Creating A Credible Business Plan

Transcription

1 Creating A Credible Business Plan Combining Real-World Experience, Research, and Best Practice Observations September 27, 2016 UGA SBDC in Gwinnett

2 Your Facilitator Today Benny StaRomana (last name pronounced Santa Romana ) Business Consultant, UGA-SBDC in Gwinnett Owner, Management Consulting business for 5 years Grand Prize winner of Gwinnett Chamber s 2011 Amazing Entrepreneur Business Plan competition 15+ years in management and professional positions Panasonic USA, Lucent Technologies, Exxon Asia, and medium-sized companies MBA, MPM (Project Management), BS Business Administration, BA Behavioral Science Specialization: Strategic Planning, Process Improvement, Project Management, Marketing & Sales

3 Reasons A Business Plan Is Critically Important To Prove to Lenders, Investors, and the Business Owners Themselves that They ll Get Compensated for the Risks They ll Take To Provide A Roadmap for the Business Owner

4 Before Our Business Plan Deep Dive Assess Your Fit with the Business You Have in Mind Experience Knowledge Business Connections Resiliency

5 The All-Important First 2 Questions about Your Business What Problem or Opportunity are People Willing to Pay for to be Addressed? Why Would those People Choose My Product or Service Over the Alternatives?

6 Our Approach Today Executive Summary Company Description Financial Projections Risk Management Management Operations Plan Production Plan Marketing & Sales Plan Strategic Position Competition Analysis & Trends Market Analysis & Trends

7 Steps & Tips Market Analysis & Trends Goal: How: Prove that a need, problem, challenge, or opportunity is being experienced by people willing to pay for a solution, which is your product or service. In short, you are proving that demand exists for your product or service. By providing research findings from authoritative, credible sources Industry associations Research organizations Own surveys Techniques: Use your favorite search engine to find information on the web Add pdf to keyword search to locate white papers, articles Use complimentary, paid research tools or DIY methods like Reference USA Survey Monkey Mall Interviews

8 Steps & Tips Market Analysis & Trends Example According to a February 2016 article by fastcasual.com, a publication reporting on the fast casual restaurant business, healthy smoothie beverages are increasing in demand as meal replacements. Tropical Smoothie Café, a national franchise focusing on the smoothie product line, reported same-store sales growth of 11.5% in 2015 versus 2014, and has signed new franchise agreements for 199 in multiple states. In Gwinnett County, there are approximately 57,264 persons who per Reference USA s 2016 demographic profile are interested in health/diet/fitness. There are 10 trends predicted for the healthy smoothie business: 1) Build-Your-Own, 2) Healthy Boosters, 3) Smoothie Meals On The Go, 4) Smoothie Bowls, 5) Sugar Alternatives, 6) Colorful Veggies, 7) Global Inspiration, 8) Low-Profile Liquirds, 9) Spices & Herbs, and 10) Adult Smoothies (w/alcohol)

9 Notes on Example Steps & Tips Market Analysis & Trends Search keywords used: smoothie trends, healthy smoothie demand, healthy smoothie restaurant association of america Websites found: Paid but affordable resource:

10 Steps & Tips Competition Analysis & Trends Goal: How: Demonstrate awareness and familiarity with market forces that will be competing with your business. This will provide support for how the business will be positioned in terms of product offerings, unique benefits, pricing, etc. By visiting competitors websites and researching market feedback on the competition. Techniques: Use your favorite search engine to find information on the web Enter customer feedback as search words Add Facebook to the search phrase Go to Yelp Use complimentary or paid research tools, especially Reference USA Searches:

11 Steps & Tips Competition Analysis & Trends Example Weight Fresh Ingredients Friendly Customer Service 5 5 COMPETITION ANALYSIS Customers' Expectations Clean, Pleasant Environment Reasonable Price 5 4 Research Info Made Available Suppliers' Ability To Meet Buyers' Expectation (1 to 5 score where 5 = Excellent) Your Business Competitor A Competitor B Competitor C Competitor D Total Score Where is Competitor C located? Should I challenge Competitor C or not? What can I say about my pricing? Some Questions to Ask Ourselves:

12 Steps & Tips Strategic Position Goal: How: Convey a logical conclusion from the market and competition analysis in the way that the business will be at maximum advantage in terms of product, price, promotion, and place. By referring to the scores generated by the competition analysis, and selecting the best possible mix of product, price, promotion, and place. Techniques: Use Reference USA Engage a commercial real estate broker to help if the business has a physical location Are you the best in only one or a few of the customers expectations? Then, stress and leverage those characteristics! Tip: This part of planning needs to be deliberate and sure-footed. Do not rush. Remember to measure twice, cut once.

13 Steps & Tips Strategic Position Additional Notes: Product/Service Mix & Pricing Based on previous market and competition research Create your product line or service line enumerating the products and services in demand by the target customers Depending on the strategic position of the business (niche provider/segment leader, market challenger, market leader), develop pricing that Please note! Conveys the desired level of quality Attracts first-time customers to try the product or service Your positioning of the product and the business itself influences the market price!

14 Steps & Tips Strategic Position Example Green Smoothie Café will locate its first store in zip code serving mostly the city of Grayson GA due to the lack of healthy juice and smoothie establishments serving a population of 1,898 health-conscious persons in the area. The store location will serve, in addition to the city residents, commuter traffic and the city s elementary and high school students numbering 1,038 and 2,500, respectively. Green Smoothie Café will offer regular and premium products to create price levels that appeal to different budgets. The business will introduce DIY Smoothies and Adult Smoothies (alcohol-infused) to broaden its market base; these smoothie variants are product evolutions reported by blendtec.com.

15 Steps & Tips Marketing & Sales Plan Goal: How: Describe the who, what, and how of communicating the sales pitch or value proposition of the business. It includes methods of facilitating the decision process of prospective customers. By referring to the scores generated by the competition, and isolating areas where the business excels. Develop a concise message that s fresh, truthful, and inspirational. Techniques: Create a marketing matrix per example that follows Draw from both good and bad examples from competition and other unrelated businesses. Tip: This part of planning needs to be deliberate and sure-footed. Do not rush. Remember that marketing companies harness people and spend the time necessary to create just the right message.

16 Steps & Tips Marketing & Sales Plan Example The Message The First DIY Smoothie Bar in Grayson! The Marketing Matrix Marketing Vehicles Target Audience Age Group SEO-Enabled Social Mailbox Direct Personal Co- Radio Website Media Postcards Mail Selling Marketing Millennials x x x Generation X x x x x Boomers x x x x x Corporate, Institutional n.a. x x x x x x

17 Steps & Tips Marketing & Sales Plan Must-Do Promote the business ahead of actual opening to build buzz and excitement Minimum rule-of-thumb: 30 days before opening Call vendors and compare quotes Work best quotes into the marketing & sales budget These numbers will go into the financial projections!

18 Steps & Tips Production Plan Goal: Define how the business product or service will be made and delivered that meets or exceeds customers expectations in quality, timeliness, and price. How: By researching processes, policies, and best practices of competition and improving upon them. Employ yourself with a competitor if possible for a first-person appreciation of the business. Techniques: Search for existing business plans Get employed with a competitor Investigate outsourcing options Engage help from an experienced professional familiar with the operation of the business

19 Steps & Tips Operations Plan Goal: How: Define how the different functions of the business will be managed to meet or exceed customer expectations, at the same time maximizing profit opportunities and managing risks inherent in the business. Refer to the provided image of the 3-Legged Stool of Business Viability and develop a corresponding organization chart to graphically represent the functions of the business. Document processes and procedures and organize into an operations manual. Techniques: Search for existing business plans Get employed with a competitor Engage help from an experienced professional familiar with the operation of the business

20 Steps & Tips Operations Plan The 3-Legged Stool of Business Viability

21 Steps & Tips Operations Plan The Organization Chart Owner & Managing Member Legend Direct Hire Outsourced Bookkeeper Legal Services Insurance Digital Marketer Shift Supervisor Associate 1 Associate 2

22 Steps & Tips Management Goal: How: Define the skills, knowledge, experience, education, and other attributes of the business owner or executive that directly relate to the critical management requirements of the business. It is important to note that the management function requires the ability to anticipate future events that may affect the business and to lead the business accordingly. Refer to the Marketing & Sales, Production, and Operations sections of the business plan and determine if you can capably handle those functions on your own if you had to. If not, engage a resource who can. Techniques: Search for existing business plans Get employed with a competitor Engage help from an experienced professional familiar with the operation of the business

23 Steps & Tips Management Example Michael Johnson, Owner & Managing Member 25 years in the restaurant business 2 years college, Business Administration District Manager for national fast casual chain, 2008 to 2015 Physical fitness and healthy lifestyle advocate Caroline Johnson, Co-Owner & Business Manager 15 years in financial management, utility company Degree-holder, BS Finance Physical fitness, healthy lifestyle, and yoga advocate

24 Steps & Tips Risk Management Goal: How: Convey acceptance of risks inherent in the business, their intensity and probability of occurring, and a plan to mitigate them. Consult with insurance agencies, lawyers, and accountants in addition to internet research. Techniques: Use the provided Risk Management Plan format.

25 Steps & Tips Risk Management Example of a Risk Management Plan Risk Owner Incapacitation Competitive Incursion Financial Collapse Impact High Medium High Probability Low Medium Low Mitigation Cross-Training, Mentoring of Co-Owner Service Mark Registration of Business Name & Tagline Personal Savings, Strict Financial Monitoring by Co-Owner

26 Steps & Tips Financial Projections Goal: Demonstrate the ability of the business to satisfy financial obligations to all stakeholders and show profitability that makes it a desirable and sustainable investment. Define clearly for lenders or investors how the business will be funded and for what purpose. How: Engage a professional if necessary to develop financial projections that are widely accepted by lenders and investors. Minimum Requirements: Cash Flow, P & L, and Balance Sheet

27 Steps & Tips Financial Projections Cash Flow Profit & Loss Balance Sheet Sources & Uses of Funds Examples Follow

28 Grayson HJB LLC Projected Cash Flow Statements For the 12 Months Ending Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Beginning Cash 100,000 16, ,897 1,008,811 1,998,806 3,233,044 4,546,475 5,853,862 7,183,539 8,512,712 9,828,284 11,141,716 Operating Inflows: Sales (& Collections) 264, ,707 1,277,077 1,588,639 1,839,201 1,920,535 1,920,535 1,936,277 1,936,277 1,920,535 1,920,535 1,920,535 Operating Outflows: Current Operating Expense 52,675 54,111 61,573 66,295 67,429 66,295 67,429 67,429 66,295 67,429 66,295 67,429 Cash Purchases - CGS 295, , , , , , , , , , , ,762 Payments of A/P Balance 0 236, , , , , , , , , , ,125 Paymnent for Aquired Asse 1,729,614 Cash Flow: Operations (1,812,986) 330, ,746 1,029,826 1,274,070 1,353,263 1,347,218 1,369,509 1,369,005 1,355,404 1,353,263 1,347,218 Financing/Investing Inflows: LT Debt Proceeds 1,729, Equity Proceeds Line of Credit Proceeds Financing/Investing Outflows: Fixed Asset Additions Dividends / Distributions Line of Credit Payment LT Debt Principal Payment 0 32,625 32,761 32,898 33,035 33,172 33,310 33,449 33,589 33,729 33,869 34,010 Interest 0 7,207 7,071 6,934 6,797 6,660 6,521 6,383 6,243 6,103 5,963 5,822 Cash Flow: Finance/Inves 1,729,614 (39,832) (39,832) (39,832) (39,832) (39,832) (39,832) (39,832) (39,832) (39,832) (39,832) (39,832) Total Cash Flows (83,372) 290, , ,994 1,234,238 1,313,431 1,307,386 1,329,677 1,329,173 1,315,572 1,313,431 1,307,386 Ending Cash 16, ,897 1,008,811 1,998,806 3,233,044 4,546,475 5,853,862 7,183,539 8,512,712 9,828,284 11,141,716 12,449,102

29 Grayson HJB LLC Projected Income Statements For the Months Ending Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Year 1 Total Revenue 1,057,344 1,212,141 1,626,682 1,889,051 1,952,019 1,889,051 1,952,019 1,952,019 1,889,051 1,952,019 1,889,051 1,952,019 21,212,463 Cost of Goods Sold 274, , , , , , , , , , , ,525 5,515,241 Gross Profit 782, ,984 1,203,745 1,397,897 1,444,494 1,397,897 1,444,494 1,444,494 1,397,897 1,444,494 1,397,897 1,444,494 15,697,223 Advertising / Promotion / PR / Marketing. % o Amortization Auto Expense Bad Debts Bank Charges 19,032 21,819 29,280 34,003 35,136 34,003 35,136 35,136 34,003 35,136 34,003 35, ,824 Consultants Groundskeeper, Exterminator ,120 Delivery & Shipping Depreciation 6,430 6,430 6,430 6,430 6,430 6,430 6,430 6,430 6,430 6,430 6,430 6,430 77,161 Dues / Publications / Subscriptions Equipment Rental / Lease Legal Services (Self-Funded, Set Aside Eac ,200 Graphics / Printing / Copier Insurance ,000 Interest on Loans - 7,207 7,071 6,934 6,797 6,660 6,521 6,383 6,243 6,103 5,963 5,822 71,703 Laundry & Linens Accounting ,000 Licenses & Permits Maintenance & Repairs ,440 Miscellaneous Office Supplies & Postage Operating or Shop Supplies Payroll 26,883 26,883 26,883 26,883 26,883 26,883 26,883 26,883 26,883 26,883 26,883 26, ,600 Payroll Taxes & Benefits 4,033 4,033 4,033 4,033 4,033 4,033 4,033 4,033 4,033 4,033 4,033 4,033 48,390 Refunds / Cash Short & Over Rent Research & Development Royalties Taxes Telephone & Internet ,200 Training Travel Uniforms 1, ,200 Utilities Security System Total Expenses 59,105 67,748 75,074 79,660 80,656 79,385 80,380 80,241 78,969 79,962 78,688 79, ,549 Profit (Loss) 723, ,236 1,128,671 1,318,238 1,363,838 1,318,512 1,364,114 1,364,253 1,318,929 1,364,532 1,319,209 1,364,813 14,777,674

30 Grayson HJB LLC Projected Balance Sheets For the 12 Months Ending Beg. Bal. Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Current Assets Cash 100,000 16, ,897 1,008,811 1,998,806 3,233,044 4,546,475 5,853,862 7,183,539 8,512,712 9,828,284 11,141,716 12,449,102 Deposits Accounts Rec ,008 1,173,441 1,523,047 1,823,459 1,936,277 1,904,793 1,936,277 1,952,019 1,904,793 1,936,277 1,904,793 1,936,277 Supplies Inventory 0 315, , , , , , , , , , , ,525 Current Assets 100,000 1,124,793 1,903,276 3,023,012 4,329,789 5,660,474 6,958,793 8,297,663 9,626,711 10,925,030 12,255,714 13,554,033 14,892,904 Long-Term Assets Office Equipment 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 Furniture & Fixtures 200, , , , , , , , , , , , ,000 Leasehold Improvements 57,840 57,840 57,840 57,840 57,840 57,840 57,840 57,840 57,840 57,840 57,840 57,840 57,840 Machinery 100, , , , , , , , , , , , ,000 Vehicles Buildings 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 Land 575, , , , , , , , , , , , ,000 Accum. Depr. 0 (6,430) (12,860) (19,290) (25,720) (32,150) (38,581) (45,011) (51,441) (57,871) (64,301) (70,731) (77,161) Organization Costs Accum. Amortization Long-Term Assets 1,934,840 1,928,410 1,921,980 1,915,550 1,909,120 1,902,690 1,896,259 1,889,829 1,883,399 1,876,969 1,870,539 1,864,109 1,857,679 Total Assets 2,034,840 3,053,202 3,825,256 4,938,561 6,238,909 7,563,164 8,855,052 10,187,493 11,510,110 12,801,999 14,126,254 15,418,142 16,750,583 Current Liabilities Accounts Payable 0 295, , , , , , , , , , , ,515 Line of Credit Current-LT Debt 366, , , , , , , , , , , , ,347 Current Liabilities 366, , , , , , , , , , , , ,861 Long Term Liabilities Long Term Debt 1,363,167 1,329,016 1,294,721 1,260,284 1,225,704 1,190,979 1,156,110 1,121,095 1,085,934 1,050,627 1,015, , ,821 Total Liabilities 1,729,614 2,024,647 1,967,464 1,952,098 1,934,208 1,894,625 1,868,001 1,836,328 1,794,693 1,767,653 1,727,376 1,700,055 1,667,682 Owner's Equity Stock / Owner Capital 305, , , , , , , , , , , , ,226 Ret. Earnings YTD Earnings 0 723,329 1,552,566 2,681,237 3,999,475 5,363,313 6,681,825 8,045,939 9,410,191 10,729,120 12,093,652 13,412,861 14,777,674 Total Equity 305,226 1,028,555 1,857,792 2,986,463 4,304,701 5,668,539 6,987,051 8,351,165 9,715,417 11,034,346 12,398,878 13,718,087 15,082,900 Total Liabilities & Equity 2,034,840 3,053,202 3,825,256 4,938,561 6,238,909 7,563,164 8,855,052 10,187,493 11,510,110 12,801,999 14,126,254 15,418,142 16,750,583

31 USES & SOURCES OF FUNDS A. Uses of Funds Equipment $25,000 Furniture, Fixtures $15,000 Build-Out $60,000 Beginning Inventory $6,000 Beginning Working Capital $9,000 TOTAL $115,000 B. Sources of Funds Owner's Equity Infusion (20%) $23,000 Bank Loan $92,000 TOTAL $115,000

32 Example of Summary Steps & Tips Financial Projections The Cash Flow projections of the business indicate that strong revenues from the first quarter of operation combined with deferred compensation of the business owners during the same period will allow the business to generate positive cash flows of $53,145 at the end of the first 12 months of operation and $189,213 by the 36 th month. The company s profitability likewise is positive throughout the first 3 years, attaining $49,125 in the first year and culminating at $154,339 at the end of the 3-year period. The Balance Sheet of the business shows a current ratio of 0.7:1.0 at the end of the first year due to loans taken out for start-up, but this improves to 1.8:1.0 by the end of year 3 as cash build-up improves due to sustained profitability.

33 Steps & Tips Company Description Goal: How: Define the legal structure of the business in a way that depicts the company s ability to protect its owners personal assets from business liability, accept investors, and address its tax obligations Consult with a knowledgeable professional such as a business lawyer, accountant, or business counselor.

34 Steps & Tips Company Description Example Grayson HJB, LLC is a for-profit business registered as a Limited Liability Company in the state of Georgia for purposes of providing food services to include serving smoothie and like juices, including complementary snacks and other food items. The company is owned and operated by Michael Johnson and his spouse, Caroline Johnson.

35 Steps & Tips Executive Summary Goal: How: Tips: Facilitate quick understanding of the business by a lender, investor, and other stakeholders who may have interest in some form or another in the company. Extract, organize, and present key messages from each section of the business plan in a manner that stimulates interest and favorable impressions of the business. Do this section last! The content of this section will come and flow almost naturally after accomplishing the other sections of the business plan.

36 Steps & Tips Example Executive Summary Grayson HJB, LLC s entry into the healthy smoothie business is expected to generate ascending profits from $49,125 on its first year to $154,339 on the third year of operation, with cash flow reaching $189,213 by the 36 th month. This growth is supported by a national trend for almost all demographic groups that favor healthy smoothies as a meal replacement. The company s selection of its first store in Grayson GA resulted from a county-wide analysis of competition that indicates the city as a significantly underserved area. The market potential is estimated at 1,898 health & fitness advocates and 3,538 elementary and high school students per statistics provided by Reference USA. The business will be aggressively promoted 30 days prior to opening to create buzz and excitement among its target market. The local Chamber of Commerce will be requested to cut the ribbon on opening day. A multi-media marketing strategy will be employed to reach the store s target customer segments. The founder and owner of the business, Michael Johnson, has 25 years experience in the fastcasual restaurant industry while his spouse and business co-owner Caroline Johnson is a successful finance and administration professional who will devote full time to the business as will her husband.

37 Recap Executive Summary Company Description Financial Projections Risk Management Management Operations Plan Production Plan Marketing & Sales Plan Strategic Position Competition Analysis & Trends Market Analysis & Trends

38 Open Forum

39 How To Engage the Services of a UGA SBDC Consultant Complete your business plan draft. Then call to begin one-on-one consulting sessions. Contact: Ms. Helen Sutherland Administrative Associate (678) hsutherland@georgiasbdc.org

40 What s Your Score? Presenter: Rosemarie A. Drake Lender Relations Specialist Supervisor Georgia District Office

41 Established in 1953 Independent Federal Government Agency About the SBA

42 SBA s Mission Capital Contracts Counseling

43 SBA Loan Data

44 YTD Loan Volume for SBA Loan Programs October 2015 thru June 2016 Georgia 7a loans= #1,411 Totaling $943,845,300 National 7a loans= #47,475 Totaling $17,422,472, = #113 Totaling= $87,143, loans= 4,199 Totaling=$17,422,472,643 $1,030,988,300 YTD FY16 compared to $928,217,800 YTD FY15 $20,765,271,643 YTD FY16 compared to $19,121,746,300 YTD FY15 5

45 Breakdown of Georgia Loans by Industry FY 16 FY 15 Industry # % # % Accom. Food Serv % % Admin/Supp % % Agric/Forest/Fish % % Arts/Entert/Recr % % Construction % % Educational Serv % % Fin. & Insur % % Health Care/Soc % % Information % % Mgmt./Comp % % Manufacturing % % Minning % % Other Serv % % Prof/Sci/Tech/Serv % % Public Admin % % Real Estate/Rent % % Retail Trade % % Transport/Ware % % UNK 0.00% 0.00% Utilities % % Wholesale Trade % % Grand Total 1, % 1, % 6

46 Georgia 7a Loan Breakdown by $ Loan Sizes FY 16 FY 15 7(A) # % # % < = to $50, % % $50.01K - $100K % % $100.01K - $150K % % $150.01K - $250K % % $250.01K - $350K % % $350.01K - $500K % % $500K - $1M % % $1.01M - $2M % % $2.01M - $2.5M % % $2.501M - $3M % % $3.01M - $4M % % $4.01M - $5.5M % % Grand Total 1, % 1, % 7

47 8 Georgia 504 Loan Breakdown by $

48 What s in my FICO Score A credit risk measures for consumers. Equifax, Experian, Transunion Score Range

49 5 Categories FICO Score Breakdown

50 FICO does not take into consideration Ethnicity Age Gender Religious affiliation Residence Interest rate charge Certain Types of inquires*

51 How Does My Personal Credit Impact My Business Credit? Global cash flow Character Personal Guarantee

52 5 C s of Credit Character Industry and/or management experience. Credit history Capital Capacity Borrower s equity into the business (generally non borrowed) Measures the ability to repay the loan. Business and/or personal. Reviews credit (NW) Collateral Assets to secure debt Conditions Overall economy and borrower. Industry, competition, etc. What are the terms and purpose of the loan

53 Why the 5 C s? Lenders are assessing your ability to pay them back Partly an assessment of your business; partly an assessment of you, the owner Uniform formulas, tools and data sources Judgment comes in amount of risk lender is willing to take Ask yourself: would you loan a lot of money to a friend with the same qualifications as you are presenting?

54 CHARACTER FICO Score DUNS (Data Universal Number System Personal vs Business Credit SBA Personal History

55 CAPITAL Equity Injection (cash (*) not collateral) Secondary source of repayment Personal debt service

56 CAPACITY Repayment ability (historical or future) Business Cash Flow Personal Cash Flow Global Cash Flow Projections (with assumptions)

57 CAPACITY Cash Flow does the business reliably generate enough cash to make the monthly loan payment? Debt service coverage ratio at least 1.25 Net Operating Income > 1.25 Loan Payment (Principal & Interest) o Net Operating Income = Net Income + (Depreciation & Amortization) o Example: onoi = $4,000 oloan payment = $2,500 oratio = 4,000/2,500 = 1.60 Other sources of income so this would meet the requirement

58 Traditional Cash Flow Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) Net Income (loss) +Interest Expense +Tax +Depreciation +Amortization =Net cash available to service debt

59 Sample IRS 1040 Schedule C & Debt Service Coverage Ratio

60 COLLATERAL All Available Assets (Business & Personal) Collateral vs Equity Collateral Valuations

61 COLLATERAL Assets pledged by borrower to lender as security for a loan ( secured loan ) Lenders like all assets to be listed; but may not use all for collateral Collateral vs. lien Collateral is the asset, the property; lien is the legal claim on the property There are many types of liens: tax, judgment, mechanic, etc. Uniform Commercial Code (UCC) lien filing gives lender legal right to seize and sell an asset Sometimes one collateral asset may be pledged more than once and have multiple liens (cross-collateralization) Personal guarantee may also be required Allows lender to pursue personal assets, not just business assets

62 CONDITIONS Purpose Market Condition Other Factors Uses and sources of proceeds Industry Competition and competitive advantage Lender s Risk Portfolio

63 Lender s Role Application Decision Closing & Disbursement Servicing Collection (i.e. liquidation) 24

64 Preparation for a loan request BASIC Financial statements 3 years business, affiliate business and personal federal tax returns Financial projections with written assumptions Personal financial statement* Business plan/executive summary Overview of business, & management Loan purpose: use of proceeds (C s of credit) Market demographics, competition SBA FORMS Statement of Personal History (912) SBA borrower application (1919)* Personal Financial Statement (413) *PERSONAL GUARANTY*

65 Are you Ready for Financing? Recap Know your numbers Mitigate the deficiencies Completed application with support documents

66 LINC Access: 27

67 Q&A

68 Rosemarie A. Drake

69 SMALL BUSINESS FINANCING Presenter: Amber Bennett Business Consultant UGA SBDC at Gwinnett

70 Access To Capital - The Process Needs Assessment Alternative Sources of Capital Traditional Sources of Capital GeorgiaSBDC.org SBDC Credit School

71 Types of Financing Available Commercial Bank Loans Lines of Credit Trade Credit Micro Lenders SBA Loan Programs Traditional Sources GeorgiaSBDC.org your business strenghtestablisha srongbond with your bank before requesting a loan. "The most important thing you have with your bank is not money: it's the relationship you have with the bank," Improve your chances SBDC Credit School

72 Types of Financing Available Alternative Sources Crowdfunding Friends & Family Investors Factoring Seller Financing Leasing Equipment/Supplies Bootstrapping GeorgiaSBDC.org SBDC Credit School of your business strenghtestablisha srongbond thing you have with your bank is not money: it's the relationship you have with the bank," Improve your chances with your bank before requesting a loan. "The most important

73 Crowdfunding GeorgiaSBDC.org SBDC Credit School

74 Equity Financing via Investors Money raised by a company in exchange for a share of ownership in the business. Allows a business to obtain funds without incurring debt, or without having to repay a specific amount of money at a particular time. Most small or growth-stage businesses use limited equity financing. Equity often comes from non-professional investors such as friends, relatives, employees, customers or industry colleagues. GeorgiaSBDC.org SBDC Credit School

75 Equity Financing Angel Investors Former entrepreneurs or executives who cashed out and retired early from ventures that they started and grew into successful businesses.. Generally SEC accredited investors Seek companies with high growth potentials, strong management teams, and solid business plans. Typically invest in ventures involved in industries or technologies with which they are personally familiar. Seek active involvement in the business, such as consulting and mentoring the entrepreneur. GeorgiaSBDC.org SBDC Credit School

76 Factoring (on AR) Factoring Type of financial service whereby a firm sells or transfers title of its accounts receivable (all or part) to a factoring company which then acts as principal, not as agent. Receivables are sold with or without recourse, i.e. the factor cannot turn to uncollectible. GeorgiaSBDC.org SBDC Credit School

77 Other Alternate Options Merchant Cash Advances Merchant cash advance companies provide funds to businesses in exchange for a percentage of the businesses daily credit card income, directly from the processor that clears and settles the credit card payment. GeorgiaSBDC.org SBDC Credit School

78 Seller Financing A loan provided by the seller of a property or business to the purchase. Usually, the purchaser will make some sort of down payment to the seller, and then make installment payments (usually on a monthly basis) over a specified time, at an agreed-upon interest rate, until the loan is fully repaid. GeorgiaSBDC.org SBDC Credit School

79 Types of Financing Available Alternative Sources Crowdfunding Friends & Family Investors Factoring Seller Financing Leasing Equipment/Supplies Bootstrapping GeorgiaSBDC.org SBDC Credit School of your business strenghtestablisha srongbond thing you have with your bank is not money: it's the relationship you have with the bank," Improve your chances with your bank before requesting a loan. "The most important

80 Alternate Financing Questions? GeorgiaSBDC.org SBDC Credit School

81 Types of Financing Available Commercial Bank Loans Lines of Credit Trade Credit Micro Lenders SBA Loan Programs Traditional Sources GeorgiaSBDC.org your business strenghtestablisha srongbond with your bank before requesting a loan. "The most important thing you have with your bank is not money: it's the relationship you have with the bank," Improve your chances SBDC Credit School

82 Debt Financing Borrowing money that must be repaid over a period of time, usually with interest. The lender does not gain an ownership interest in the business, and debt obligations are typically limited to repaying the loan with interest. Short-Term: Repayment due in less than one year. Long-Term: Repayment due over a period greater than one. GeorgiaSBDC.org SBDC Credit School

83 TypTypes of Financing Available Strong Credit History Established Business Banking Relationship Commercial Bank Loan History of Profitability Experienced Management Team GeorgiaSBDC.org SBDC Credit School

84 Types of Financing Available Line of Credit Specific Reason Trade Credit- Seasonality Strong Credit History Established Business Not Generally Available to Start Ups of your business strenghtestablisha srongbond with your bank before requesting a loan. "The most important thing you have with your bank is not money: it's the relationship you have with the bank," Improve your chances GeorgiaSBDC.org SBDC Credit School

85 Types of Financing Available Supplied by Vendors Trade Credit Could Make Loan Request Smaller Usually a Gradual Build Up 7, 15, 30 days Generally Discount for Fast Pay (i.e. 2% discount if pay by 10 days) GeorgiaSBDC.org SBDC Credit School

86 Traditional Financing (Part 1) Questions? GeorgiaSBDC.org SBDC Credit School

87 OVERVIEW OF SBA LOAN PROGRAMS Georgia District Office Rosemarie A. Drake Lender Relations Specialist Supervisor

88 Small Business Administration U.S. Small Business Administration (SBA) guarantees a large percentage of loan value for specific loans to banks and commercial lenders on the premise that the loan might not be made without the guarantee. The SBA does not make loans directly to borrowers (with the exception of specific emergency cases in flooded or other distressed areas). GeorgiaSBDC.org SBDC Credit School

89 Grants Beware of the common myth: There is a lot of government grant money through the SBA for my business. GeorgiaSBDC.org SBDC Credit School

90 Benefits to the borrower Longer terms (up to 25 years for CRE) No balloon payment Mitigates insufficient collateral Less down payment (in some instances) GeorgiaSBDC.org SBDC Credit School

91 SBA Loan Programs 7(a) 504 Micro GeorgiaSBDC.org SBDC Credit School

92 SBA Loan Programs Basic Eligibility Be an Operating Business Be Organized for Profit Be Located in the United States (includes territories & possessions) Be Small (as defined by SBA) Demonstrate a Need for the Desired Credit GeorgiaSBDC.org SBDC Credit School

93 SBA s 7(a) Loan Loan originates at local institution SBA guarantees a % to bank Loan payments are made to bank Up to $5,000,000 Interest Rates: Prime Rate + Lengthy application and underwriting GeorgiaSBDC.org SBDC Credit School

94 7(a) Proceeds Use of Proceeds Ineligible Uses Land and building acquisition Inventory purchase Machinery and equipment Working capital Refinancing Non-Profit Organizations Developer/Landlord Deals Financial Institutions Religious Institutions Real Estate Company GeorgiaSBDC.org SBDC Credit School

95 504 Loans The 504 Program provide small businesses with long-term, fixed-rate financing to acquire major fixed assets for expansion or modernization A Certified Development Company (CDC) is a private, nonprofit corporation which is set up to contribute to economic development within its community Economic Development-Oriented (must create one job for every $65,000 borrowed) GeorgiaSBDC.org SBDC Credit School

96 504 Loans Maximum loan $5,500,000 Loan Terms 10- or 20 years Lengthy application and underwriting Must be 51% owner-occupied GeorgiaSBDC.org SBDC Credit School

97 Seeking a SBA Guaranty Loan What the Lender / SBA is looking for A Solid Business Plan with 3 Years of Projections A Strong Personal Credit Score* Personal Financial Statement* Showing Personal Assets / Liabilities Minimum of 10% Contribution (a.k.a. Down Payment) Direct or Transferrable Experience GeorgiaSBDC.org Personal Guarantee* SBDC Credit School * For everyone identified as owning 20% or more of the business.

98 Loan Package (Both 7a and 504) New Businesses Existing Businesses Lender s loan application Business plan Financial Projections (3 Years) Start-up costs Individual tax returns Personal financial statements Support exhibits ex Lender s loan application Business plan (updated) Financial projections (1 Year) Business Financial Statements Individual & Business tax returns Personal financial statements Support exhibits GeorgiaSBDC.org SBDC Credit School

99 Microloan Programs Microloan Programs provide small, short-term loans to small business Usually the maximum loan amount is $50,000. Average loan amount is $13,000. Microloans may be used to purchase inventory or supplies, furniture and fixtures, equipment and working capital Shorter application and underwriting process GeorgiaSBDC.org SBDC Credit School

100 Micro Lenders Lenders usually are community-based organizations with experience in lending as well as management and technical assistance. Albany Community Together, Inc. (ACT) Access to Capital for Entrepreneurs (ACE) Atlanta Micro Fund DeKalb Microenterprise Institute istance Corporation Savannah GeorgiaSBDC.org SBDC Credit School

101 Questions Your Lender Will Ask Can the business repay the loan? Can you repay the loan if the business fails? (Is collateral sufficient to repay the loan?) Does the business collect its bills? Does the business pay its bills? Does the business control expenses? Are the officers committed to the business? Does the business have a profitable operating history? Are sales growing? Are profits increasing as a percentage of sales? What is the future of the industry? GeorgiaSBDC.org SBDC Credit School

102 Traditional Financing (Part 2) Questions? GeorgiaSBDC.org SBDC Credit School

103 THANK YOU Amber Bennett Business Consultant In Partnership with the U.S. Small Business Administration