Finding and Financing Your Small Business. Hosted by Susan Strong 77

Transcription

1 Finding and Financing Your Small Business Hosted by Susan Strong 77

2 Welcome! we will begin the webinar at the top of the hour Finding and Financing A Business... Find out the benefits and facts

3 Agenda Introduction The Cost of Buying A Franchise Top Financing Solutions Loan Types SBA 401K Rollovers ROBS (Rollovers For Business Start-ups) Wrap Up and Questions

4 Your Presenter 35 years of business experience in Human Resources, Marketing, Finance Independent franchise owner of The Entrepreneur s Source and Advicoach, starting in August of 2009 Coach to hundreds of executives, small business owners, employees, and job seekers to help them identify their greatest skills Third Generation UC Berkeley Alumna, Class of 1977

5 Sample Industries/ Investment Ranges $20,000 $250,000 $500,000 $1M DIRECT MAIL TRAINING SENIOR CARE, CLEANING LAWN CARE, PETS DECORATING HAIR CARE AUTO, CHILDREN S PROGRAMS DRY CLEANING SPAS FOOD HOTELS

6 Common Franchise Arrangement Multiple Units Single unit Owner operator Semi-absentee owner Absentee owner Multiple units Add additional units over time Commit & grow Manage the manager Area Developer / Master Franchisor Recruit, Train and Support Recurring revenue streams

7 What Does It Cost To Buy A Franchise? It depends Franchise Fee Most Run Around $40k For A Single Unit Start Up Costs Varies Depending On The Type of Business Mobile $80-$150 Home Based Office Equipment & Marketing Activities - $20-$30k Plus Living Expense During Ramp-Up Franchise Fee s are depreciated over a 7-10 year period

8 Calculating Total Investment Required Start-up Costs $$ Price tag of Business or franchise fee Training Pre-marketing plan Property/plant/equipment required Leasehold improvements + Working Capital until Break Even + $$ Advertising/marketing Office supplies & expense Payroll & taxes Utilities / internet / phone Vehicle/equipment payments Rent / lease payments Loan payments + Your household budget needs + $$ = Total Initial Investment Required =$$$$$$

9 Funding Solutions For Your Business ONCE I HAVE FOUND THE RIGHT BUSINESS, HOW DO I FINANCE IT? WHILE IT DOESN T GROW ON TREES, THERE ARE A NUMBER OF GOOD OPTIONS TO CONSIDER.

10 Facts MOST desiring to start a business won t fully qualify. Part of the Funding process includes having sufficient capital reserves to pay for your living expenses for months. Average family has 1 MONTH of PLEs (personal living expenses). Banks do not loan money for PLEs. Under capitalization is THE PRIMARY cause for business failure. Debt is key component in under capitalization.

11 Facts Virtually 100% of Business Start-Ups Require some form of Funding (Equity or Debt). 95%+ plan to use Debt Financing as Part or All of their Funding needs. Requirements for Financing are HIGHER than they ve been in the past but loosening up. You MUST Be Prepared EARLY in the process!

12 What Are Your PRIMARY GOALS (Rank First too Last In Importance) 1. Obtain Necessary Funding 2. Minimize Funding Costs 3. Conserve cash for emergencies and for expansion needs in the future 4. Accumulate, accelerate and protect wealth for family and retirement 5. Minimize potential short and long term tax issues 6. Protect future appreciation of business. 7. Minimize equity injection requirements to conserve cash or other liquidation requirements 8. Facilitate the accumulation of retained earnings with minimal tax erosion for future expansion needs 9. Minimize personal financial risk of investment 10. Minimize the time necessary to obtain funding 11. Minimize health care costs and out of pocket expenses 12. Provide income during startup period 13. Other

13 Access to Capital:Signs of Improvement

14 FICO Credit Score Criteria (Fair Issac Corp. Created Software) Credit Score Facts Credit Scores can range from Most lenders base approval on your credit score Higher Scores mean lower payments and better deals Higher Scores mean Lower interest rates Scores are determined by 5 main categories Average US Credit Score is 693

15 Types of Financing 401(k) Rollovers SBA Loans Low-doc SBA Loans Unsecured Loans Portfolio Loans Funding amount Account balance $150k-$5M $25k-$150k $25k-$150k 60%-80% of balance Term None 10 years 10 years Revolving Revolving Time to fund 3 week average 2-4 months 45 days 3 weeks 2-3 weeks Setup fees $5000 $2500 $2500 $3495-$6495 2% of loan amount Ongoing fees $120 $0 $0 $0 $0 Payments $0 Principal + Interest Principal + Interest Principal + Interest Interest Only

16 Using Retirement Funds A commonly Used, Successful Mechanism

17 Risk Assuming 32% Fed.+ 5% State income tax. Retirement Funds: $100,000 Less Federal Inc. Taxes -32,000 Less State Income Taxes -5,000 CFR = 63%: (Collateral Risk Factor) $63,000 Assume only 37% of the Investment Risk vs. traditional loan much greater risk Note: California State Income tax as much as 13% CFR =< 55%

18 Benefits of 401(k) Funding #1 Franchise Funding Resource For Franchises Closing Ratio 2X greater vs. traditional funding. Ability to increase capital and investment (100k = 300k+) Authorized as required Equity Injection for SBA Loans Quick (Typically 2-4 wks depending on state) NOT A LOAN, An investment in your own business No Loan, No interest = Shorter time to profitability Protection of Wealth & Significant future tax benefits Less Collateral Risk: Govt. Assumes as much as 40+% of risk (pretax $$)

19 Benefits of 401(k) or ROBS Ability to pay yourself a SALARY FROM DAY ONE ZERO Net Cost* Tax Credits, Includes Corp Fee Fee To Set Up Tax Deductible Less Personal Stock Requirement ($1000 vs. 5%)* Multiple Retirement Plan Options = C Corp Tax Protection* Addresses Double Taxation Risks - Avoids 401(k) Mouse/Tax Traps Retirement DESIGN firms (vs. TPA Third Party Administrators) have the ability to design plans that can protect HUNDREDS of Thousands of Dollars vs. Simple 401(k)/Hybrid plan providers that often only protect $17,500 - $51,000 per person.

20 Small Business Administration (SBA) Loans The SBA had a 2011 budget of $30 Billion to loan to small businesses. There are a number of programs available.

21 Eligibility SBA Requirements: Must Be owner-operated Business Be for profit business Be a US Citizen or permanent resident(must have green card) Have industry experience Have at least 10% to 20! Cash injection of total project Borrowers must have the 5 C s 1. Cash Where is your cash injection coming from, provide bank statements to verify (at least 10%) 2. Credit - Credit score, must have good credit (all guarantors and business) 3. Commitment Must own and OPERATE the business 4. Character-Review Form 912 Statement of Personal History (cannot be on parole or probation) 5. Capability Direct industry experience, know your product, your competition, and your customers

22 Discussion On The Five Cs of Credit Capacity Your business plan and/or prior year(s) financials must show that you can produce enough cash to repay the loan. This is the most critical of the five Cs. Capital How much equity do you have? First you'll need to be prepared to contribute some of your own money toward the business to ensure its success. Only a portion of your start-up or acquisition costs can be borrowed, not 100%. Funds for these costs can come from deposits, an equity loan against your personal residence, or other sources. Collateral A lender looks at collateral as an additional credit enhancement. It won't necessarily make the monthly payments, but it could, if liquidated, help repay the loan. Regulations limit and dictate how much collateral is required. The loan request generally cannot exceed 80% of the collateral value. The 80% requirement is usually associated with liens against real estate Other types of collateral such as accounts receivable and inventory may be at a lower percentage rate or lower maximum Loan-to-Value. Conditions Be prepared to prove that the conditions are right for your type of business. Make sure there is a market for your business, based on the conditions of the local, regional and national economy, the type of industry, the competitiveness of the business and your experience in the industry and managing a business. Character This is the general impression you make on the lender. Your educational background and business experience will be reviewed, along with your credit score. It's important to manage your personal credit carefully. Statistics show that the way you handle your personal credit is a strong indicator of how you'll manage your small business credit.

23 SBA Loans $150k - $5 million General Requirements Core Benefits 20-30% Down Payment A Secondary Source Strong Credit History (700+ score) Relatable Professional Experience A Single Loan Application Access to huge lender network Rapid loan approval (usually) Money Back Guarantee

24 Low Doc SBA Loans ($25,000-$150,000) General Requirements Core Benefits 10% Down Payment 700+ Credit Score Franchise Must Be On SBA Registry Executed Franchise Agreement 45 Day Processing Time No Personal Collateral Required Low Interest Rates 100% Money Back Guarantee

25 Required SBA Documents Application filled out completely (Online or on paper) Personal Financial Statement Three years corporate tax returns Three years of personal tax returns (If applicable) Three years of Fiscal year end statement and interim statement (if applicable) Debt schedule Three month s bank statements Articles of incorporation and bi-laws

26 Other SBA Funding Strategies Use PLP Providers Preferred Lending Program Use Community vs. Big Banks Use Loan Officers with 20+ years of SBA expertise Use MULTI - Bank PLP Providers vs. Single Source Banks Higher Approval rates, lower costs and shorter process times! REQUIRE a Money Back Guarantee!

27 Home Equity Lines of Credit or Refinancing Some individuals use money from their home equity lines of credit to finance a business Another possible avenue is refinancing a home to obtain cashwith cash-out refinancing, you refinance your mortgage for more than you currently owe, then pocket the difference

28 Home Equity Claims $100K in Equity REAL Amount Available Example Equity Loan Claim $100k in Equity Home Value $500k Mortgage $400k EQUITY $100k 85% LTV $425k Mortgage - $400k Loanable $ 25k Collateral Risk Factor Loan Amount: $25,000 Amount of Equity Risk: $100,000 Collateral Risk Factor: ($100,000/$25,000) = 400% Risks 4X the amount borrowed Adversely impacts credit score Risks Long term credit problems if they default.

29 Unsecured Lines of Credit No collateral required must have good credit, meet certain lender conditions.

30 Other SBA Funding Strategies Friends and Family Angel Investors Equipment Leasing Conventional Business Loans Business Credit Cards Working with a Partner Loan on Cash Value of

31 Initial Franchise Fee $30,000 Capital Investment equipment, location (if required), etc. $10,000 An Example of Use of Funds Working Capital for marketing and other day to day expenses $10,000 Living Expenses Paying yourself a salary through the start up phase of the business (6 months at $3,000 per month) $10,000 Total Funds Required $68,000

32 Overcoming Common Obstacles Concerns / Obstacles Unknown Credit Score Low Credit Score Fear of risking personal assets Concern of high interest rates No Paycheck Phobia Concern - time to profitability Not enough funds Fear of risking 401k/IRAs Solutions Credit Repair Service Unsecured Loans, 401k Funding SBL Secured Loans, 401k Funding 401k Funding (Pay self a salary) Equity Funding (No Debt Funding) Bundle Funding Services Stock Market is a Bigger Risk!

33 Questions Can I Get A Government Grant To Start And Grow My Small Business? What if I m involved in R&D? Can I get a grant? Why are banks and other lending institutions more likely to fund a franchise than a new business? What is an angel investor and how do I find one to help me finance my business? Is It Possible To Lease Equipment Rather Than Financing A Purchase? What Are Some Of The Obvious Financial Benefits To Being A Small Business Owner?

34 Why are Franchise Businesses More Successful Than Most Independent Businesses? There are thousands of opportunities, with proven business systems, that have delivered consistent profitability over time. Franchises have greater success rates over independent business for a variety of reasons, including: Franchisees utilize proprietary tools and effective systems to put time tested business methods into action to achieve positive financial results for themselves and their families. People invest in franchises to be in business for themselves, but not by themselves. There is an important Team element dedicated to your success since franchisors can only succeed when you succeed. Each franchisor has experienced staff who are experts in every aspect of that business who can answer all your questions and address your concerns. You will find a community of peers, as a network of current franchisees are anxious to help you learn from their experience, because the success of your franchise adds value to the entire franchise brand. These proven business methods, in conjunction with a specific brand, hold tremendous value for people who can operate these systems within their given marketplace!

35 Recommended Companies Benetrends Guidant Financial Franfund Tenet Financial First Financial If you want more information about specific lenders or finance institutions please contact me.

36 The Entrepreneur s Source (TES) Who We Are and What We Do Educating those considering business ownership for over 30 years Small business coaches; franchise expertise 230 offices nationwide Start A Business weekend March Coaching help clients explore self employment options; stay focused on goals Bring the right fit businesses to clients AIM & FAST On-Line Programs Use education, assessments and on line business courses No cost for our placement services "A coach is someone who tells you what you don't want to hear, who has you see what you don't want to see, so you can be who you have always known you could be." - Tom Landry, Coach Dallas Cowboys

37 Our Services Are Free To You Call Us To Discuss What You Are Trying To Achieve Susan Strong The Entrepreneur s Source (510) sstrong@esourcecoach.com linkedin.com/in/smstrong Ask to Be Registered For Start A Business Weekend

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