So you need capital to grow your business, but you're unsure how to get it. Or how much you can get. There is one solution, and that's to be "investible."
What makes your business investible? There are several aspects of your business (and you) that make your whole package investible. Here are the big ones. As you read, ask yourself, "How many of these can I claim? Where are the holes?"
You have invested your own money… “skin in the game”
Detailed 3-year financial plan: realistic, professional, easy to understand
Collateral: assets in your business
Visibility to Revenues
Great team. No heroes, no critical point of failure.
Product or service superiority
Strong IT infrastructure
Clearly defined job roles and responsibilities. No holes.
Consistent, predictable cash flows/profitability
Contingency plan if things go awry?
Advisory board or outside board of directors
How to Get the Money
Once you know you're investible, it's time to approach potential sources of capital. Here's what you need to know going in:
Banks are more risk averse than equity investors/ partners
Bank financing is the lowest cost money
Finance companies / factors are expensive but sometimes the right answer
Equity has advantages because equity investors will wait for their payout
Sometimes you need a blend of equity and bank financing
How Much Can You Get?
That depends on many factors, but here are some rough rules of thumb:
Banks will want collateral: Inventory, equipment, real estate, customer accounts receivable
Will generally lend approximately 70 - 80% of collateral, subject to cash flow and repayment ability
Types of loans:
Term / Installment loans have a stipulated fixed monthly payment, 3 -10 years in length. Acquisition, Equipment Purchase, Facility Build Out or Improvements.
Working capital lines of credit are generally interest-only, renewable, 1-year loans, used to finance inventory and cover current period costs, e.g. payroll, rent, taxes, insurance
Expect to pay 4 - 6% interest in today’s environment
Equipment leasing companies specialize in financing equipment vehicles, etc.; rates generally 2-4% higher than bank rates.
Finance companies (Factors) offer Purchase Order financing and factoring of Accounts receivable; rates approaching 20%
Equity investors will need to trust you and believe your story: Angel Investors, Private Equity, Mezzanin
The plan needs to be very tight, few things left to chance
Will want 10 - 20% annual return but may be patient, and supportive with future capital as needs arise
Usually want to be paid out in 3-5 years
What You Need to Show
Last 3 years of business and personal tax returns
Last 3 years of internal financial statements: Income statements, balance sheets, cash flows
3 Year projections
Specific use of the money
A written plan proving that you're investible and can generate the ROI
Expect to produce monthly financial statements vs plan to be accountable to your money source
Expect to have to sign personal guarantee for the money
Expect to meet with your financing partner regularly