YOUR BUSINESS ... FUNDING YOUR BUSINESS

Previously we examined some of the essential elements required for a Business Plan.  One of the prime results of a good plan is the determination of how much money is required to start or expand a business.  Most companies sooner or later require an infusion of money ‑ in a startup, two main types exist: loans or investment capital (sometimes known as venture capital ‑ which are funds exchanged for stock, or shares in a business).  A variety of sources exist for each type:

Loans usually begin with a local bank ‑ shop bankers (and accountants, lawyers, and business consultants) as you would any important service.  Some banks will be open to a discussion of your needs, but most will not be encouraging, since adequate colla­teral will be difficult to obtain, and there is no operating history.  A variety of State and Federal programs exist, and the requirements and guidelines change frequently.  In Maryland, contact the Howard County Business Resource Center (410-313-6550) for free advice on which programs may be available for your specific situation.  NOTE: it is doing a disservice to your friends and relatives if you suggest they provide the loan ‑ they deserve better returns on their investment.  The risk of loss is so high that even 30% to 50% interest would be inadequate, even if your business could afford the payments.

Investment capital can come from a variety of sources ‑ start with people who know you and your business.  If significant amounts (over $500,000) are required, there are periodic listings of venture capital firms in the Library, and in databases avilable in the Business Resource Center or from the SBA.  It is wise ‑ essential! ‑ to get competent professional and legal advice before asking for or accepting private investment funds.  As was discussed in an article in Howard County Business Monthly, there is an entirely new form of fundraising available:  The Small Company Offering Registration ("SCOR U-7 Registration").  Companies can raise up to $1,000,000 from the general public without the previous restrictions of a full SEC registration.

It is very important to realize that the assumptions behind a loan and the assumptions behind an investment are extremely different: a bank or other lender only is interest­ed in whether your business is successful enough to make the payments for the term of the loan, while a private investor anticipates 2 to 5 times return on their investment back in 2 to 5 years. 

This gives you the answer to the question of how much stock do you give up: if the original investment is $10,000 for 30% of the stock, and the company is worth $100,000 in 5 years ‑ then 30% of $100,000 is the end value of the investment, and the investor has a 3 time return on the original investment.  Less than 30% ownership would decrease the end value of the investment.

Finally, and most important, is "the exit".  How do you return the investor's money?  When you buy a house, you get your money back by selling the house.  The same applies for businesses.  Therefore, if you are not willing to sell the business (or at least part of it) after a reasonable time, don't accept the investment. 

However, selling a business is not necessarily a bad thing ‑ it is also known as "going public", merging, being acquired, and may in fact give you an excellent return on your investment.

Ralph Helwig is President of Economic Strategies, Ltd., a consulting firm established in 1983 which specializes in assisting entrepreneurs in starting and financing businesses (www.econstrategies.com).