Food Business Entrepreneurial Training Academy #9: Funding Your … FBETA 9 - Funding (Dubli… ·...
Transcript of Food Business Entrepreneurial Training Academy #9: Funding Your … FBETA 9 - Funding (Dubli… ·...
Food Business Entrepreneurial Training Academy
#9: Funding Your Company
Dublin, CA.
May 14, 2018
Alameda County SBDC
Thank you to Our Sponsor
Questions To Get Started
1. Are you a start-up, a seasoned business, or are you
buying a business?
2. Explain the model of the business and your experience
3. How much & what is the money for?
4. What’s your credit report story?
5. What type of collateral do you have?
6. Is the business your sole income?
7. Have you been turned down by a lender & why?
Common Uses for Financing
Start-up Expenses
Build inventory
Finance sales
Permanent Working Capital to
bridge product development
and Sales gap
Growth Capital to expand by
product lines or territories
Debt refinancing
There are three primary ways to get
funding for your business:
Debt/Equity/Crowdfunding
So what’s the difference?
Debt is another word for Loan.
Banks provide you a loan and they
want their money back.
Equity requires you to give up
ownership in your business in
exchange for future cash.
The equity provided is called
“investment”.
Crowdfunding can be debt, equity
or incentives
May or may not involve giving up
ownership
Equity vs. Debt Financing
Advantages
Debt Financing
Advantages:
Relatively Easy & Quick
Maintain control & ownership
Interest & other costs tax deductible
Equity Financing
Advantages:
Unsecured (no collateral)
Share of financial risk (partners)
Less pressure to make monthly payments
May be able to borrow more
Payback is negotiable
Equity vs. Debt Financing
Disadvantages
Debt FinancingDisadvantages:
Interest Costs Expensive
Risk of profits not covering repayment
Must share financial information
Lender Restrictions & Limitations
Equity FinancingDisadvantages:
Risk of destroying personal relationships
Give up part of profits
Give up part of ownership of business
Give up some control of business
Legal restrictions
Equity Financing
Equity Sources
Family & friends
Channel partners
Angels
Crowdfunding
Food for thought
People invest in people they
know and trust
Your Network
Your earliest stage capital is most likely to come from
friends and family and their personal contacts
- Everyone you know and everyone they know
Ask your Family, Friends and Business Associates
about investing
Equity commitments can help you get a loan
- The more equity in place, the “safer” the business will
appear to potential lenders, suppliers, landlords, etc.
Channel Partners = Access to Cash
Companies you buy from and sell to
Go over your business plan with them
Probably won’t make a direct investment
Negotiate for preferable trade credit terms
Lower deposits, more days before bills are due and/or
higher credit lines
Better terms translate into less cash required
Angel Investors
High net worth individual investors (think “Shark Tank”)
Tend to be early investors and more flexible
All have their own processes
There are some formal networks to approach (mostly
technology-oriented)
May associate with incubators and accelerators
Who is passionate about your business/product?
Angel Investors
Can find them almost anywhere, but there are ways to
meet them faster:
Find out where they “hang out”, and network there
– slowmoneynorcal.org
– angellist.com
Angel Investors
Best chance to succeed if you have:
Idea and a Plan
– Opportunity and problem you will solve
Team
– Do you have the key people who can bring the idea
to market?
Product
– Are you past the raw idea stage? Do you have
customer validation?
Valuation
– What is the company worth at this stage?
Angel Investor sites
Slowmoneynorcal.com
angel.co/food-and-beverages/investors
Foodangels.co
Circleup.com
Many more…
Preparing for Equity Financing
Prepare an “elevator pitch” and a “pitch deck”
Cover Page / Name of Company
Problem with current market before your product
Solution with your product
Market size / GO-TO Market
Product/Service and how it works
Business Model / Benefits / Unfair Advantage
Competition / Team / Resume
Projections
Your Ask / Business Loan or Investment $$$
CROWDFUNDING
Crowdfunding
A relatively new source of finance for startups– A Crowdfunding platform can be used to raise money for a
campaign (may include startup funding)
– “Contributors” might not receive ownership, rather they can
receive something of value (tickets to events, t-shirts, etc.)
– Very marketing/social media intensive
– Can also be debt or equity
Recently, the JOBS Act expanded this concept to
provide for money to be raised from investors in
exchange for equity ownership – Signed into law April 2012
– Guidelines effective May 2016
Crowdfunding
Transaction Value in the "Crowdfunding" segment is
forecasted at $1.041 billion in 2018
Transaction Value is expected to show an annual growth
rate (CAGR 2018-2022) of 10.4% resulting in the total
amount of $1.546 billion in 2022
The average funding per campaign in the is forecasted
to be $5,534Source: Statistica.com
Major Crowdfunding Players
Rewards BasedDonation gets you a promised
product
DonationGiving for nothing in return
EquityOwning a part of the project
LendingMoney returned, with interest
Kickstarter GoFundMe Wefunder LendingClub
Indiegogo CrowdRise StartEngine Prosper
PledgeMusic YouCaring Seedinvest Kiva (no interest)
RocketHub Causes Equitynet FundingCircle
Barnraiser GiveForward Rockethub SoFi
Crowdtilt Fundrazer Angel List SoMoLend
Rewards Based Sites
Rewards Based Sites take Off!
2008: Indiegogo
2009: Kickstarter
Rewards Based sites – encompassed arts, social causes, entrepreneurs and small
businesses
Rewards Crowdfundng
Key: Offer benefits that are perceived as high value to
your customer, but that don’t cost you a lot of cash and
time
Examples:
Opening Day Party
Name on the wall, stool, shelf, etc.
Signed items
Equity Crowdfunding
Emerged in 2011 with “Regulation D” Platforms
• Microventures – Tech companies
• CircleUp – Branded consumer products and retail
Prior to 2016, allowed only “sophisticated” investors
• Generally, $1 million net worth other than home
• Or, income of $200,000 last 2 years ($300,000 if
married) and expectation to continue at same level
New Equity Crowdfunding Rules
Beginning May, 2016, Regulation CF allowed
“unaccredited” investors to purchase ownership in
crowdfunded companies
Regulation CF has many requirements before offering
securities and ongoing reporting requirements.
• Likely $10,000-$25,000+ in professional fees to
make an offering
• Ongoing financial reports
New Equity Crowdfunding Rules
Regulation CF has many requirements before offering
securities and ongoing reporting requirements.
- Likely $5,000-20,000+ in fees to make an offering
- Ongoing financial reports
Equity Crowdfunding Sites
Reg CF Deals through 2017
Source: Wefunder
Non-equity Crowdfunding
You can raise debt through the “crowd”:
Kiva.org: up to $10,000 with zero percent interest
- Start with friends/family, finish with the crowd
Prosper.com: peer to peer loans
You can raise funds to be repaid with royalties
Repay with a percentage of sales and a “bonus”
eg., Red Bay Coffee, Crooked City Cider
Crowdfunding Success Factors
Needed:
A good story
A good following (start building that now!)
Media Database
A well conceived campaign (rewards!)
Strong Kickoff
Focus on the campaign daily-spread the word!
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Debt Financing
Debt – Early Stage Companies
Start-up or very early stage companies have limited
options (unless there is substantial collateral):
Kiva.org – “Crowd” lending up to $10,000 at 0% interest
Microloans – SBA sponsored programs that go up to $50,000 and
require no collateral
workingsolutions.org, mainstreetlaunch.org are major Bay Area
lenders in this category
Community Advantage Loans – up to $250,000
Nonprofit lenders including mainstreetlaunch.org (Oakland)
cdcloans.com (San Diego), selected lenders in and out of state
Debt – Early Stage Companies
Other early stage lenders we see regularly:
Hebrew Free Loan (hflasf.org) – up to $50,000 @ 0% interest
Opportunity Fund (opportunityfundloan.org) – up to $200,000
- One year in business
Pacific Community Ventures $10,000 - $200,000
- One year into business and at least one employee
Many other specialized programs
Microloan Borrower
Characteristics:
A microenterprise may be a start-up
Borrower may have had some credit problems in the past
Borrower is not a viable candidate for a bank loan
Microloan application process:
SBA resource partners, SCORE & SBDC, can assist
borrower with financial projections
Borrower discusses financing need with the Microlenders
that serve borrower’s county
Borrower submits completed application to Microlender
Debt – Seasoned Companies
After 1-3 years in business, many options can open up:
Conventional Loans – Every financial institution makes
own policy, sets programs and risk tolerance as they
see fit (within government constraints) – many choices
SBA loans – SBA guarantees part of the loan amount to
the lender, limits lender risk – must be turned down
elsewhere to apply:
– 7(a) Program – up to $5 million, most business
purposes, minimum 10-20% down, rates vary from
prime + 2.75% - 6.5%, 5-10 year term
Expansion Capital Borrowing
Usually an existing business, although startups are eligible:
For each owner of 20% or more of the business, personal credit
must be satisfactory (no recent bankruptcies)
Personal credit score must meet lender’s minimum requirement.
7(a) loan application process:
Written business plan is typically required
SBA resource partners, particularly SBDC, can assist borrower to
prepare financial projections
Borrower contacts 7(a) lenders to discuss financing need
Lender provides application forms & reviews application for
approval prior to submission to SBA
Debt – Seasoned Companies
SBA 504 Loan Program
504 Program – up to $5 million for real estate
purchases, machinery & equipment
10%-20% down from borrower
First mortgage lender lends 50% of the project cost
Second mortgage lender is a nonprofit company
(Certified Development Company or “CDC”) that
provides up to 40% of the project cost at a fixed rate
25 year fixed term
Other Debt Products
Asset Based Financing
– Loans secured by equipment
– Loans secured by your accounts receivable or
inventory
– Loans advancing funds against purchase orders
Merchant Credit Card Advances
– Purchase of your future credit card sales at a
discount
– Quick money, but can be expensive
Non-SBA Loan Programs
Non-SBA loan sources include:
Conventional Loans (Major Banks)
Special Funds and Programs
- Community Advantage (up to $250,000)
- Green Funds
Online Direct Lending Platforms
Peer to Peer Lending
Other
Peer to Peer Lending
Arrangement of lending money to unrelated individuals
with an intermediary
Takes place on online “platforms” that facilitate and
service the loan
Typically unsecured loans
Platforms validate borrower information
Lenders (individuals) choose to whom they loan funds
Kiva Zip, Prosper, Lending Club, Funding Circle, others
Peer to Peer Lending
kiva.org – zero percent loans (great deal!)
lendingclub.com – average loan is $15,000 @ 13.4%
prosper.com –- average loan is $13,000 @ 13.9%
Many others…
Other Financing Sources
Credit cards (watch out!)
Online lenders (watch out!)
Equipment Leases
Accounts Receivable Financing
Trade Credit
“Fintech” Online Lenders
Great convenience, but most often at much higher rates than if you
went through a longer process with a traditional lender – know your
rate!
Beware! Many lenders charge 40-100% APR – you don’t have
consumer protections as a business – this is not a suitable long-
term solution
However, some lender are streamlining the process using
technology and web-based solutions, so not all are at the high rates
In the majority of cases, a bank, credit union or SBA loan will be
lower cost if you qualify
Lending Club Example
How are You Set Up?
Basics:
Bank Account
– Are you separating business and personal?
Payroll Service or Manual payments
Accounting Program
IRS, EDD (UI/ETT/SDI), FTB, City/County License
- Are you “reserving funds” for the payments?
Are you free of liens and claims? If not, are you on a
payment plan?
Build Your Credit
Make sure your credit and public records are clean as
possible – check and correct any errors
Helpful sites:
– nav.com, nerdwallet.com, creditkarma.com,
creditsesame.com
If you need help to build credit:
– ccssf.org
– operationhope.org/oakland
Keep Good Records
Set up a good record keeping system and maintain it
- Use Quickbooks, Xero, even an excel sheet
Don’t hide your income (if you want a loan)
Keep receipts and contracts handy
Debt – Getting Prepared
Check your personal and business credit to find out if you
have anything to clear up or explain:
Nav.com – free business and personal credit reports
Creditkarma.com, creditsesame.com, many others – personal
credit report
Your FICO and business scores will help determine your strategy
Start-ups - need a personal financial statement (pfs), business
plan (10-15 pages is sufficient) and financial projections
Seasoned companies – usually need personal financial statement,
2-3 years of tax returns and financial projections
What collateral do you have? Recent valuation
Considerations for Loan Approval - 3 C’s
Cash Flow
– Start-ups - can you afford to pay back the new monthly
business loan payment, plus your personal bills without
counting on the future projected income of your startup?
– Existing business - are you able to afford the new loan payment
with your existing cash flow?
Credit Story
– What is on your credit report? Need to know when and why any
blemishes happened, what you have done to rebuild your credit
and why it won’t happen again
Collateral
– What type do you have, and are your willing to use it to secure
the loan
Courting Bankers/Investors
Courting the Money
Shop Around!
Find a lender/investor that likes your
type and stage of business
This is a “campaign” that may take a lot
of time
What Documents to Have
A current Profit and Loss Statement and Projected Cash Flow
Credit Report
Current Personal Financial Statement
Itemized Use of Proceeds
List of Collateral and estimated value
Business Plan
Schedule of
Business Debt
Personal and
Business Tax
Returns last 3 years
Copy of leases and
all pertinent
agreements
Debt – Getting Prepared
If a business plan is required, you need to provide the
following elements:
Team/Owners – Resume
Market research – Problem solved, Market Size,
Competition, Who is your customer? Why?
Marketing Plan - Research, Strategy and Execution
Projections with Assumptions and detailed numbers
with your assumptions
What Documents to Bring
A current Profit and Loss Statement and Projected Cash Flow
Current Personal Financial Statement
Itemized Use of Proceeds
List of Collateral and estimated value.
Business Plan
Schedule of
Business Debt
Personal and
Business Tax
Returns last 3 years
Copy of leases and
all pertinent
agreements
Don’t get a “No”
GET:
– A referral
– Qualitative advice on your plan
– Quantitative advice on how to change the numerical
assumptions
– Information on the competition
Bootstrap Strategy
Many clients follow this formula:
Kiva
Crowdfunding Platform
Microloan or Larger Loan
Funding with “Specials” Sites
Don’t do it!
Don’t use sites like Groupon, Living Social, Travelzoo. Etc.
as a source of funding.
Can cheapen your brand
Service issues can arise causing poor reviews
Not likely to be a “sticky” customer
Often cuts margins below cost
THANK YOU!