How To Fund A Business

Transcription

1 Access to Capital 101: Funding Options to Start and Grow Your Small Business May 28, 2015 Rhea Aguinaldo Manager of Entrepreneurship Small Business Majority

2 About Small Business Majority Small business education and advocacy organization founded and run by small business owners. Been in business nine years. National 14 offices in Washington, D.C., California, Colorado, Illinois, Maryland, Michigan, Missouri, New Jersey, New York, Ohio, Oregon, Virginia and Washington state Focus on issues of top importance to small businesses (<100 employees) and the self-employed, including access to capital, workforce, healthcare, retirement, taxes, technology and energy savings. Work supported by extensive research

3 Entrepreneurship Program Our Entrepreneurship Program brings resources and education to small business owners and entrepreneurs in key areas of running and growing a small business. Core program areas: Access to capital, technology, workforce benefits, business skills, retirement security. Online and in-person seminars in partnership with local and nat l business groups and other for-profit, nonprofit and public entities Special focus on underserved entrepreneurs, women- and minority-owned businesses Visit our Entrepreneurship resource portal:

4 Topics of discussion Background and research Key questions to ask when seeking funding Debt vs. equity financing The funding landscape: o Microloans o SBA-backed loans o Community banks & credit unions o Alternative online lenders: Merchant cash advance, marketplace lenders, cash flow lenders, crowdfunding Resources and tools Q&A

5 The dilemma Inadequate access to capital continues to be a top issue facing small business Our scientific opinion polling: 90% of small businesses say the availability of credit is a problem

6 Women and minority owned businesses Women and minority owned firms face significant barriers: o Typically smaller in size, start with less capital, less likely to have access to venture capital o Lower approval rates for bank loans and at smaller dollar amounts o More vulnerable to predatory lending

7 Women and minority owned businesses (cont.) Women-owned firms account for 16% of bank loans and 4.4% of dollar total just $1 out of every $23 Minority firms pay higher interest rates on average o Low levels of wealth and liquidity constraints

8 What happened to small business bank lending? Small business bank lending is down 20% since before the Great Recession Banks are more risk averse stricter underwriting standards Small business loans are riskier than large business loans; Costly to write smaller $ loans Consolidation of community banks

9 Small business recovery Small businesses were hit hard by the Great Recession o Many suffer from devalued collateral, damaged credit scores and reduced cash flow making them less credit worthy by today s lending standards 40% financial Small businesses accounted for 40% of job losses after the crisis

10 Access to capital the lifeblood of small business The availability of capital is crucial for small business startup, survival, and growth Small business uses of capital Renovation and remodeling Purchase equipment Purchase inventory Hire employees Expansion and acquisition Purchase real estate Short and long term working capital Manage cash flow Access to capital for small business means job creation in local communities and economic stability.

11 The good news There are more funding options available than ever before to help you start and grow your business

12 Important questions to consider What do you need the money for? How much money do you need? How long will it take you to pay it back? What is the current financial shape of your business? How long have you been in business? How much collateral, if any, do you have to put up for the loan? How quickly do you need the money?

13 Debt vs. Equity financing Debt financing is money you pay back, usually with interest, over a set time period with specific terms o Examples: Bank loans, Credit cards Equity financing involves giving up a portion of the ownership of business in exchange for money from equity investors; equity investors become part owner of company. o Examples: Angel investors, Venture capitalists

14 Debt vs. equity financing (cont.) + Pros Debt financing Wide range of options Easier to obtain than equity financing Retain control and ownership of business Interest paid is tax-deductible Cons Collateral, personal guarantee often required Repayment required regardless of how business is doing Funds spent paying down debt + Pros Equity financing Intellectual capital Investors can provide expertise, experience and key contacts No obligation to repay if business loses money or fails Flexible use of funds without burden of paying down debt Cons Forfeit sole ownership and control of business and profits Time consuming; Difficult to find Actions must reflect interests of investors

15 Sources of funding Family & friends Personal savings Microloans Personal & Business credit cards Home equity Community banks & Credit unions Venture capital Equipment financing Merchant cash advance Angel investors Economic dev t agencies Start up programs, bus. plan competitions Grants Receivables & Purchase order financing Bank loans SBA loans (guarantee) Community dev t loan funds (CDFI) Online cash flow lenders Online marketplace lenders Crowdfunding: Reward & Equity Incubators & accelerators

16 SBA-backed loans (guarantee) The U.S. Small Business Administration (SBA) guarantees a portion of loans to provide incentive for institutions to approve loans to small businesses who are riskier borrowers and not poised to obtain traditional bank loans. SBA is not a lender, but a guarantor Loans cover a wide range of uses incl. start-ups, working capital, inventory, real estate, equip, etc. Programs also available for disaster relief, export assistance and veteran and military

17 SBA-backed loans (guarantee) Primary SBA loan programs 7(a) loans allows funds to be used for starting, acquiring or expanding a small business; up to $5M o Up to 7 years for working capital; Rates from prime +1 to prime +4; Fees 2% to 3.75% Certified Dev t Company/504 loans are long-term, fixed rate financing for real estate equipment and other fixed assets o Terms for 10 or 20 years Borrowers must apply through a participating lender institution

18 SBA-backed loans (guarantee) + Pros Very competitive rates Longer loan terms No balloon payments Tools Cons Lengthy application process requiring extensive documentation Strict underwriting requirements Personal guarantee required Find an SBA lender near you for in-person consultation with a loan specialist: SBA resource partners : Women s Business Centers, SCORE, Small Business Development Centers

19 Microloans Microloans are small loans (less than $50k) for entrepreneurs who are typically ineligible for traditional bank loans; may be used for wide range of business purposes. Community Development Financial Institutions (CDFIs) are dedicated to responsible affordable lending to disadvantaged entrepreneurs and low-income communities o Revolving loan funds through private and gov t funding o High touch model includes mentoring and technical assistance support o Examples: Accion and Opportunity Fund

20 Microloans (cont.) + Pros Competitive rates Great for entrepreneurs unable to secure traditional bank loans Microlenders offer add l business technical assistance support Cons Small value loans may not be sufficient Personal collateral and guaranteed often required Resources: Opportunity Finance Network is a national membership organization of CDFIs across the country. Find a CDFI near you:

21 Community banks and credit unions Small community banks and credit unions have long been key allies for small business Community banks: small, locally owned and operated o Primary focus on supporting small business Credit unions: not-for-profit financial institutions o Clients must become members o Not all offer small business loans Small business loan approval rates in 2014 Big banks 20% Community banks 50% Credit unions 43%

22 Community banks and Credit unions (cont.) + Pros Low interest rates (6% to 10%) current avg. 7% Long loan terms (multiyear) Commitment to local community Great customer service, personal touch Resources Cons Long application times High hurdles, i.e. in business for 2+ years, good credit, collateral requirements Tightly regulated limited flexibility Less range of products and technology than big banks National Credit Union Association locator: Independent Community Bankers of America locator:

23 Alternative online lenders A new breed of online lenders are innovating small business lending, expanding new options for entrepreneurs: o Simple, streamlined application process o Convenient and quick approval and delivery of funds o Typically higher interest rates than banks Not all online marketplace lenders are equal and some players mask very high rates Small businesses must proceed with caution

24 Merchant cash advance A merchant cash advance (MCA) provides cash up-front in exchange for a portion of future credit card or cash sales. The provider in turn takes a percentage of credit card/debit sales every day until the loan, plus a premium, is paid back. Not technically lenders but credit card payment processors Quick and unsecured funds at a high price Payday loans for small businesses

25 Merchant cash advance + Pros Fast access to cash Easy approval process No collateral, bad credit OK Payments tied to fixed percentage of sales Good for retailers, restaurants and service based cash/creditintensive businesses Cons Very expensive: interest rates are high Short-term: Not sustainable for funding long term growth Daily payments reduce cash flow No due date, no fixed payment Borrowers can get locked into cycle of high risk loans

26 Merchant cash advance Tip MCAs should be a last resort Be cautious of deceptive and aggressive sales/advertising o Keywords: Fast cash, no credit score, no collateral needed Proper cash flow planning is highly recommended Fundastic merchant cash advance APR calculator: Examples: CAN Capital, RapidAdvance, AdvanceMe, AmeriMerchant, Merchant Cash & Capital

27 Online marketplace lenders Online marketplace lenders (peer-to-peer) connect small businesses with institutional and individual investors; capital obtained via term loan, similar to traditional bank loan. o New wave of online lenders o Focused on transparency in pricing and overall process

28 Online marketplace lenders There are 2 main types of marketplace loans: Personal loans for business use (unsecured, no collateral req d) Don t look into your business; focus on personal finances and credit score o Lending Club, Prosper Business loans (secured, collateral req d) Similar to small business bank loan; look into business and personal finances o Funding Circle, Dealstruck, Lending Club

29 Online marketplace lenders + Pros Fixed monthly payments Transparent pricing and process Quick application, approval and delivery of funds Cons Higher interest rates than banks Lenders may require access to bank account

30 Online cash flow lenders Loans typically secured for short-term working capital (cash flow) Non-traditional underwriting algorithms incl. social, online data o Short-term (6-12 mo.) o High-interest (20-50%) o Similar to merchant cash advance o Deduct a fixed amount or percent of sales on daily basis until loan is paid off Examples: OnDeck, Kabbage, IOU Central, PayPal, Square, Amazon

31 Online cash flow lenders + Pros Instant decision, fast access to cash Flexible underwriting as long as you have cash flow No collateral required (personal guarantee in most cases) Cons Very high interest rates Opaque pricing makes true cost of loans hard to determine, often 50%+ Not term loan Borrowers can get locked into cycle of high risk loans Lender pulls directly from merchant or bank accts

32 Crowdfunding In crowdfunding, entrepreneurs raise funds by reaching out to a large number of people (investors) through an online platform. o Lots of smaller sums of money takes the place of one or two large investors Entrepreneurs create an online campaign about their venture/idea, indicate amount of money they re seeking, what it ll be used for, and what contributors (or investors) will get in return. o The best campaigns inspire people to donate or invest.

33 Crowdfunding Reward & Equity There are 2 main types of crowdfunding: Reward crowdfunding o Most common form, popularized by sites like IndieGogo and Kickstarter o Entrepreneurs solicit financial contributions in exchange for rewards (T-shirt, customized trinket, thank-you note, first access to product) o No financial return so SEC laws don t apply Equity crowdfunding o Similar concept but instead entrepreneur offers financial return o JOBS Act and Title II rules

34 Crowdfunding (cont.) + Pros Opens new pools of funding Eliminates the gatekeepers no financial underwriting Marketing and promotion Vet an idea A successful campaign can lead to bank or VC funds Cons Time intensive before, during and after campaign Requires tech savvy Some platforms have all or nothing policy IP protection Not for all businesses and industries Resources: Online review site to compare and choose which crowdfunding platform is right for your business: Crowdsunite.com

35 Crowdfunding (cont.) Are you a good crowdfunding candidate? Ask yourself three questions: Do you have a loyal following or inspiring story? Do you have a good list and social media presence? Are you looking to engage an audience of potential customers?

36 The funding landscape Fundastic was created with small business owners in mind and provides unbiased, objective information, resources and tools to help small business owners navigate their financing options, with a special focus on the new online lending options.

37 Resources Still need help navigating your options? Visit lender agnostic marketplaces to comparison shop among a wide range of products from a variety of lenders community banks, online lenders, SBA loans, etc. Bonus: they also provide good educational tools and resources

38 Resources Small Business Majority Visit our Entrepreneurship resource portal Opportunity Fund

39 Join our network Contact Rhea Aguinaldo Manager of Entrepreneurship (415) Ways to Get Involved: Receive a monthly newsletter Connect with us! Share your story for media Letters to the editor/op-eds State events/roundtables Small Business Majority Fly-ins Webinars for business organizations

40 Questions? Small Business Majority Rhea Aguinaldo Manager of Entrepreneurship (415)