offers "CFO on Demand" services to companies in the Northeast. Founder John Gillespie has worked with Fortune 1000 companies, startups, and nonprofits. Prior to launching the company in 1998, he was COO and CFO of Innovation Luggage. Gillespie says the fees the firm charges range from $125 to $250 per hour. "It depends on the situation and how complex the assignment is," he says. "Sometimes we're simply keeping the books and closing them at the end of the month. Other times we're doing forensic accounting." A dedicated community activist, Gillespie gives nonprofits a break on fees.
Another firm with a similar mission, but a larger territory, is B2B CFO. The company has 98 partner CFOs across 42 states. B2B CFO works with smaller clients such as dentists and doctors, but also caters to larger companies with up to $75 million in revenue. "Our fees are flexible and fit within the budgets that our clients can afford," Ania M. Kubicki says, speaking on behalf of the firm. "Some clients pay our partners as little as a few hundred dollars a month." Both B2B CFO and Beyond the Bottom Line offer clients a complimentary financial "fitness" analysis prior to beginning work.
It is always challenging to take on another expense when you're trying to build a company, but the fees for a part-time CFO may be offset with reduced fees from your accountant, as your financials will no doubt be in better order. To find a floating CFO in your area Gillespie suggests asking your accountant for a referral, or calling your state CPA organization or area chapter for the Financial Executives International (FEI).
Source: http://www.allbusiness.com/banking-finance/personal-finance-financial-planning/11700585-1.html
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Some tax goodies extend popular incentives that recently expired. Others expand tax write-offs for losses — which will generate quick cash for many business owners. Here’s a rundown of key business tax benefits included in the stimulus bill:
1) Longer operating loss carry-backs: If your small business had a “net operating loss” (NOL) in 2008, this provision could be a terrific way to generate cash by claiming refunds now of taxes paid in previous years when profits were flowing. Instead of the current two-year carry-back period, eligible businesses (those averaging less than $15 million in gross receipts) can now carry back 2008 losses to 2003, 2004 or 2005. And you don’t have to be a corporation or LLC. Even sole proprietors can qualify. If your business had a loss last year, CBIZ suggests filing your 2008 return early so you can then file amended returns for prior years and reclaim your cash.
2) Bonus depreciation extended: In a bid to boost new equipment purchases (computers, machinery, vehicles) “Bonus Depreciation” - a juicy tax tidbit that expired in 2008 - has been extended through 2009 for most property, and 2010 for longer-lived assets. Basically, this is a 50 percent “bonus” write-off for the cost of new equipment a business buys and starts using this year.
Say you spend $100,000 on new computers, software and other IT equipment. Under prior rules, your first year depreciation write-off would be 14 percent ($14,000). But now you can get a 50 percent “bonus depreciation” ($50,000), plus 14 percent of the remaining amount (another $7,000). Thus, you’d net a total first-year deduction of $57,000 on the $100,000 purchase. This applies to businesses of all sizes that invest in tangible property or computer software, as well as improvements to leased property.
3) Bigger expensing write-offs for depreciable property: Higher expensing limits for depreciable property that expired in ‘08 have also been extended through ‘09. This lets your business immediately write off up to $250,000 of tangible personal property placed in service this year.
“The tax benefits of leveraging these two provisions can be tremendous” say CBIZ experts. You can quickly recover the cost of major asset purchases. But the provisions might not be around for long, so moving up equipment purchases to get the tax benefits now might make sense. Be sure to check with your tax advisor about state tax provisions since not all states conform to the federal bonus deprecation provisions.
4) Estimated tax relief: If you report income from a small business on your personal tax return, you’ll get a small break on the amount of estimated taxes required to avoid underpayment penalties. If at least 50 percent of your adjusted gross income is from the business, you’ll only need to cover 90 percent of your prior year’s taxes to avoid penalty, beginning with the 2009 tax year. Previously this was 100 percent to 110 percent, depending on your income.
5) Small biz stock gains: Anyone who buys stock in a small business between the enactment date of the stimulus bill and 2011 gets a bulked-up break on capital gains taxes later on. If the stock is held at least five years, 75 percent of any gain can be excluded - up from the current 50 percent. According to CBIZ, the stock must be original issue stock held by a non-corporate investor in a C corporation with gross assets under $50 million. The company must also be actively engaged in a trade or business.
6) Tax breaks for hiring: The new law expands the Work Opportunity Tax Credit (WOTC) program to include two new targeted groups - unemployed vets and young people between 16 and 25 who haven’t been employed or attended school in the past six months. Businesses hiring such individuals can qualify for a $2,400 tax credit per worker.
Source: http://www.whatworksforbusiness.com/2009/02/small-business-bags-stimulus-bill-tax-breaks/
Disclaimer: The SBDC does not engage in providing legal, financial, or tax advice. You must seek professional assistance for these matters. This information in provided to inform clients -- not as business advice.
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The American Recovery and Reinvestment Act contains a package of loan fee reductions, higher guarantees, new SBA programs, secondary market incentives, and enhancements to current SBA programs that will help unlock credit markets and begin economic recovery for the nation’s small business sector.
“The tax incentives and credit stimulus elements of the Recovery Act will truly help small business owners affected by the credit crunch, and will provide financing opportunities to help them create new jobs in their communities,” said Acting SBA Administrator Darryl K. Hairston.
“There’s a lot to digest in the legislation, and SBA has established teams to tackle a wide variety of policy decisions, system modifications, regulatory changes, legal requirements, and new program launches authorized by the President and Congress,” said Hairston.
The bill provides $730 million to SBA and makes changes to the agency’s lending and investment programs so that they can reach more small businesses that need help. The funding includes:
• $375 million for temporary fee reductions or eliminations on SBA loans and increased SBA guaranteed shares, up to 90 percent for certain loans
• $255 million for a new loan program to help small businesses meet existing debt payments
• $30 million for expanding SBA’s Microloan program, enough to finance up to $50 million in new lending and $24 million in technical assistance grants to microlenders
• $20 million for technology systems to streamline SBA’s lending and oversight processes
• $15 million for expanding SBA’s Surety Bond Guarantee program
• $25 million for staffing up to meet demands for new programs
• $10 million for the Office of Inspector General
The bill also authorizes refinancing for certain SBA loans so borrowers can expand their businesses on favorable terms, and expands leverage capability for Small Business Investment Companies.
“We are going to be part of the solution, and this bill gives us specific tools to make it easier and less expensive for small businesses to get loans, give lenders new incentives to make more loans, and help restore healthy SBA secondary markets to boost liquidity,” Hairston said, noting also that more details on implementation will be coming over the next few weeks.
The stimulus bill takes a comprehensive approach and attacks several problems facing small businesses at once by reducing fees, guaranteeing a greater share of certain loans, expanding capacity in the Microloan program, providing new loans to help small businesses keep their doors open through economic hardship, as well as new mechanisms to help unfreeze the secondary markets for SBA-backed loans.
Declines in SBA lending volume last year, which are continuing in FY 2009, reflect problems in the broader credit markets, and present hurdles to small businesses that are seeking credit in the current economy. The financial crisis has created a variety of conditions that impact small businesses, including a lack of liquidity in the banking system, a reluctance of many lenders to extend new loans, tightened credit standards, weaker finances at small businesses, and uncertainty about taking on new debt on the part of many entrepreneurs.
The Recovery Act addresses small businesses’ lending problems, and addresses key investment and contracting issues. The bill helps Small Business Investment Companies better leverage investment capital to reach more small companies. The bill also increases the current contract limit for SBA’s Surety Bond Guarantee program, which will help small businesses compete for contracts.
90 Percent Guarantee
The bill allows SBA to raise its loan guarantee from the current levels to as much as 90 percent for some loans. At present, SBA can guarantee loans up to 85 percent on loans up to $150,000, and up to 75 percent on loans greater than $150,000. The 50 percent guarantee on SBA Express loans would remain unchanged. Increasing the SBA guarantee percentage will encourage lenders to extend more capital to small businesses by increasing the share covered by an SBA guarantee.
Business Stabilization Loans
The bill creates a new SBA loan program to provide deferred-payment loans of up to $35,000 to viable small businesses that need the money to make payments on an existing, qualifying loan for up to six months. These loans will be 100 percent guaranteed by SBA. Repayment would not have to begin until 12 months after the loan is fully disbursed. The bill provides $255 million for this new program. These loans will help ensure that small businesses have time to re-focus their business plans in order to succeed in the long run.
Microloans
The bill expands SBA’s Microloan program, which provides small loans (up to $35,000) paired with technical assistance to start-up, newly established or growing small businesses. The bill provides funding to increase loans from SBA to participating Microlenders by $50 million through September 30, 2010, and adds $24 million in grants to provide technical assistance to borrowers. Historically, these loans reach low-income individuals, women and minorities in both rural and urban areas. Expanding this program through the stimulus bill will help ensure these entrepreneurs are not left behind in the credit crunch.
Refinancing
The bill also gives SBA the power to use the 504 Certified Development Company program to refinance existing loans for fixed assets, providing fresh support for small business expansion. This change will help business owners expand their current development projects and create jobs in their communities.
Secondary Market Expansion
The bill authorizes SBA to establish a secondary market for pools of “first lien” loans under the 504 program. These “first lien” loans from commercial lenders currently have no SBA guarantee. The bill authorizes SBA to deploy federal guarantees for pools of these first lien loans, so that they can be sold to investors in a secondary market. Providing liquidity for these first mortgages will help encourage lenders to continue participating in SBA’s 504 loan program, which provides a key source of capital for community development and other projects.
The bill also empowers SBA to set up a Secondary Market Lending Authority that would make direct loans to broker-dealers that participate in the secondary market for SBA-guaranteed 7(a) loans. These broker-dealers would use the funds to purchase SBA-backed loans from commercial lenders, assemble them into pools and sell them to investors in the secondary loan market. This program may help address some of the issues facing the secondary market for SBA loans and may ultimately help SBA lenders make new loans to borrowers.
Investment Program
The bill helps SBA-licensed Small Business Investment Companies (SBICs) and families of SBIC funds better leverage the capital they use to invest in small businesses. The bill sets maximum levels of funding the agency can provide to these companies at up to three times the private capital raised by those companies, or $150 million, whichever is less. It also raises the percentage any one SBIC can invest in a single small business to 10 percent of total capital, and raises from 20 percent to 25 percent the percentage of any licensee’s dollar investments that must be made in “smaller” businesses.
Surety Bonds
The bill also raises the maximum contract amount that can be covered by an SBA guaranteed surety bond from $2 million to $5 million, and, under certain circumstances, for contracts amounting to $10 million, and provides additional funds to cover the costs of expanding this program. Small businesses need surety bonds in order to bid on and obtain many federal and other contracts. SBA guarantees surety bonds to small businesses that private surety companies would not otherwise be able to extend.
Source: http://sbdcnet.org/sbdc-national-blog/115.php
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