#9: Funding Your Company

Transcription

1 Food Business Entrepreneurial Training Academy #9: Funding Your Company Alameda County SBDC Dublin, CA. May 14, 2018

2 Thank you to Our Sponsor

3 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?

4 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

5 There are three primary ways to get funding for your business: Debt/Equity/Crowdfunding So what s the difference?

6 Debt is another word for Loan. Banks provide you a loan and they want their money back.

7 Equity requires you to give up ownership in your business in exchange for future cash. The equity provided is called investment.

8 Crowdfunding can be debt, equity or incentives May or may not involve giving up ownership

9 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

10 Equity vs. Debt Financing Disadvantages Debt Financing Disadvantages: Interest Costs Expensive Risk of profits not covering repayment Must share financial information Lender Restrictions & Limitations Equity Financing Disadvantages: 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

11 Equity Financing

12 Equity Sources Family & friends Channel partners Angels Crowdfunding

13 Food for thought People invest in people they know and trust

14 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.

15 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

16 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?

17 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

18 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?

19 Angel Investor sites Slowmoneynorcal.com angel.co/food-and-beverages/investors Foodangels.co Circleup.com Many more

20 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 $$$

21 CROWDFUNDING

22 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

23 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 ) 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 $5,534 Source: Statistica.com

24 Major Crowdfunding Players Rewards Based Donation gets you a promised product Donation Giving for nothing in return Equity Owning a part of the project Lending Money 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

25 Rewards Based Sites Rewards Based Sites take Off! 2008: Indiegogo 2009: Kickstarter Rewards Based sites encompassed arts, social causes, entrepreneurs and small businesses

26 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

27 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

28 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

29 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

30 Equity Crowdfunding Sites

31 Reg CF Deals through 2017 Source: Wefunder

32 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

33 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! 33

34 Debt Financing

35 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

36 Debt Early Stage Companies Other early stage lenders we see regularly: Hebrew Free Loan (hflasf.org) up to 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

37 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

38 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 % - 6.5%, 5-10 year term

39 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

40 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

41 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

42 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

43 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

44 Peer to Peer Lending kiva.org zero percent loans (great deal!) lendingclub.com average loan is 13.4% prosper.com - average loan is 13.9% Many others

45 Other Financing Sources Credit cards (watch out!) Online lenders (watch out!) Equipment Leases Accounts Receivable Financing Trade Credit

46 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 % APR you don t have consumer protections as a business this is not a suitable longterm 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

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48 Lending Club Example

49 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?

50 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

51 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

52 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

53 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

54 Courting Bankers/Investors

55 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

56 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

57 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

58 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

59 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

60 Bootstrap Strategy Many clients follow this formula: Kiva Crowdfunding Platform Microloan or Larger Loan

61 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

62 THANK YOU!