Tools for procuring capital
The clients we see at the University Center for Innovation and Entrepreneurship present us with diverse hopes, dreams, challenges and possibilities. One common theme in their stories is the need to develop a better respect for, and understanding of, money—how to get it, how to use it and how to manage with it.
Whether the client aspires to start a company or already is in business and is seeking additional financing, many of the folks we see have let their personal or business financial situations get out of hand. And when seeking financing, one of the first things bankers or investors assess is your previous relationship with money.
There are ways to ensure your financial house is in order before you approach someone for funding. Here’s what bankers tell us:
1. Research your options. Put pen to paper and see if that new piece of equipment your employees would love to buy will actually pay for itself in a reasonable timeframe. Shop around, and check out other suppliers and other options, such as leasing.
2. Put policies in place. Establish procedures for taking bids, not necessarily so you can take the cheapest one but so you can be better educated to make the best decision.
3. Educate yourself about monetary issues. We see clients who tell us they don’t understand their insurance or their taxes or their cell phone agreements. They don’t take the time to educate themselves about the legal documents they sign. Not understanding is all right; not educating yourself isn’t.
4. Don’t stick your head in the sand. Be brave, and ask questions if you need to. If you are dissatisfied with the response or service you receive from a supplier, banker or partner, find someone else.
5. Save money for slow times, for tax times, for retirement and for unexpected events. The business climate can change quickly. Tuck some away for a rainy day.
6. Plan, plan and re-plan. When something changes in your business or your personal life, rework your budget and do projections for the next year. This way you’ll know ahead of time if you are going to have a shortfall. The sooner you realize a problem, the more time you will have to fix it.
7. Yes, you need a business plan. Business plans are not just for start-ups.
8. Energize your sales. Money won’t just come to you; you need to get assertive and lead it to you. Set a marketing and advertising plan and stick to it.
9. Control spending. Ask yourself if you want a new piece or equipment or if you really need it. Be honest with yourself, and only buy things you really need.
10. Train your employees to respect money so you won’t have problems in the future. They won’t respect money unless you show them how by your example.
11. Build the right team. Successful entrepreneurs have learned that it helps to hire people whose strengths complement their own weaknesses. In other words, if you are a creative person who is excellent at marketing but would rather not deal with finances, find with someone who can. If you are a one-person enterprise, hire out some of the accounting, human resources or legal duties to others.
12. Understand what stage your business is in. Unless you’ve developed a good track record with credit, many lenders will be reluctant to extend credit to you. It will help if you match your business stage with the right source. For instance, start-up businesses or businesses with plans, products and services but no revenues are often better suited to approach informal investors, such as friends, family, partners, local development corporations or state and local government micro-lending programs. Businesses with full business plans are better suited to approach commercial lenders.
13. Start by approaching the bank with which you have an existing relationship.
14. Understand how the lender looks at you. Whether it’s your banker, a development corporation board or your Great Aunt Tilly, your lender is going to examine your creditworthiness.
• That includes your capacity to pay back the money you borrow. By examining the company’s cash flow and probability of payback (including your past performance in credit relationships), the lender will assess how likely he or she is to get his or her money back.
• Capital is the money you personally have invested in the business and indicates how much you have at risk. Lenders expect you to have invested something of your own in the company.
• Collateral is additional security that you can offer the lender and includes assets of your own that you will use as repayment in the event you cannot repay the loan. Another type of collateral is the guarantee, which is when someone else promises to repay the loan if you default.
• Conditions focus on the intended purpose of the loan. In examining condition, the lender will examine the local economic climate and the economic conditions within your chosen industry and others that could affect your business.
• Finally, character is the personal impression you make. The quality of your references and the background, experience and education of you and your employees will also be factors.
If your request for funding is not approved, you are entitled by law to a written statement of the reasons for denial. Not all lenders assess things in the same way, so another application to another lender may result in an approval.
In the end, your chances for acquiring additional future capital are directly related to how much respect you have for the current investments in your company. And respect means understanding. Instill in your employees the need to not only bring money into the company but also to understand how it’s used to keep your doors open.
Mary Paulsell is the director of operations at the University Center for Innovation and Entrepreneurship.