Financing Options: Crowdfunding to Loans

This is such a big subject and getting bigger each day so we'll try to give you the highlights. If you are looking for further detail, please let us know.

While traditional banking and equity investment through private equity investors are still very much alive and kicking, there are many other "creative" methods of raising funds for your business.

 

Crowdfunding has been getting a ton of attention lately with Kickstarter and Indiegogo showing off many funding successes. One thing to remember is that this space is a real moving target. With rules and regulations changes coming from the SEC, we may be seeing different players, or at least different looking players, in the near future. Two types of crowdfunding appear to be emerging: peer-to-peer and donation/purchase-based.

Peer-to-peer crowdfunding sites currently include ones like LendingClub.com and Prosper.com.  These organizations operate as matching sites, bringing together individual member lenders and borrowers. Many provide quick response to requests for funding and interest rates can be significantly higher than other sources of funding. If you are having troubles with other avenues of borrowing, read all the fine print before making a decision, on either side of the transaction (this goes for all of the options discussed here).

With donation/purchase-based websites like Kickstarter and Indiegogo, you get to operate as a fundraiser or as a place to take pre-orders for your product or service. Many artists and non-profits like this space as well as businesses. There are a couple of keys to raising funds on one of these types of sites: have an awesome network, create a compelling story and offer desirable "perks". You pretty much will need all three components to have a successful campaign. And a great video really helps too!

Other funding sources include credit card advances and factoring can help with cash flow issues. While these avenues may help with daily or weekly cash flow, the cost of capital can be quite high when compared with other options. With credit card advances, they may hold back as much as 20% until the customer pays and it doesn't improve your business credit (which is important in getting future business loans). If you have inventory or accounts receivable, then factoring may be an option, but again this option can have a high cost of capital.

Another funding option is a short-term business loan. Usually these non-bank operations offer loans based on personal credit, annual revenue and time in business.  Many loans can be made up to $250,000 and have terms from 3-18 months. If you qualify, you can get decisions typically within one day. And like the other solutions above, the cost of capital is high and there are no guarantees and you have to read the fine print. A good business situation for this type of product would be where a supplier is offering a significant discount on a large shipment of regular inventory items that you know you can turn very quickly yet you don't have the cash flow to cover a large purchase. The discount would help offset the high cost of capital.

While there are no easy solutions to finding funding these days, there are still many options. It's all a matter of which one best fits your needs. Need help deciding which one to use? Give us a call at 775-283-7122 to set up an appointment and we'll help you with evaluating what works with your plan and your business.

What's your Competitive Advantage?

Harvard professor Michael Porter originally proposed the theory of competitive advantage in 1985.  Porter emphasized productivity instead of cheap labor and natural resources. The chart below identifies basics of Porter's theory - and points to the area where most small businesses strategy exists - Focus Strategy or differentiation.

So how do you get started and how important is having a competitive advantage or CA? If you start with Jack Welch, the former CEO of General Electric, he said, "If you don't have a competitive advantage, don't compete."  Warren Buffet looks for CA to be sustainable.  Brand and a great sales effort combined with a CA can ensure the success of a company.  And it all starts with asking the question of your customers, "What made you choose me?".

Many businesses think they know their CA or haven't defined it or don't use it. So let's start with what it is not.  CA is not:

• keeping up with the competition
• offering free shipping when everyone else is offering free shipping
• having the lowest price
• someone else will have deeper pockets
• the same as everyone else
• "we have on-time delivery" - who doesn't?
• subjective
• "we have great customer service" - doesn't everyone?
• arbitrary
• "we're better at..." - 80% of drivers think they are above average
• cliche
• "we mean business" - doesn't everyone?

So what can CA be?

• Internal or external
• the distribution system of Walmart is a huge advantage in many ways
• Highly visible
• a distinctive design like the POM pomegranate juice bottle
• Owning a niche market
• many small businesses can claim to be a big fish in small pond

So how do you determine what your CA is right now? Ask yourself these questions:

• What do you think your CA is right now?
• Can you prove it? Do you have the data?
• Have you evaluated your CA against the competition?
• Is price part of your CA?
• Is it sustainable at least for a certain time period?
• Are there big costs for the customer to switch?
• Do you have low overhead costs?
• Do you have strategic intellectual property?
• Have you established a broad network? Think Facebook or Verizon.

Your marketing plan is the key place where your CA resides.  Your brand strategy will support your CA.  Training you employees to be brand ambassadors will be key as well as your slogan or tag lines, logo, website and packaging.  And always review your competitive advantage.  Keep measuring against the competition. Ask if your CA is still important to your customers. Constantly prove that your CA is relevant. Reassess then update your CA and start the process over.

Thinking of borrowing funds for your business? Remember the 5 C's!

Yes, banks have been around a long time and have survived everything from train robberies to the Great Depression to the Great Recession. And you have a business that needs additional cash to help with its growth. So how can you win a loan into today's uncertain economy? It goes back to basics. 

 

Back in the days, oh so long ago, when money was flowing much more freely, back in 2005, banks still looked at that they call the 5 C's - character, capacity, capital, collateral and conditions like they do today. The only difference with their view today is that their glasses are focused about 30-40 years in the past. Bottom line: you have to meet the bank's guidelines in order to get funded.

The first C is Character. This refers the skill set of the management team, who are the managers, has anyone filed for bankruptcy or had any other business issues in the past. Today, ideally banks would like to know that you have had some business management experience as well as industry experience. How much do you ask? It all depends. On the bank. On the underwriting department. On your personal relationship with your banker. You need to have experience and success with all the challenges in today's economy.

The second C is Capacity. This refers to your ability to pay back the loan. Do you have the cash flow to pay for all the other aspects of your business AND pay the principal and interest on your loan? What do they look at? It all depends. On the bank. Mostly they look at prior year's tax returns for you personally and the business, as well as projected financial statements. Be careful with your assumptions.

The third C is Capital. How much "skin" do you have in the game? How much have you invested of your own money in the business? How much can you potentially lose if the business fails? The bank wants to know that you are a very interested party in the success of the business. How much of your money invested kinda has a way of doing that. How much? It all depends. On the bank.

The fourth C is Collateral. What asset do you have to pledge to the bank in case you default on the loan? What is the condition and value of the asset? How much collateral do you need? It all depends. On the bank. Some banks may require that you fully collateralize the loan. Ask what their requirements are.

The last C is Conditions. These are economic conditions in your industry and the economy in general that can affect your business. You probably have little or no control over this C. Do your best to know what the leading indicators of success are for your industry and your businesses operating region. Are you local, regional, national or international? You better know what types of risk affect your business. What risks are measured? It all depends. On the bank.

We hope that you've gotten the gist of this post. It all depends. On the bank. Big bank, regional bank, community bank - they all look at things different and you need a bank that is a financial partner, so please consider all the options before you start going through the brain damage of filling out loan applications and gathering required paperwork. And know that we at the BRIC are always available to help.