Gerri Detweiler, a nationally recognized credit expert, he has created this guide to help you navigate the sometimes rough waters of financing a business.
If you are like me, you aren’t willing to wait until conditions are perfect for starting your business. You want to dive in now. Finance Your Own Business will give you lots of strategies for raising the money you need to get off the ground or take your business to the next level. I wish I had this kind of information when I got started!
~Ali Brown, Leading Entrepreneur, Mentor, Angel Investor, www.AliBrown.com
Part One: Finding Financing
Overview
A Tale of Two Business Start Ups
Mike, Jan and Liz had worked their way up the ladder at the PR firm where they landed after college.
Talented and hardworking, they loved their jobs in the beginning. But as the company grew and they moved up the ranks, they found themselves in endless meetings, scheduling more endless meetings. When a much larger agency acquired the firm, they pictured more endless meetings. All three of them decided to take their severance money and pursue other opportunities.
Starting with his $50,000 severance pay Mike built his PR firm into a boutique agency billing over $5 million a year. Creative and personable, Mike’s reputation and company grew quickly. As it did, he found himself constantly putting out fires—and all too often, they were financial fires.
Many of his clients were Fortune 500 companies that paid well, but slowly. Sometimes, it took six months to collect from them. The larger the client company, it seemed, the longer it took to get paid. In the meantime, he had to keep paying salaries and overhead. More than once, he threw expenses onto his personal credit cards. And he missed a payment more than once because he was too busy to notice when the bills were due. His interest rates on his credit cards were now all in the double digits.
One day, Mike was contacted by a company that told him they could factor his firm’s receivables. The pitch was attractive: Get paid for work right away, and let someone else worry about collecting on the invoice. The cut he had to give the factoring firm shaved a little more off his already thin margins, but at least he was making payroll.
Then the bank where he held his business accounts, including his operating line of credit, was sold. The line of credit—his lifeline—was cut, because he didn’t meet the new bank’s credit criteria. Now he didn’t have the funds he needed to float him between client payments, and it looked like his business might not make it. In his moment of desperation, he received a call from one of the bigger firms. They were looking for companies to acquire and were interested in his.
Like Mike, Jan and Liz joined together to start their own PR firm at the same time. They each took $15,000 from their severance pay and parked the $30,000 in their business bank accounts, agreeing not to spend it except in an absolute emergency. Both women had excellent credit ratings, and wanted to keep them strong. On advice from their CPA, they carefully researched the business credit building process so they wouldn’t run into the cash flow problems the CPA had seen so many of his clients encounter.
Their firm also grew, but they watched their expenses like hawks, reviewed their finances every week, and avoided tapping their personal credit. When Jan and Liz needed computers and a phone system for their small office, they leased them. When they needed office supplies, they charged them to their office supply account and paid them off when they came due.
Many of the accounts they established allowed them to pay in 30, 60, and sometimes 90 days. Whenever possible, they chose accounts with companies that gave them the longest terms, and once their firm established a payment history, they negotiated even better terms. They also established an operating line of credit at their bank, but used very little of it.
Unlike Mike, who hired the best and the brightest, Jan and Liz outsourced a lot of their work to avoid a large payroll. Several of their best employees agreed to work on more modest salaries, but with a generous bonus plan at the end of the year based on the firm’s profits. They, too, were billing several million dollars a year when they received a call from the larger firms.
How Deep Is Your Well?
Mike’s story is a common one, except that the vast majority don’t survive the financial turbulence that Mike and his business faced. Entrepreneurs are usually self-starters who are good at what they know. They come up with great concepts, invest in marketing and advertising, and are willing to work hard to get the job done. But ultimately, they fail because they never planned for their capital needs. Think of capitalizing business as digging a well. Smart business owners dig the well as deep as possible—or at least lay that groundwork for doing so. Otherwise, they are constantly trying to refill the well every time it stops raining business.
The biggest tragedy is that many business owners wait until it is too late to start digging that well; that is, looking for capital. At that point, like Mike, they usually end up out of luck. The reality is, no one wants to give you money if they know you need it. Word to the wise: Dig your well when you don’t need the water.
What is Financing a Business?
This is a book about financing your business. It is not about business finance. What is the difference? Business finance is the broad activity of managing money and other assets within a company. Business finance courses in college and in graduate school deal with accounting methods, strategic investing, debt management and financial principles. You will often hear people say, “He’s a finance guy.” Or “She’s a financial whiz.” These are people who know how to manage, move and manipulate money to the company’s (and their) benefit.
Financing a business, though it sounds similar, is not the same thing. Instead, it means bringing money into your business. It’s a much narrower activity than business finance, certainly for young businesses. But it is arguably a more important activity. You can hire the finance guy to manage all the money later. But first you need to get started and you need money to do it. And then you need to keep going—and unless your business is rolling in cash, you need the continuing financing to grow it.
As a corporate attorney, Garrett Sutton, one of the authors of this book, has worked with business owners all over the world, at all stages of their businesses—from start-up to selling the business. But one thing he hears time and time again is that business owners are frustrated when it comes to getting the financing they need to either start a venture or to grow it. They often don’t realize the variety of financing options available to them, and as a result may wind up with the wrong kind of financing. We don’t want that to happen to you.
As a credit expert, Gerri Detweiler, the other author of this book, has heard too many stories from entrepreneurs who have destroyed their personal credit because they didn’t understand how to protect themselves. They found themselves dealing with the aftermath of their credit decisions for many years. And that includes successful business owners as well as those whose ventures failed! We don’t want that to happen to you either.
Businesses need financing for a variety of reasons, including:
• To start up
• To expand and grow
• To develop new products
• To enter new markets
• To acquire other businesses
Where Does The Money Come From?
Every year, Inc. magazine publishes the Inc. 500 issue, which features 500 of the fastest growing private companies in America. It’s fascinating to see all the different types of businesses featured, and how they are growing.
In that issue, Inc. also publishes a survey of the ways these companies access start-up capital. In one issue, those top ways were:
• Personal savings (71%)
• Loans from friends and family (21%)
• Personal bank loans (13%)
• Home equity loans