Jumpstart Your Business

Read this very illuminating presentation. It is really eye opening.

Working Capital or the measure of a company’s ability to pay off its short term debt is the difference between current assets and current liabilities.

There are two fundamental ways through which a business can be financed: debt financing and equity financing.

In debt financing, money is borrowed to be repaid over a fixed period of time, generally with interest. Debt financing may be short-term (repaid in full in less than one year) or long-term (repaid in full in more than one year). The lender derives no ownership interest in the business and the business has no other obligations except full repayment of the loan. Personal guarantees are normally required for small businesses and therefore personal credit history becomes very important.

In equity financing, money is exchanged for a share of ownership in the business. So the business raises funds without incurring debt and has no obligation to repay specific sums at specific milestones. The ownership interests of the principals may become diluted and their control can eroded especially as additional investors are added.

There are several major types of equity investments for a small business:

Here are the 5 Cs that lending institutions look at when determining whether to give you a loan to start or grow your business:

This is an actual letter that was sent to a bank by an 86 year old woman. The bank manager thought it amusing enough to have it published in the New York Times.

People-to-people lending is the new game in town. It is a unique way of borrowing/lending money where no banks are involved but rather people deal directly with each other. If you want to borrow money, you post your request for a loan with the amount needed and the maximum interest rate you are willing to pay.

A loan is a debt incurred by a company or organization, over a fixed period of time, and needs to be repaid with interest. The loan appears on the balance sheet as a liability. Loans can be made from family and friends; from financial institutions (Banks & Credit Unions) and from investors (Angels and Venture Capitalists). Regardless of the source of the funds, the loan should be treated the same way and interested should be charged and paid by the respective parties.

A grant is a gift from either a government or private organization and is given for a specific purpose for the “public benefit”. To a company or organization, a grant appears on their balance sheet as an asset and does not need to be repaid. Applicants need to prove that they can fulfill the specific purposes of the grant.

Unlike what you see on late night television or published in some of the newspapers and magazines, there are no government grants for private companies unless they are involved in very technical research in the military or health arenas or they do business in certain designated geographical areas and contribute to the economic and job growth of the residents of that area.

Banks typically make loans between $2,500 to $100.000 with an interest rate up to 5% above prime. Applicants need a well written Business Plan and stellar personal credit ratings for the principals. For companies that appear risky, the banks may request that the SBA guarantee the loans and if the companies meet the requirements an added 2% is needed for the guarantee.

Another method of financing would be to obtain a “Personal Equity Line of Credit” or “Personal Equity Loan” from a bank for the business.

The following video “How To Raise Money From VC’s” comes from 5min.com, an instructional video site we covered in May, and is currently getting a lot of attention in Israel.

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Your credit score may change after the overhaul of the scoring system that is due to take place in September. Since this is the way lending institutions determine whether to extend credit to your business, you want to keep a lookout for how this progresses.

For those of you wanting to go into business for yourself and haven’t had a lot of time out of school this is very good advice. Scroll down to the topic Build Good Credit After College and click play.

You may also want to check out the following article: http://www.ychange.com/smallbusinessloan.pdf