FINANCING YOUR BUSINESS PLAN
A plan for financing is
important and should be carefully addressed. A
business that tries to begin with no capital
will face difficulty in surviving. For example,
if your business will represent your sole
income, you should have savings that are
sufficient to establish a financial interest,
and still carry you for a necessary period of
time until your business becomes productive.
Financially, there are four
stages to consider on your way to becoming a
business success:
(1) The Break Even
Consideration
(2) The Survival
Consideration
(3) The Expansion
Consideration
(4) The Wealth-Building
Consideration
Depending on your skills, and
the type of computer business you have, the time
it takes to reach the "break-even" point is less
than the other considerations. Ideally your
business will continue to grow, however many go
beyond this point.
"Breaking even" means that a
business has generated enough income to pay the
costs of the business operation without using
savings or other resources to maintain a modest
standard of living. Normally, this will take
from one to six months.
The "Survival Consideration"
occurs when a business is not only generating
enough money to cover all it's costs, but also
provides a respectable salary. This may take up
to one year or more to achieve.
The "Expansion Consideration"
occurs when a business begins to show a gross
profit of 20% or more a year, and can expand the
business on site or open offices in other
geographic areas.
The "Wealth Building
Consideration" occurs when an expanding company
either goes public with a stock issue, or merges
with another company. At this point a computer
business entrepreneur can turn an initial
investment into marketable stock that could be
worth many times his or her interest, if
converted into cash.
The survival consideration is
the point you should be concerned about to begin
with. There are many ways to obtain necessary
funds. A new entrepreneur will discover that
there are many sources available for funding.
Lending money is a business that is the major
operation of some organizations, and a side line
of others. Banks lend money that is deposited
with them. Their only commodity is money. They
pay interest to depositors for the use of their
money, which in turn is loaned out at a rate
that makes a profit both for the bank and the
depositor.
There are many other sources
of financing, such as private lenders, private
investors, credit unions, equity in real estate,
and other private and government assistance
programs. Also, your local Small Business
Administration has information that can assist
you. You may also be fortunate enough to have a
SCORE Group in your area. This committee of
retired executives is available to assist you in
planning your every move into the business
community.
The best starting point for
determining the financial needs of a new
business is to define the problem. Defining the
problem includes determining the most likely
source of funds for your needs. Also included in
the problem is a dollar figure. How much will
you need in order to be a success in your
venture.
Success means not only
keeping your business in a solvent state, but
supporting yourself and your family until your
new enterprise is healthy enough to support
itself and show a sufficient surplus that
enables you to live comfortably. When you first
organize your business you will need records of
capital outlay, equipment purchased or leased,
and the terms by which the assets are obtained.
Initial inventory and renewal methods tracking
inventory as sold requires records. The method
of financing the venture must be a matter of
record as must be methods of repayment. Cost of
financing will be an important part of those
records.
A personal balance sheet
showing your requirements is the first step.
List your monthly obligations such as mortgage
payment, or rent, utilities, installment credit
payments, groceries and possible medical
expenses. Add a realistic percentage to cover
entertainment and unexpected expenses. Determine
the annual cost of these items.
Next determine the cost of
the business from day one for one year. The
initial outlay required for rent or lease of the
location will usually require the first and last
month's rent plus a deposit to cover security
and clean up. List the capital outlay necessary
to equip your business with machinery, office
equipment, transportation and inventory. If you
are planning to have employees other than
yourself, include one year's salary for them in
addition to your own. Not necessary, but
sometimes included, is a sinking fund
replacement cost for equipment as it
depreciates. Initial and projected inventory
sufficient to operate for one year may be
financed by a combination of methods.
In order to borrow money,
regardless of the source, you must have
credibility. To establish the fact that you are
a good risk you must furnish two documents. The
first will be the credit application that covers
your personal history. The second is a personal
balance sheet listing your assets and
liabilities. The credit application and the
personal financial statement combined with a
credit check from an independent credit
reporting agency will help the bank determine
the risk factor involved in lending the
necessary funds.
Commercial banks are one of
the biggest sources of funds. Primarily
concerned with loans not exceeding five years,
they look to amortization and new loans as a way
of business as opposed to savings and loan
associations that deal mainly with long term,
thirty year housing loans. Credit Unions are
classed with banks but usually have a restricted
clientele. If you are a member of a credit union
it should be your first consideration. As a
member of a credit union you will enjoy a better
interest rate and also special consideration not
given by banks
Of the many government
agencies available, the Small Business
Administration (SBA) is probably best known for
aid in financing. The usual procedure is to
apply for a bank loan. If the loan is rejected,
apply to the SBA. When the loan is approved, a
bank will make the loan with the additional
assurance that the government is standing behind
it. Sometimes this is the only way a small
business can be financed.
One advantage of dealing with
the SBA is the fact that your home may be used
as partial collateral even though your equity is
not sufficient to cover the amount of the loan.
The equity in your home may
be used in another way. Banks and private
mortgage institutions will loan the difference
between the present encumbrance on your real
property and eighty percent of the fair market
value as determined by an independent appraiser.
Known as equity loans, they become second
mortgages on your properly. One advantage to
this type of loan is the payment structure. You
may arrange interest only payments or payments
of one percent of the face value per month. This
of course means a balloon payment is due at the
maturity date. It may be that the lower monthly
payment at the beginning will enable you to
carry your business into a successful period in
a shorter length of time, and then be in a
stronger financial position when the principal
amount becomes due.
Many private individuals loan
money as a business. They are limited by usury
laws as to the amount of interest they may
charge. However these people are usually looking
for a tax shelter as well as a better bank rate
of return. They will look to your real and
personal property as collateral. Frequently they
will be more flexible in their requirements, and
in some states the interest rate may be lower
than prevailing bank rates. To find these people
you need not go any further than the classified
section of your newspaper.
In some areas you will find
private assistance groups. Sometimes these
groups are formed to assist minorities in
bettering themselves by entering into the
business world on their own. Some of these
groups have no ethnic guidelines but are solely
interested in helping people improve their
quality of life. The requirements vary from
group to group. Check the yellow pages of your
telephone director to locate these agencies.
The private investor, like
the private lender, has funds available for
business. His goal, like the private lender, is
to get a good return and probably some tax
shelter. He or she may be one and the same with
the private lender but in the role of investor
they look for more than a fixed rate return.
They want a piece of the action and the size of
the piece they take will depend on the ratio of
their funds to the total value of the
enterprise. He or she will in effect be your
partner. Most likely they will specify a limited
partnership arrangement. Some states will
require a registration of the limited partner.
It will be your responsibility for seeing that
the venture is successful; you will also be
liable for the losses over and above the
investor's share. A limited partner is liable
only to the extent of his investment for any
losses that may occur. In the event of total
loss, such as bankruptcy, after all of the
assets of the business are expended the
creditors may look to your real and personal
property to recoup their losses. But the limited
partner cannot be called upon to put up
additional funds. There are occasions when a
legal action may be entered against the limited
partner but with no assurance of success. Under
these conditions the private investor feels
confident that he can make money. You may also
find that a private investor will only make his
funds available to you if you agree to his being
an active partner. He may feel that his business
acumen will be an asset to both of you.
A more sophisticated source
of funds is the factor. A factor is the agent of
many investors. He places their funds for the
best possible return on their investment. Like
banks, they require the best possible credit and
personal references. As with banks, they will
want to know what your experience is in the
field of your endeavor. Financial reports are
normally required on a regular basis. Usually
factors prefer to deal with established
businesses.
Financing a new business
venture by selling shares of stock in a
corporation supplies funds, and establishes the
guiding hand. A corporation requires officers,
and, if large enough an enterprise, a board of
directors. In this event, decisions are not made
by one person. The corporate structure
eliminates all personal liability. The
corporation, as a legal person, bears all
responsibility for financial success or failure.
Shares are sold and the holders of the shares
all have a vote in the selection of officers,
and a say in the running of the business. The
shares increase in value as the venture succeeds
and decrease if it declines. The loss to each
investor in case of failure is limited to his
investment. The tax structure in the case of a
corporation has some drawbacks. The corporate
profits are taxed as income, then the share
taken as individual income is taxed, in effect,
double taxation. Other benefits derived offset
this apparent disadvantage. Corporations must be
registered with the state in which they are
incorporated. The Securities and Exchange
Commission of the federal government requires
registration of the stock for sale if
capitalization exceeds an amount permitted by
law. Corporations may be one of two types. A
private corporation issues stock to a limited
group of people strictly associated with the
venture. The stock may not be sold to an
outsider, that is the general public. The stock
issue is limited to a certain number of shares
to be held by the officers of the corporation. A
corporation may be formed with only two shares
of stock if it is to be a private or closed
corporation. A public corporation sells stock on
the open market to anyone who has the money to
purchase the shares. Shares are traded back and
forth. The value of the shares will vary as the
economy changes as well as according to the
success of the business. A private corporation
may elect to go public when it has grown beyond
the point where private capitalization can carry
it. Additional funds for expansion may be raised
in this manner. It is possible for a public
corporation to buy up all the outstanding shares
and go private although it is not usually a
common practice.
You, as the entrepreneur, may
use a combination of forms to finance your new
business. In many cases your inventory will be
financed by trade credit. Credit extended by the
supplier is known as trade credit. You may use
short term loans that mature in one year or
less. Portions of your funds may of course come
from long term loans. Depending on the ownership
structure, your funds will represent investments
by yourself and partners or shareholders, bank
funds of a long term nature, and a combination
of trade credit and short term loans.
A few sources of government
assistance are: The Department of Housing and
Urban Development (HUD), the Veteran's
Administration (VA), the Export Import Bank, the
Department of Health, Education and Welfare
(HEW), and the Small Business Administration
(SBA).
The Government Printing
Office, Washington, D. C. 20402 is a source of
many pamphlets and books of great interest to
anyone entering business. A catalog will be
mailed on request. There are also branches of
the Government Printing Office in some major
cities. Check your telephone book under U.S.
Government. |
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WQC 2003 
ISAQ 2005