Cash for Impact

Financing Your Business – How to Obtain Working Capital to Grow or Start a Business
By Michael B Roche, guest writer

Whether you own a restaurant, dry cleaners, carpet store, medical practice or any other business that serves the general public financing a business is problematic in today’s economic environment. Traditional banks are not prepared to grant working capital loans to the well established business, let alone provide capital to start a new business. The bank’s security requirements are such that the business owners might just as well look to their personal resources or private capital sources. Over the decades it has been frequently said that banks only lend to those that don’t need a loan. This observation has never been more accurate than in today’s economic environment.

Most businesses need working capital to grow and prosper. The axiom “when you stop growing you start dying” is not far from a fact for many entrepreneurs. So where does one find access to working capital or a loan to start a business. The good news is that difficult economic conditions have fostered non-traditional funding sources that fill the void that the banks have found it necessary to create.

For instance, The Small Business Administration made sweeping changes to its loan programs in late 2010 and 2011 as a result of the U.S. Government’s focus on economic stimulus. Expanded lending criteria, low equity requirements and streamlining of the application process have served to make SBA financing not only a viable source of capital, but the small business’s preferred financing choice. The lending limits are now $150,000 to $5 million. SBA will finance working capital, furniture, fixture and equipment, purchase /refinance of the business’s commercial real estate or a combination of all of these needs at up to 90% of the cost with interest rates currently as low as 5.25% with terms up to 25 years. And yes, under certain conditions they will approve a loan to start a new business. SBA requires one new job be created by the business for every $50 thousand loaned. Some might say that this makes more sense than any other street level economic stimulus initiated by the administration so far. Supporting small business and creating new jobs in the process is an obvious assistance to economic growth.

Unsecured lines of credit (ULOC) up to $150 thousand are available to business owners with personal credit scores above 700 and no recent derogatory entries on their credit report. Interest rates on this program are surprisingly low particularly considering there is no income verification required and no financial statement or tax return requirement. These loans are approved based on the strength of the borrower’s ability to manage a business and their good credit. This is an ideal capital scenario for a start up business or franchise purchaser for several reasons. The maximum loan is $150,000 to each borrower legally associated with the new business. Family members, associates or partners with excellent credit might consider participating in a business for a negotiated interest in the future profits. This works exceptionally well for national and local franchise purchases because the lender will finance up to 90% of the franchise cost. The repayment structure is identical to a home equity line of credit where the monthly payment is based upon the actual amount outstanding, not the total maximum credit line available. To make it even more palatable for the start up business the lenders recognize that the business is not likely to generate much profit in the early stages so there is no interest charged in the first six months and there are no upfront fees. This is obviously not a bank loan. It is funded by institutional and private investor sources.

For quick and easy capital for almost purpose, many businesses find Merchant Credit Card Advance programs their most practical solution. These programs do not actually lend capital. They advance funds up to 200% of the average of the merchant’s previous four to six months of credit card receipts. What makes this source popular is that there are no upfront fees, no personal liability and no credit score or personal financial requirements.

Repayment is accomplished through a small percentage of future daily credit card receipts. There are no closing fees and it is affordable. The basic requirement is that the business has been in existence for six months and has a minimum of $5,000.00 credit card charges per month.

When the business owner looks beyond the local banks and traditional lending sources, there is a new world of capital resources looking for an opportunity to lend their money at reasonable terms. As always, the cost to the merchant comes down to risk verses reward. Even so, those with credit issues or marginal track records do not have to resort to the exorbitant cost of hard money lending to grow and maintain their enterprises.

For comprehensive insight into real estate and mortgage matters please visit http://onlinemortgageresources.com. Michael Roche the author of this article is a principal of American Capital Investors Group representing a consortium of private and institutional investors throughout the United States. Michael, with thirty years of direct lending experience, directs small businesses through variety of solutions to their financing and capitalization needs. Contact him directly to discuss how he can assist your business. Mikeroche01@gmail.com or 703-328-7475.

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Technorati Tags: business credit, finance, line credit, small business loan, start a business, what is line of credit

I am currently serving in various capacities where I am notified by the IRS and State Revenue Boards of individuals who owe taxes and of my entities’ need to garnish their wages/rental payments/periodic checks.  What I’ve noticed is the tax year referenced in these notifications/demands for payments is…2010!!! Here it is only January of 2012 and the notifications are arriving already. Quite frankly, they started arriving in late January.

Actually, "we" just want the money due "us"!

I’ve seen the notifications from State Revenue Boards AND from  the IRS. Both are moving quickly to collect their payments. After having done a little research on the various websites, here is what I think is happening.

1. Very small small business owners are delivering services as sole proprietors and thus documenting their business revenue on their individual 1040s and the associated individual state tax return.
2. These business owners are NOT filing their 1040 tax returns by the final extension date.
3. The IRS and the State Revenue Boards are then going in and calculating the anticipated tax based on their documentation and past filings.
4. Since there is no dispute with the taxes (since the individual never filed, there can be no dispute!), the IRS and State Revenue Boards are providing one (1) notification of the need to file 2010 taxes or be subject to their respective tax assessment.
5. Within 3 – 4 weeks of such notice, when the individual takes no action, the IRS and State Revenue Boards issue an assessment and immediately seek payment via the entities that previously reported income paid to the individual via previous year 1099s.

With personal incomes down and therefore, state and federal incomes down, it appears that both the state and federal governments are pursuing the taxes they are (rightfully) owed. Those with disputes regarding the amount of taxes owed still receive the 3-4 notifications before pursuit of levies and liens. By this I am referring to examples such as the IRS notified you that you owed more than your tax return stated or you owed money and you couldn’t pay so you entered into an installment agreement but then skipped or was late making a payment. In these cases the IRS still sends a number of notices, the last by certified mail, letting you know of the issue and asking you to address it immediately. It’s just when you have not filed your tax return and you owed taxes in the previous year that the minimal notice occurs.

So my STRONG recommendation to all of you who owed in 2009 and have not filed your 2010 tax return:

• Please file your 2010 taxes immediately.
• If you receive a letter from the IRS or your State Revenue Board, respond immediately but definitely by the Respond By date.

Failure to respond WILL result in the applicable entities contacting the businesses that pay you to demand that they garnish the amount due from what they pay you. Or they will file a levy against your bank account. (Note: the IRS or State Revenue Board has this information if you received a direct deposit into your account or if you paid your taxes by check!)

Also note that the IRS and the State Revenue Boards will work with you via an installment agreement or other options. But you have to RESPOND in order to set these up. It’s much easier to do these in advance and not have to do this while attempting to remove levies.

Next up: What to do if your pay source has been levied? (Yes, I’ve been getting experience in this area too as a result of the above!)

Technorati Tags: 2010 tax return, Internal Revenue Service, IRS, State Revenue Boards

Here is a narrated powerpoint presentation I created that explains the relationship between a construction company’s financial statements, especially the balance sheet and net income statement, and the ease or difficulty in procuring and maintaining bonding. This presentation is for construction companies and related entities…and those that serve them (such as accountants and accounting firms).

Technorati Tags: bonding and finance, construction company

You can also pursue a line of credit with an accounts receivable financing or factoring firm. These entities charge much higher rates than banks but often are a good source of capital if you are growing significantly or garner a much larger contract than is typical for your company. Banks use your company’s three-year historical performance to provide credit lines so large increases in revenue over a short period often do not translate into a credit line increase for a few quarters. A receivables financing firm will provide a line based on your historical financials and the credit-worthiness of your customer. Rates are typically 1-2% per month but can be as high as 4-6% per month – assuming a 30-day payoff on the receivables. 4-6% per month equates to 48-60% per year!!! Sometimes you have to take what you can get but do so ONLY for very short periods with a plan of action to obtain other financing at much better terms within the next 4-6 months.

To summarize, cash is always king but definitely in restricted capital environments. Money is still available but it takes longer and requires more creativity and perseverance to access it. Therefore, plan your cash needs and budget your cash resources as much as possible. Know your daily spend rate and be able to quickly determine how much cash you have on hand at any given time. Know your expected operating cash flows and the timing of those cash flows. If you do not, you are headed for trouble.

Or you may already be troubled – stressed out, continuously seeking money from somewhere, continually trying to increase revenue even though you may lose money with each sale. Stop. Determine your cash outflows and inflows on a per project basis, and make decisions based on that information. In this market, you may have to jettison slow-paying, high complaint customers. When cash is king, these customers drag down your bottom line.

Technorati Tags: cash management, cash management techniques, small business

(A continuation)

Working capital for business is something many small business owners do not plan. They often do not think about it until they encounter a cash crunch. Or sometimes, not until they have encountered a number of cash crunches and are tired of the stress of not knowing how they’ll make payroll or pay irate suppliers.

Some of the myriad sources of financing working capital for business include short term asset-based lines of credit, term loans, equipment loans, signature credit lines, supplier financing or extended payment terms, economic development grants, and factoring. Typically loans against receivables and inventory are short-term lines of credit, renewable annually. Some banks and other financing institutions will extend a term loan for three to five years against high grade collateral. (i.e., Accounts receivables that typically pay within 30-45 days and are with highly credit worthy customers and inventory that is replaced within a similar time frame.)

The important thing is to continually keep in mind what “working capital” is and what goes into it. It’s vitally important to track your business cash and how quickly your company converts its short-term assets to cash. Not doing so can result in a significant shortage in working capital and, in short order, a liquidity crisis. If your company qualifies for a line of credit, get one. You don’t have to use it but you should have it on hand to use in case of a crisis. I’ve had clients who have lost major customers to bankruptcy. That unfortunate scenario has occurred more often in 2008 and 2009 than in previous years but it could happen anytime. If your customers have large outstanding receivables that are close to 90 days, your exposure to such a scenario is drastically high. Even if your risk is low, when a customer can’t or won’t pay receivables in a timely manner, where will your cash to run the business come from while you deal with the problem? Plan for the future and track your working capital. Your business will thank you for it in the form of stronger financial health.

One of the greatest needs that small businesses have is the need for working capital. Working capital is the lifeblood of the business, the fuel that funds the daily operations and ability to pursue near-term growth opportunities for the business. Working capital is officially defined as “….”. The financial equation for determining working capital is as follows: (Account receivables + inventory + cash on hand) – (Account payables + prepaids)

There are numerous sources of working capital for businesses. Looking at the equation, one way to obtain additional working capital is to increase account receivables (i.e., sell more) or convert the receivables to cash by getting customers to pay sooner. Continuing to examine the equation, another way is to increase inventory. When examining a company’s balance sheet for the purpose of acquiring that company, it is important to examine how these parameters fluctuate as part of the working capital. A company can increase inventory and receivables significantly, drastically increasing the amount of “working capital” denoted. However, those receivables could be essentially non-collectible and the inventory could be obsolete. Either of these would essentially nullify the advantages of a large “working capital”.

You can access cash by getting customers to prepay their orders by offering significant discounts for doing so. For example, if a customer buys a monthly service for $100, you can offer them a yearly pre-paid, discounted rate of $1,000. That’s roughly 20% off but when you factor in the time value of money, the discount drops by 5-8% (depending on your internal rate). If you sell much larger service contracts or products, the difference in actual cash can be profound with prepaids. From the other vantage point, you can get your supplier(s) to extend terms. So, instead of payment expected within 15-30 days, you may be able to push it out to 90 days. You never know unless you ask.

From the perspective of the company owner, the larger the proportion of working capital in cash, the better. Cash can be spent on anything – to pay suppliers, pay employees, pay rent, pay for geographic expansion or product line development. Receivables and inventory not quickly converted to cash through turnover must be converted to necessary cash via financing that uses either or both of these two as the collateral for loans.

(Check back for the rest)

If you listen to the news reports and pundits, small businesses are having an extremely difficult time obtaining financing due to the mortgage industry’s adverse impact on the banking industry and the resulting tightening of credit.

“Lack of capital is not the real issue, although it is a much bigger issue than in 2007. Capital in 2009 is still available. The primary issue is lack of knowledge of and access to capital. The younger the entity, the fewer the sources,” says Tiffany Wright, author of the new book Help! I Need Money for My Business Now!!. “Most small and medium businesses are completely unaware of the variety of financing sources that exist for their business type or they are highly unprepared to meet the requirements from a relationship and financial packaging perspective.”

Wright contends that there are always several financing alternatives available for any small business. To access these entrepreneurs and business owners must educate themselves and think creatively. “Most business owners think of bank financing when you say debt and venture capital when you say equity. While these two sources provide a significant amount of small business funding, there is a vast pool of working capital for business and other ways to raise capital available from other entities. There are even providers of financing that looks a little like debt and a little like equity.”

Help! I Need Money for My Business Now!!:How to Access Traditional and Creative Financing for Your Business has over 25 in-depth yet succinct case study examples of what other real business owners have done to raise capital to grow their businesses. The material covers not just what is available but the how to obtain it – what works best and why for your particular business type, templates, websites. It includes everything from pursuing business-friendly community banks to forming strategic alliances to tapping supplier financing. This ebook manual shows business owners how to raise the capital they need to survive the economic downturn and grow their business. Help! I Need Money for My Business Now!! helps business owners lay the financial framework to create a viable, sustainable business to sell or pass on.

According to the U.S. Census Bureau, as of 2004, there were nearly 5.9 Million firms with employees in the US and 19.5 Million firms with no employees. 2.8 Million firms had 1-4 employees and another 1.0 Million firms had 5-9 employees. Only 86, 538 companies had 100 or more employees and only 17,047 of those had 500 or more employees. Thus the impact of small businesses on the economy is huge. Wright says, “We must help more small businesses grow into larger, financially stable and viable firms. This way we ensure the return to health of the American economy.”

Help! I Need Money for My Business Now!! can be ordered from Toca Family Business Services, 595 Piedmont Ave.., NE, Suite 320-206, Atlanta, GA 30308; fax credit orders to 404-348-4469; or order online at www.moneytogrowbusiness.com . The price is $59.99 and is delivered immediately upon order confirmation. For more details visit http://www.moneytogrowbusiness.com .

About the Author: Tiffany Wright is the president of an interim management consulting firm and publisher of Equal Construction Record, a commercial construction newspaper, both located in Atlanta, Georgia. In addition to extensive corporate business development and finance deal participation, she is a former financial and business advisor to numerous small businesses in industries ranging from manufacturing to transportation to business services. She has an MBA from the Wharton School at the University of Pennsylvania in Finance and Entrepreneurial Management and a BS in Industrial Engineering from The Ohio State University.

Technorati Tags: cash flow, raise capital, small business funding

There are myriad sources that construction companies can access when seeking working capital for business or funds to grow the business whether that is to broaden the geographical area, expand the array of services, or pursue significantly larger contracts. (Acquisition financing is not covered here.) I have covered many of these sources in previous articles. However, the question sometimes is, “What options should I pursue and in what order?” For construction companies, the answer lies below.

Follow these steps to procure financing to grow your business
1. Personal finances.

2. Friends and family.

3. Banks. Typically a line of credit is what will provide you with the working capital cash your business needs. If you are purchasing equipment, materials, and other assets, consider financing from the seller (distributor, equipment leasing vendor, or other supplier) and credit cards. For all other working capital needs – payroll and other payments in advance of payment from customers – the line of credit should suffice.

4. Credit cards. Refer to the bank discussion. Use credit cards to purchase office supplies and other materials.

5. Accounts receivable financing or factoring. If you have contracts or purchase orders or proposals from which you create invoices, and hence receivables, then accounts receivable financing may work well for you. As mentioned in previous articles, this can be expensive but is often a great short-term solution. Comparison shop for the best service and rates. Some receivable financing and factoring firms do not finance construction projects due to the reserves/retainers often contractually required.

If you are working on specific government contracts or with a specific government sub-agency, there may be dollars set aside to provide lower interest loans tied to the receivables from the contract. Ask. Investigate. This is a good source of working capital for business.

6. Microloans. If the amount of money you need is low (under $25,000) consider microloans. There are a number of microloan providers in the Atlanta metro area and throughout the state of Georgia. The same applies across the United States.

7. Angel investors. If you have a rapidly expanding business or have a plan for one, an angel may provide the equity funds you need to grow your business. An angel that is actively involved in the business may also serve as a guarantor for a bank line of credit if your personal credit or your business credit rating is too low to qualify for a loan.

8. Joint venture.

9. Strategic investment.

10. Private equity. Business service providers such as construction companies, IT services companies, marketing firms, and business consulting providers (the list goes on) can only attract equity if and when they have a plan to expand regionally or nationally, occupy a strong market niche or have successfully differentiated their company from their competitors.

Private equity funds typically need a 20% or greater expected return and without the larger expansion plans and scope, a construction firm or other business services company will not provide the required returns. In addition, some funds do not like the lack of contractual recurring revenue inherent to the construction industry. You cannot attract equity and raise capital for your ten-person firm. However, if you have the management team, business development acumen, sales strategy, and operational foundation to grow the business to a 100-person or larger enterprise in a few years, private equity funds may be interested.

Construction firms tend to be small, local operations. Therefore, most firms will not qualify for any equity investment. However, if you want to make the leap from a small consulting type shop with historical revenue of $3 Million or less to one with $30 Million or more, you need to first create the vision and goals, then the plan to achieve those goals . If necessary, engage business consultants and coaches who can help you identify the company’s and your weak areas and put the things in place that will lay the foundation to help you achieve your goals.

If you only reached $3 Million in all of the last ten years, and now you want to make the jump to $30 Million in five years, you must address the huge credibility gap you are now burdened with. Utilizing consultants and coaches will get you on the path to raise capital sooner. These entities can also help you write a plan that incorporates the necessary changes.

If you have been on the path to larger revenue from the beginning, then you do not have the credibility gap with an equity source. However, you must clearly understand and clearly communicate how you are different and how you will achieve revenues of tens of millions when the vast majority of your peers will never come close. This is not to discourage you but to simply help you understand what the investors’ point of view will be.

Technorati Tags: cash flow, cash management, working capital