Financial Basics to Grow Your Business

Transcription

1 Financial Basics to Grow Your Business

2 Presenter: Sheila Spangler, Vice President/Director Business Resource Center 25 years experience commercial lender, business advisor/consultant Education: Certified Business Intermediary, Real Estate Broker, Pacific Coast Banking School graduate, Boise State University alum

3 Workshop Overview Understand the costs involved in growing a business Learn the steps to obtain investor and loan funding Review some vital financial basics Create financial projections to determine funding needs Discover some key steps to build value in your business

4 Key Ques4ons to Ask Yourself What is your end goal? A job or a business? Is your business model sustainable and scalable? Does your business have an excep4onal advantage? Will you give up ownership to get exper4se and value? How and when will you exit from your business? What is your walk- away number? Who will buy your business? 2014 Zions Bank Business Resource Center

5 Spend Money to Make Money Star4ng or growing your business takes capital.either yours or outside sources of funds. How much do you need? Where do you get it? When is the op4mal 4me to obtain it? 2014 Zions Bank Business Resource Center

6 Some Funding Options Self-funding( bootstrapping )--savings, personal loans Family & Friends---gifts or loans Crowd funding Kickstarter, Indigogo, etc. Investors equity partners Microloans---usually for amounts less than $50,000 Term loans banks, credit unions, may have SBA loan guarantee Other financing sources---lines of credit, factoring, leases, credit unions, private lenders, hard money, finance companies, etc.

7 Investors vs. Lenders Both look for: Proof of concept, sustainability, projec4ons, strong management, owner investment Investors Equity ownership, percentage varies Management decisions and leadership Scalability Exit strategy, 10x return for investors Lenders Fixed term, repayment schedule Owner investment, collateral, personal guarantee Covenants on loan but no management control 2014 Zions Bank Business Resource Center

8 Capital Investment Founder, Friends, Family, Fools cash into business Angel investors ($25M - $1MM) Venture Capital investors ($1MM - $20MM) Private Equity Group ($10MM- $1 Billion) Exit within 3 to 5 years Business sale to large company ini4al public offering (IPO) Strategic Partnership 2014 Zions Bank Business Resource Center

9 Powerful Pitch Process 1. U4lize the Business Model Canvas to validate your concept. 2. Prepare wrifen narra4ve and projec4ons. 3. For equity capital, prepare slide deck. 4. For loans, prepare banker lefer. 5. Prac4ce your pitch to trusted advisors. 6. Get feedback and fix your pitch Zions Bank Business Resource Center

10 2014 Zions Bank Business Resource Center

11 Why Use Financing? Startup costs and working capital Purchase an existing business Expand an existing business Buy fixed assets (buildings, equipment, vehicles) Manage cash flow gaps such as: Sales fluctuations due to seasonality Covering short term working capital needs Timing difference between collection of accounts receivable and payments to vendors Seasonal inventory build-up

12 How Lenders Make Loan Decisions The Five C s of Credit Character: past successful industry-specific experience including the owner s personal credit history demonstrating willingness and ability to repay debts. Capacity: the business s ability to generate positive cash flow and profit to cover business operations including any debt service requirement. Capital: the owner s cash or equity contribution into the business (known as skin in the game ). Collateral: tangible (physical) assets pledged to secure the loan amount (example: equipment, vehicles, stocks, etc.) Conditions: the current and projected economic conditions for the industry and overall economy in which the business operates

13 How Do You Get a Loan? Have a complete loan package. Understand the strengths and weaknesses of your request and be able to explain them. Make an appointment with a qualified lender. Deliver your pitch and package. Request a decision date for initial approval. Follow-up if no response by agreed date.

14 Choosing a Lender Is the lender experienced with your loan request? Is the lender able to approve your loan type? Is the lender experienced with your industry? What is the reputation and financial strength of the lender? Is the lender SBA Preferred or SBA Approved? SBA Preferred status makes a difference These banks make SBA loan decisions in house without having to get SBA approval thus saving time. Zions Bank has been ranked as the #1 lender of SBA 7(a) loans for 12 consecutive years in Idaho.

15 About the SBA What is the SBA? SBA - Small Business Administra4on, a government agency Offers financial programs to help small businesses How do SBA loan programs work? SBA does not make direct loans to businesses. SBA provides a financial guarantee to approved lenders. Approved lenders include: banks, CDFI s, credit unions Loans are made based on SBA guidelines and approved by the lender.

16 Common SBA Loan Programs SBA 7(a) To buy or start a new business To purchase fixed assets (equipment, land/building) To fund tenant improvements To fund working capital SBA 504 To purchase fixed assets (equipment, land/building) To construct or upgrade buildings

17 What is a Complete Loan Package?! Letter to the Lender! Completed Loan Application! Copy of your personal credit report! Personal Financial Statement! Copies of last three years personal and business tax returns (as appropriate)! Business Plan Narrative with financial projections including:! Balance Sheet! Income Statement (also known as an P & L)! Breakeven Analysis! First 12 month cash flow worksheet/budget! Projection assumptions (how did you determine your numbers)! List existing business debt including: term, interest rate, monthly payment, balance owing! Proposed use of loan proceeds (i.e. how will you use the money?)

18 The Letter to the Banker The cover letter accompanies a completed loan package and gives a broad overview of the proposal. List the strengths of your loan request List the weaknesses and how you will mitigate them List up to five relevant reasons your business will succeed based on your analysis Provide your contact information and ask for a meeting Thank the banker for his/her time and consideration

19 Understanding Financial Statements What is a financial statement? Balance Sheet Profit & Loss a.k.a. Income Statement Same date? Reconcile? All adjustments made? What do they tell us about the business?

20 Balance Sheet: A Snapshot in Time Lists what the business: owns (assets) and owes (liabilities) and Has invested (equity or net worth) Assets = Liabilities + Owner s Equity/Net Worth Or Assets Liabilities = Owner s Equity/Net Worth

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22 Profit & Loss (Income Statement) A year-to-date accrual of total sales and total expenses for your business Revenues Expenses = Net Profit (Net Loss) When a company makes a profit it: Has a good chance of qualifying for a loan Builds net worth (equity) to support its growth Pays taxes Is attractive to buyers and investors Stays in business!

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24 Calculate Total Funds Needed Total Startup Costs + Working Capital = Funds Needed Working capital is the amount of money you need to cover three to six months of your ongoing expenses (overhead). To calculate working capital: Multiply your total expenses from the breakeven analysis spreadsheet by by 6 to get this figure.

25 Projections Are Required 12 month cash flow budget showing projected monthly revenue and expenses. Profit & Loss Startup: shows projected first two years of operations Existing business: shows projected operations for the business year when requested loan will be in place Total of loan request Itemized list of total start up costs Total of working capital needs for 6 months

26 2014 Zions Bank Business Resource Center

27 Calculating Startup Costs What are my one-time costs just to open the doors Item Website with shopping cart & SEO Legal fees to set up LLC, create contracts with suppliers, analyze lease agreement, etc. Produc4on equipment (sewing machines, cukng tables, pafern makers, etc.) Office equipment & office furniture Beginning inventory purchases (fabric, etc.) Business license, permits and other fees Grand opening marke4ng/adver4sing Total Startup Expenses Cost $

28 Calculating Monthly Expenses What ongoing costs (overhead) will I pay every month? Name of Expense Rent U4li4es Marke4ng Campaign Bank account charges, credit card processing Office supplies & postage Business insurance Owner salary and staff wages Loan payment (to be computed) Total Amount $ $

29 Skin in the Game : Required Cash Down Uses Dollars Sources Dollars Startup Costs $50,000 Owner Cash (.20 x 141,950) $28,390 Working capital $91,950 Borrowed Funds $100,000 Investor Funds $13,560 Total $141,950 Total $141,950

30 Calculating Bankers Cash Flow Startups--- cash flow based on projections Existing business---- cash flow based on historical performance (and projections) calculated by: + Net Profit (- Loss) + Depreciation Expense + Interest Expense + Amortization Expense = Bankers Cash Flow Bankers cash flow should cover your debt service requirement (loan payments) by at least 1.50 times. Example: If your monthly loan payment is $1,000, your business should generate a monthly cash flow of $1,500. (Note: $1,500 divided by $1,000)

31 Steps to Creating a Successful Business Create a franchise Execute marke4ng strategy & tac4cs Keep accurate and books &records Review your business model frequently Pivot as necessary Know what your business is worth Iden4fy your exit strategy 2014 Zions Bank Business Resource Center

32 BRC Workshops & Events! Smart StartUp for Business---Part I and Part II! Inside Secrets to Funding Your Business! Money Making Marketing! LinkedIn Strategies: Managing Your Brand! Business Strategies Series Commercial Real Estate Getting Bank Financing Buy/Sell/Value a Business Attracting Investors Small Business Legal Seminar Manufacturing: From Idea to Market Success for Women in Business Money Management Communications & Presentations Technology & Time Management Protecting Assets/Managing Risk Healthcare for Small Business 2014 Zions Bank

33 Finance Acronyms to Know DTI = Debt to Income LTV = Loan To Value DSR = Debt Service Ratio APR = Annual Percentage Rate APY = Annual Percentage Yield EBITDA----Earnings Before Interest, Taxes, Depreciation and Amortization

34 Contact Us at Zions Bank Your Business Resource Center (BRC) Team Sheila Spangler Vice President & Director Karen Appelgren Asst. Vice President & Asst. Director Zions Bank

35 We haven t forgotten who keeps us in business. Zions Bank Business Resource Center