April 2012
W-2 & 1099 Information

Small Business Blog

Brought to you by Steve Strauss

April 2012

Getting a Bank Loan

An issue that has become quite vexing for many small business owners in recent years is finding the funding for their business, be it for a start-up or to fund growth. Between the Great Recession and the mortgage meltdown, financing dried up; not only was the home equity ATM turned off, but loans generally became harder to get.

But the good news is that there are all still sorts of ways these days to still get your dream funded. So in this blog and the next few, I would like to share with my friends here at Greatland some different ways to get your business funded.

Today, let's look at how one gets a regular old bank loan, because, despite some common misperceptions, that is still the way most entrepreneurs fund their businesses. Now, is it a little more difficult than before? Sure. But that said, it is still quite doable. After all, what is the business of a bank? To lend money. They want to lend you money. It is your job therefore to make it easy for them to do so.

Here's how: Getting a business loan will require that you jump through several hoops – properly and in order. You will need to have a lot of documentation prepared for the bank, and the bank will additionally look at your personal credit history, ability to collateralize the loan, business history, books (profit & loss statements, balance sheets, etc.), and more.

Because an element of risk is involved in every loan a bank makes, you need to help the bank understand that your loan's risk is low. You can do that if you understand the "Four Cs" of credit. When a banker considers a business loan, it will analyze your application through this filter:

  • Character. This relates to the integrity, reputation, and history of the borrower. In smaller community credit unions and banks, character is a significant factor, whereas in many big banks, your credit score matters much more. Character is determined by your payment history, credit profile, letters of reference, and so on.
  • Capital. How much money do you need? The more money you seek, the tougher it will be to get.
  • Capacity. What is your ability of to repay the loan? You will need to be able to show to the lender that you will be able to service the loan amount requested and that it will be repaid in full and on time. Requesting too much is not a good idea therefore.
  • Collateral. Not all business bank loans require collateral, in fact, some are unsecured, but that is more the exception than the rule. Bankers like collateral, and there are all sorts of options you can use to secure a loan: A home or other real estate, inventory, machinery, even accounts receivable.

So, if you need a bank loan, think like a banker and understand these four concepts before you apply.

(For even more business tips and strategies, check out our podcast on iTunes, Small Business Success with Steve Strauss, Powered by Greatland.)

SBA Loans

In my last blog, I shared how to think like a banker so as to up your chances of getting a conventional bank loan. Today I would like to drill down a bit more into a very specific sort of loan – one made in conjunction with The Small Business Administration.

What if I were to tell you that there is an agency of the United States government whose sole job is to help you succeed in your business? Would you like that? And what if I further told you that said agency has a yearly budget of over $1 billion and that it facilitates in excess of 50,000 small business loans a year, totaling more than $15 billion? Do you think that may help you get your business funded?

Of course we are talking about the Small Business Administration. In many ways, the SBA is one of the best friends your business can have, but this is even truer when it comes to funding. SBA loans have helped millions of entrepreneurs start and grow their business and it can help you too.

The first thing to understand about SBA loans is that the SBA does not make loans, as strange as that sounds. What the SBA does is guarantee loans. By offering a loan guarantee to a bank, the SBA makes it easier for that bank to make more loans since the bank is assured of repayment; if the borrower is unable to repay the loan, the U.S. government will. That is a fine incentive for making more loans.

How much does the SBA guarantee? Traditionally, SBA loan guarantees worked this way:

  • Loans up to $50,000 – SBA guarantees 50% of the loan
  • Loans up to $150,000 – SBA guarantees 85% of the loan
  • Loans above $150,000 – SBA guarantees 75% of the loan

A big change resulting from the 2009 stimulus law is that the SBA now has the right to guarantee up to 90% of all loans. Sometimes the SBA does in fact guarantee that much, but not always. As they say, "your results may vary."

The core loan the SBA makes, its basic, mainstay loan program, is the 7(a) loan. 7(a) loans can be used for all sorts of things – startups, working capital, equipment, furniture, and real estate even. The length of the loan can be anywhere for 10 to 25 years, and loan amount have recently been raised to $5 million.

But this is just one type of loan. There are many others fo other purposes. Check out this site.

There really is not a lot of difference between applying for an SBA loan and a conventional business loans. You will need to provide extensive documentation as to your need and use of the monies and you will need to make a great impression. The main difference is that here, you will need to fill out SBA forms in addition to whatever else the lender typically requires. The basic SBA forms that you should expect to encounter, among others, are these:

  • Form 4: Application for Business Loan
  • Form 4A: Schedule of Collateral
  • Form 413: Personal Financial Statement
  • Form 912: Statement of Personal History
  • Form 1846: Statement Regarding Lobbying

One last note: Aside from more lenient underwriting criteria, one other good thing about SBA loans is that you may not need collateral to get one. According to the SBA, "To the extent that worthwhile assets are available, adequate collateral is required as security on all SBA loans. However, SBA will generally not decline a loan where inadequacy of collateral is the only unfavorable factor."

(For even more business tips and strategies, check out our podcast on iTunes, Small Business Success with Steve Strauss, Powered by Greatland.)

Factoring

In my past few blogs, I shared some thoughts on how to get a bank loan these days. But what if your credit is bad or you just don't want to go that route for some reason? In this blog and the next, I would like to share with my Greatland readers a couple of other ways to fund a business.

Today, lets look at factoring. Factoring is the selling of a business' accounts receivable to a third party in order to obtain funding now. Often, the money can be received within 24 to 48 hours. Whereas factoring was once a sort of exotic idea, today it is a commonplace way for businesses of all kinds to get the capital they need without having to apply for a bank loan or sell a piece of the company to an investor. Literally billions of dollars in accounts receivables are factored every year.

Another nice thing about factoring is that it is a relatively easy and quick process, especially in comparison to getting a bank loan. Indeed, the factor cares little about your credit-worthiness and is really only concerned about the payment history of your customer. If your customer pays in full and on time, you are in business. Usually all the factor needs from you is proof that all services are complete or that all products have been delivered as promised. Once you show that, selling your invoice on that deal should be a breeze.

Even though the idea of factoring is easy to understand – you are owed money so you sell that "asset" to someone else – factoring is a still specialized way of getting money. It has its own language. Here are the key terms you need to know:

  • Account Debtor: Your customer. The one who owes you money.
  • Factor: The Company that is willing to buy the accounts receivables so as to provide businesses with operating capital.
  • Advance rate: This is the amount the factor will advance you on the invoice.
  • Verification: This is the process whereby the factor verifies that you have in fact provided a product or service for a customer and that the customer plans on paying the invoice.
  • Discount fee: The fee that the factor will charge you for the service

Obviously, factoring is not an idea that works for most startups because consistent accounts receivable must be in the pipeline for a factor to be interested. But for those more established companies that do have money owed to them every month, factoring can be a great solution. It can provide immediate working capital for inventory, payroll, improved facilities, projects, anything.

Really, the only downsides to this deal are:

  1. In return for that almost-instant cash, you must be willing to give up some of the money you are owed, to the factor (the discount fee), and
  2. You must be willing to have the company whose invoice you are selling learn of the sale; they will be paying the invoice to the factor and not you.

(For even more business tips and strategies, check out our podcast on iTunes, Small Business Success with Steve Strauss, Powered by Greatland.)

Angel Investors

The best angel investing story, ever: In 1996, Larry Page and Sergey Brin were Ph.D. students at Stanford working on a research project that looked at the number and quality of sites that linked to a particular web page. Using mathematical algorithms, Page and Brin soon saw that the pages that had the most sites linking to it on a given subject were among the most relevant in a search engine query. Page and Brin then decided to use this information to create their own search engine they would eventually call Google.

In 1998, Page and Brin had met angel investor Andy Bechtolsheim, gave him a demonstration of Google, and Bechtolsheim decided to invest in their nascent company. He wrote out a check in the amount of $100,000 to "Google, Inc." But according to Contact Magazine, "The investment created a small dilemma. There was no way to deposit the check since there was no legal entity [yet] known as 'Google Inc.' The check sat in Larry's desk drawer for a couple of weeks while he and Sergey scrambled to set up a corporation."

That $100,000 angel investment soon led to almost another million in investor funding. In 2004, Google went public and raised more than $1 billion. Today, Google has been calculated to be the world's most valuable brand, with a value of around $100 billion.

Yes, angels are called angels for a reason – they answer business prayers. But if you want to find your own angel, then the first thing to understand is that the one thing they look for is a prayer that can make them a lot of money.

Here is what they look for:

  • The opportunity: Why is this a unique opportunity and how will your business capitalize on it? Not every business needs to be the next big thing and not every business will need to raise $1 million in angel funding, but every business will need to show the investor that it offers something unique to the marketplace such that the likelihood of the investor making money is high.
  • The competition: Who are your competitors, and why are you better?
  • The financials: Your angel investor will want to see how you plan on spending the money, where and on what. What are your projected sales? Why?
  • The team: Almost more than anything else, an investor can be wooed by a great team, one with experience, credentials, smarts, and contacts.

So where do you locate these angel investors of which I speak? The first place, and often the best, is through networking. Speak with your friends and family, with your accountant and lawyer, with real estate agents, bankers, and customers.

Beyond networking, maybe it is no surprise that the Internet has become a big player in the angel investment game. A host of online groups have cropped up in recent years to facilitate the introduction of entrepreneur and angel investor. A Google search will provide you with a list to choose from, but here are a few to help you get started:

  • Gust: Gust is a business planning and funding platform that allows entrepreneurs to search through over 25,000 investors.
  • AngelList: "How it works: You create a pitch and select investors . . . The investors review startups as they come in and ask for intros to the ones they like."
  • GoBigNetwork: First, place your business and get it promoted throughout the site. Next, gain exposure to more than 20,000 investors. Third, meet those investors interested in your project.

No, getting an angel investment will not be as easy as it was for the founders of Google, but the benefits to you should nevertheless be equally significant if you get your business prayers answered.

(For even more business tips and strategies, check out our podcast on iTunes, Small Business Success with Steve Strauss, Powered by Greatland.)