Read Start Your Own Business Online
Authors: Inc The Staff of Entrepreneur Media
Start Your Own Business (32 page)
Angels tend to find most of their investment opportunities through friends and business associates, so whatever method you use to search for angels, it is also important to spread the word. Tell your professional advi sors and people you meet at networking events, or anyone who could be a good source of referrals, that you are looking for investment capital. You never know what kind of people they know.
Getting the MoneyOnce you’ve found potential angels, how do you win them over? Angels look for many of the same things professional venture capitalists look for:
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Strong management.
Does your management team have a track record of success and experience?
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Proprietary strength.
Proprietary does not necessarily mean you must have patents, copyrights or trademarks on all your products. It just means that your product or service should be unusual enough to grab consumers’ attention.
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Window of opportunity.
Investors look for a window of opportunity when your company can be the first in a market and grab the lion’s share of business before others.
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Market potential.
Investors prefer businesses with strong market potential. That means a restaurateur with plans to franchise stands a better chance than one who simply wants to open one local site.
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Return on investment.
Most angels will expect a return of 20 to 25 percent over five years. However, they may accept a lower rate of return if your business has a lower risk.
If angels consider the same factors as venture capital companies, what is the difference between them? You have an edge with angels because many are not motivated solely by profit.
Particularly if your angel is a current or former entrepreneur, he or she may be motivated as much by the enjoyment of helping a young business succeed as by the money he or she stands to gain. Angels are more likely than venture capitalists to be persuaded by an entrepreneur’s drive to succeed, persistence and mental discipline.
AHA!Angels invest in companies for reasons that often go beyond just dollars and cents. As a result, your appeal must not only be financial but also emotional. For example: “We need more than just dollars. We need you to bring your incredible wealth of experience to the table as well.” In the long run, that may be even more important than capital.
That is why it is important that your business plan convey a good sense of your background, experience and drive. Your business plan should also address the concerns above and spell out the financing you expect to need from startup to maturity.
What if your plan is rejected? Ask the angel if he or she knows someone else your business might appeal to. If your plan is accepted, you have some negotiating to do. Be sure to spell out all the terms of the investment in a written agreement; get your lawyer’s assistance here. How long will the investment last? How will return be calculated? How will the investment be cashed out? Detail the amount of involvement each angel will have in the business and how the investment will be legalized.
Examine the deal carefully for the possibility of the investor parlaying current equity or future loans to your business into controlling interest. Such a deal is not made in heaven and could indicate you are working with a devil in angel’s garb.
chapter 14
LOOKING FOR LOANS
The Ins and Outs of Debt Financing
U
nlike equity financing, where you sell part of your business to an investor, debt financing simply means receiving money in the form of a loan that you will have to repay. There are many sources you can turn to for debt financing, including banks, commercial lenders and even your personal credit cards.
Types of Loansnlike equity financing, where you sell part of your business to an investor, debt financing simply means receiving money in the form of a loan that you will have to repay. There are many sources you can turn to for debt financing, including banks, commercial lenders and even your personal credit cards.
You don’t need to pinpoint the exact type of loan you need before you approach a lender; he or she will help you decide what type of financing is best for your needs. However, you should have some general idea of the different types of loans available so you will understand what your lender is offering.
There is a mind-boggling variety of loans available, complicated by the fact that the same type of loan may have different terms at different banks. For instance, a commercial loan at one bank might be written with equal installments of principal and interest, while at another bank the loan is written with monthly interest payments and a balloon payment of the principal.
TIPHUD (the federal Department of Housing and Urban Development) provides job and other grants to startups and small businesses for job creation (for example, $10,000 per job created) in the form of low-interest loans, often in conjunction with the SBA. HUD can provide the names and phone numbers of city, county and state organizations in your area that represent HUD for development of targeted geographic urban areas.
Here is a look at how lenders generally structure loans, with common variations.
Line-of-Credit LoansThe most useful type of loan for the small business is the line-of-credit loan. In fact, it’s probably the one permanent loan arrangement every business owner should have with his or her banker since it protects the business from emergencies and stalled cash flow. Line-of-credit loans are intended for purchases of inventory and payment of operating costs for working capital and business cycle needs. They are not intended for purchases of equipment or real estate.
A line-of-credit loan is a short-term loan that extends the cash available in your business’s checking account to the upper limit of the loan contract. Every bank has its own method of funding, but, essentially, an amount is transferred to the business’s checking account to cover checks. The business pays interest on the actual amount advanced, from the time it is advanced until it is paid back.
Line-of-credit loans usually carry the lowest interest rate a bank offers since they are seen as fairly low-risk. Some banks even include a clause that gives them the right to cancel the loan if they think your business is in jeopardy. Interest payments are made monthly, and the principal is paid off at your convenience. It is wise to make payments on the principal often. Bankers may also call this a revolving line of credit, and they see it as an indication that your business is earning enough income.
Most line-of-credit loans are written for periods of one year and may be renewed almost automatically for an annual fee. Some banks require that your credit line be fully paid off for seven to 30 days each contract year. This period is probably the best time to negotiate.
Even if you don’t need a line-of-credit loan now, talk to your banker about how to get one. To negotiate a credit line, your banker will want to see current financial statements, the latest tax returns and a projected cash-flow statement.
Installment LoansThese loans are paid back with equal monthly payments covering both principal and interest. Installment loans may be written to meet all types of business needs. You receive the full amount when the contract is signed, and interest is calculated from that date to the final day of the loan. If you repay an installment loan before its final date, there will be no penalty and an appropriate adjustment of interest.
e-FYIWant to apply for a loan from the comforts of home?
C-Loans.com
analyzes your loan application against a database of 750 commercial mortgage lenders and comes up with offers from the top 30 or so lenders who want your business. It may also be a good trial run to help you determine whether you’re ready to get a loan for your business.
The term of an installment loan will always be correlated to its use. A business cycle loan may be written as a four-month installment loan from, say, September 1 until December 31, and would carry the low interest rate since the risk to the lender is under one year. Business cycle loans may be written from one to seven years, while real estate and renovation loans may be written for up to 21 years. An installment loan is occasionally written with quarterly, half-yearly or annual payments when monthly payments are inappropriate.
Balloon LoansThough these loans are usually written under another name, you can identify them by the fact that the full amount is received when the contract is signed, but only the interest is paid off during the life of the loan, with a “balloon” payment of the principal due on the final day.
Occasionally, a lender will offer a loan in which both interest and principal are paid with a single “balloon” payment. Balloon loans are usually reserved for situations when a business has to wait until a specific date before receiving payment from a client for its product or services. In all other ways, they are the same as installment loans.
Interim LoansWhen considering interim loans, bankers are concerned with who will be paying off the loan and whether that commitment is reliable. Interim loans are used to make periodic payments to the contractors building new facilities when a mortgage on the building will be used to pay off the interim loan.
Secured and Unsecured LoansTIPAlmost every loan has covenants. These are promises that borrowers make to lenders about their actions and responsibilities. A typical covenant specifies the amount of debt the borrower is allowed to take on in the future. If you want to see just how restrictive your loan will be, look at the covenants section of the loan agreement.
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