Last night we were talking about getting angel investment, and valuation, which is one of if not the most important points in the discussion. Valuation is essentially price.

Say you want to bring in $150,000 from an angel investor. The immediate question from the investor will be something like: “at what valuation?” Sometimes that’s called “pre-money valuation,” because the instant the deal happens the valuation will change into post-money valuation, which is always higher — because your company just got some new cash.

Your answer sets your deal equivalent of an asking price. If you say $500,000, then you’re offering the investor 30% of your company for $150,000. If you say $300,000, you’re offering 50%. If you say $1 million, then you’re only offering 15%.

Which leads to the question:

So how do I know? How do I set valuation appropriately? What is that based on? Is it some multiple of sales, or intellectual property, or what?

And that’s a good question, and very hard to answer. Sure, you want some compromise between what you want to give, as a percent of ownership in your company, and what investors would want to buy. Investors will simply say no if it’s not an attractive offer. But that’s still very vague.

• In the case of an existing business, with some history, you do have some formulas you can use. For a great site on that business interpretation of valuation, for existing busineses, I suggest bizequity.com, the zillo of small business.
• When we’re talking about startups, however, you don’t have history and you can’t really apply formulas based on sales, or revenue, or even intellectual property (although that could be more relevant).

So here’s my concrete suggestion:

1. Calculate starting costs. That’s two lists, the expenses you have to incur and the assets you have to have at the starting point — except cash. Leave that blank for a bit.  Add those all-except for cash assets to the starting costs, to get an amount, a number in dollars.  Click here for a lot more on that.  

   So, for example, in the illustration here, that would be about $40,000. Yes, I know it says $38,750, but this is just an estimated guess; always round up. You never guess just right.  

2. Calculate cash flow through the lean period at the beginning, before your sales cover your costs.  Make a good guess at how much money you need to cover the deficit spending to get you to an operational month-by-month break even level of cash. That’s where the cash requirement number in the illustration came from: it seemed like this company would need about $400,000 to survive from startup to break-even.  You can’t see much in the chart below, because it’s small, but it shows a projected 12 months of cash flow (in blue) with a minimum balance, a deficit (in red), of about $400,000.

   

3. That gives you a number. In this case, it’s $400,000. That’s what your cash flow shows you you’ll need to get to cash-flow break-even. In the last two months, the cash flow is positive, so the negative balance starts shrinking. With that estimate as a best guess, you go back into your startup costs calculation, and add in the cash required. It’s $400,000. You can see what that does to the startup costs worksheet in the next illustration here.
4. Having done that, you now know that you need about $500,000 from investors (again, technically it’s $458,750, but you’re using best-guess estimates, so round up.) Set that as the amount of investment you’re seeking. Then — and here it gets hard, to be sure — you need to decide how much of your company you’re going to offer to an investor in exchange for that $500,000.

5. Get some help here if you can. Ask somebody with experience in startups, or dealing with angel investors, or both. Ask an attorney you can trust, who should also be somebody with experience. The thing is, how much of your company you offer to investors is about a compromise between what you’d like — none, free money — and what will entice the investors to write checks.

   At this point a lot depends on your overall business offering, the cards your company brings to the table. Investors want as high return as possible, with as little risk, but in relation to return. How experienced is your team? How defensible is your product? How rich is the market? All these factors determine what kind of a deal will be acceptable to investors.

   • Let’s say, in this case, you’re new at startups, you have very little track record, and you want to attract an active angel investor as a partner. So maybe you set your initial valuation at $750K, meaning you’re offering to give away 2/3 of your ownership to get the money you need. You’re being realistic about what will attract an investor. You better really, really, like that investor, because he or she will essentially own your company. But this is a hypothetical case, and without a lot of experience and defensibility, that may be the best you can do.
   • Or maybe you’ve got better cards to play: you’ve got a team with startup experience, and a defensible new product, with some intellectual property, and it looks like an attractive market. That makes you able to set a stronger valuation, and maybe — we hope — still make it an attractive offer to investors. So maybe you say you’re valuing it at $1.5 million. You’re offering investors one third of your company for $500K.

So there’s a quick and (I hope) simple summary of how you set the initial (pre-money) valuation when you want to attract investment.

The Break-even Analysis is a simple calculation that lets you determine how much you need to sell, monthly or annually, to cover your costs of doing business – your break-even point. Below this sales level, you’re taking a loss. Above it, you have a profit.

Example

Say you’re selling boxes of candy bars at $1 for each bar, and it costs you 30 cents to buy each candy bar. So, for each candy bar you sell, you have 70 cents left over – that’s your gross margin. But you also have fixed costs, which remain the same regardless of sales volume – in this case, $10 per month to store the candy bars.

The Break-even Analysis shows that you’d have to sell 14.3 candy bars per month to cover the $10 storage fee. Simple, right? Except for selling 1/3 of a candy bar…we’ll call that a marketing challenge. Or every three months you could sell one leap-bar.

Benefits
The Break-even Analysis gives you a quick reality check on your business numbers. If you’ve done your research and have some good guesses about how much you can sell each month, your break-even will show whether that’s a profitable level. You can also use it to tinker with scenarios: what happens if your direct costs are a little bit lower, if you can cut a deal with a supplier? What’s the worst-case scenario, when your operating expenses come in over budget?

Since most start-ups will generate a loss for the first few months, until word-of-mouth or other marketing efforts start generating higher sales, the break-even shows you what you’re shooting for. How many months will it take to start turning things around and become profitable?

The point here isn’t so much about showing this number to investors, although that’s one use of the Break-even Analysis. For most entrepreneurs, this calculation is useful in thinking through your budgets and sales plans, helping you to focus on the things that really make a difference to the bottom line.

Dangers
The Break-even Analysis deals only with profits, not cash. If you have to buy those candy bars before you sell them, you could find yourself short on cash and holding lots of inventory (of course, in this example, you can probably pay your sales boys in candy bars and eat the profits).

Remember that this is just one, simplified calculation. To get a full picture of your business financials, you need to develop projected statements for profit and loss, cash flow, and balance sheet. In Business Plan Pro 11.0, all of these are linked together and financially sound.

How to use the Bplans Break-even Calculator

The calculator itself is pretty easy to use. Simply double-click in the entry areas on the left and type in a number for each field requested.

Average Per-Unit Revenue means how much you charge for what you’re selling, per unit. A unit could be a single candy bar, or a box of candy bars, a haircut, or an hour of consulting time – that’s up to you.

Average Per-Unit Cost means how much it costs you to make, buy, ship, and deliver that unit of goods or services. It’s a direct cost, meaning that if you don’t sell that unit, you don’t pay for that cost. In our example, the 30 cents you pay to buy each candy bar is the direct cost, but if we were making them ourselves it could be cocoa butter and powder, sugar, wrappers, and paying the laborers a per-bar rate for making them. If you’re a service business, direct costs may not be as relevant, unless you’re paying your employees commissions.

Estimated Monthly Fixed Cost simply means how much you have to pay out each month even if you don’t sell a single thing. In our example, this is the $10 storage fee. For a real business, it probably includes payroll, utilities, rent, pre-arranged advertising, and other recurring costs.

As you change the numbers on the left, the chart on the right of the calculator will update to show how many units and what actual revenue level you need to meet to break even. The point on the chart where Profits = $0 is your break-even point.

You can be profitable and still be bankrupt. You must closely plan and monitor your cash flow to be successful and stay in business.

During the current 2008 financial crisis, even the largest corporations have had to face this truth, and more than a few have suffered the consequences.

Tim Berry, president and founder of Palo Alto Software, has been expounding this principle for years. Managing cash flow has been a key feature of Business Plan Pro, Palo Alto Software’s industry-leading business-planning software.

Unfortunately, for millions of small- and medium-sized businesses, there is no Congressional bailout or rescue plan if you run your checking and savings accounts down to $0 while still owing money. Says Berry in his book, Hurdle: the Book on Business Planning, “Although cash is critical, people think in terms of profits instead of cash. We all do. When you and your friends imagine a new business, you think of what it would cost to make the product, what you could sell it for, and what the profits per unit might be. We are trained to think of business as sales minus costs and expenses, which results in profits.

Unfortunately, we don’t spend the profits in a business. We spend cash. Profitable companies go broke because they had all their money tied up in assets and couldn’t pay their expenses. Working capital is critical to business health. Unfortunately, we don’t see the cash implications as clearly as we should, which is one of the best reasons for proper business planning. We have to manage cash, as well as profits.”

When, as now, the financial industry is threatened with huge amounts of non-collectible debt, banks and investors are loath to lend out any new money. Credit becomes as scarce as the Rhode Island Red’s dentures (hen’s teeth ;-D ). Then you really have to watch your cash flow.

Say you manufacture a product and sell it to a distributor who sells it to a chain of stores which warehouses it before sending it to a franchise retailer, where it goes onto the shelf to wait for a customer to buy it. Now, when there is a credit crunch, the customer may wait to buy or not buy at all.

The product sits on the store shelf gathering dust, and the retail franchise can’t pay for the product that hasn’t sold. The warehouse is then slow to pay the distributor, and the distributor lets the net-30-day invoice to you, the manufacturer, slide to 45 days or even 60 days. You can see the accumulating cash shortage for everyone involved. Of course, as the manufacturer, it impacts you the most.

Now you have your own bills to pay, and have a big accounts receivable, but no money in your checking account to pay the electric company, your materials supplier, your employees, the IRS, or yourself.

In years past, in this situation you simply went to your bank and asked for a short-term Line of Credit. But now, the bank has clammed up. They might have limited lending. They might have made lending requirements more strict. They might have closed, seized overnight by the Feds, for insolvency. They might have been gobbled up by another megabank, at fire-sale prices.

So instead of a quick fix you are faced with your cash flowing out, but only trickling in.

So what’s a business owner to do? Revise your business plan. Envision the worst-case scenarios. Think about the steps you’d take to survive. There’s no need to produce a new full-blown plan. Do just the planning you need at this important juncture: sales, expenses, profit and loss, and the cash flow. In his new book, Plan-As-You-Go Business Planning Tim Berry makes the point that “Things change fast. Planning needs to be quick and flexible and sensitive to changing assumptions. You do the planning that you need when you need it.”

Look at the financial tables in your planning software, and try a few what-if projections on those worst cases. Your foremost concerns are scenarios where your cash flow depletes your accounts and reserves and you are out of money. If that eventuality arises from your what-if projections now is the time to seek funding, or loans, or lines-of-credit or investors. Waiting until the last minute, hoping that somehow the worst won’t come can guarantee your demise. In a credit crunch, lenders and investors are extremely wary of those seeking desperate emergency deals ($700 billion Federal bailouts notwithstanding).

But, if you approach the various funding sources in advance of need, with your revised plan in hand, you have the breathing space to negotiate the deal from a position showing forethought and responsibility.

And, of course, if your more optimistic projections prevail, and your cash flow stays healthy and positive, you need not actually take that loan or Line of Credit. Just knowing that your cash flow is backed up by prior planning and forecasting allows you to better manage your operations. As one financial manager once told me, “You have to plan your emergencies in advance.”

What information needs to be in your business plan? What is the order of information that will make the most sense to lenders and investors? You can answer these questions with the business plan outlines provided below.

What are the standard elements of a business plan? If you do need a standard business plan to seek funding — as opposed to a plan-as-you-go approach for running your business, which I describe below — there are predictable contents of a standard business plan outline.

For example, a business plan normally starts with an Executive Summary, which should be concise and interesting. People almost always expect to see sections covering the Company, the Market, the Product, the Management Team, Strategy, Implementation, and Financial Analysis. The precise business plan format can vary.

Is the order important? If you have the main components, the order doesn’t matter that much, but here’s the sequence I suggest for a business plan. I have provided two outlines, one simple and the other more detailed.

Simple business plan outline

1. Executive Summary: Write this last. It’s just a page or two of highlights.
2. Company Description: Legal establishment, history, start-up plans, etc.
3. Product or Service: Describe what you’re selling. Focus on customer benefits.
4. Market Analysis: You need to know your market, customer needs, where they are, how to reach them, etc.
5. Strategy and Implementation: Be specific. Include management responsibilities with dates and budgets. Make sure you can track results.
6. Web Plan Summary: For e-commerce, include discussion of website, development costs, operations, sales and marketing strategies.
7. Management Team: Describe the organization and the key management team members.
8. Financial Analysis: Make sure to include at the very least your projected Profit and Loss and Cash Flow tables.

Build your plan, then organize it. I don’t recommend developing the plan in the same order you present it as a finished document. For example, although the Executive Summary obviously comes as the first section of a business plan, I recommend writing it after everything else is done. It will appear first, but you write it last.

Standard tables and charts

There are also some business tables and charts that are normally expected in a standard business plan.

Cash flow is the single most important numerical analysis in a plan, and should never be missing. Most plans will also have Sales Forecast and Profit and Loss statements. I believe they should also have separate Personnel listings, projected Balance Sheet, projected Business Ratios, and Market Analysis tables.

I also believe that every plan should include bar charts and pie charts to illustrate the numbers.

Expanded business plan outline

Here’s an expanded full business plan outline, with details you might want to include in your own business plan.

1.0 Executive Summary
1.1 Objectives
1.2 Mission
1.3 Keys to Success

2.0 Company Summary
2.1 Company Ownership
2.2 Company History (for ongoing companies) or Start-up Plan (for new companies)
2.3 Company Locations and Facilities

3.0 Products and Services
3.1 Product and Service Description
3.2 Competitive Comparison
3.3 Sales Literature
3.4 Sourcing and Fulfillment
3.5 Technology
3.6 Future Products and Services

4.0 Market Analysis Summary
4.1 Market Segmentation
4.2 Target Market Segment Strategy
4.2.1 Market Needs
4.2.2 Market Trends
4.2.3 Market Growth
4.3 Industry Analysis
4.3.1 Industry Participants
4.3.2 Distribution Patterns
4.3.3 Competition and Buying Patterns
4.3.4 Main Competitors

5.0 Strategy and Implementation Summary
5.1 Strategy Pyramids
5.2 Value Proposition
5.3 Competitive Edge
5.4 Marketing Strategy
5.4.1 Positioning Statements
5.4.2 Pricing Strategy
5.4.3 Promotion Strategy
5.4.4 Distribution Patterns
5.4.5 Marketing Programs
5.5 Sales Strategy
5.5.1 Sales Forecast
5.5.2 Sales Programs
5.6 Strategic Alliances
5.7 Milestones

6.0 Web Plan Summary
6.1 Website Marketing Strategy
6.2 Development Requirements

7.0 Management Summary
7.1 Organizational Structure
7.2 Management Team
7.3 Management Team Gaps
7.4 Personnel Plan

8.0 Financial Plan
8.1 Important Assumptions
8.2 Key Financial Indicators
8.3 Break-even Analysis
8.4 Projected Profit and Loss
8.5 Projected Cash Flow
8.6 Projected Balance Sheet
8.7 Business Ratios
8.8 Long-term Plan

Business plan outline advice

Size your business plan to fit your business. Remember that your business plan should be only as big as what you need to run your business. While everybody should have planning to help run a business, not everyone needs to develop a complete formal business plan suitable for submitting to a potential investor, or bank, or venture contest. So don’t include outline points just because they are on a big list somewhere, or on this list, unless you’re developing a standard business plan that you’ll be showing to somebody else who expects a standard business plan.

Consider plan-as-you-go business planning. I’ve done a lot of work on this idea lately, resulting in my new “Plan As You Go” business planning, which is a now a book published by Entrepreneur Press, available through Amazon.com, Barnes and Noble, and Borders, and bundled as an eBook with Business Plan Pro. I’ve also added a short video here to the right, illustrating how the outline could be simpler with a new approach.

More business planning resources

Sometimes an outline just isn’t enough to write your business plan. Do you want to view sample business plans from real businesses? Would seeing a business plan template that banks prefer be useful to you? These valuable resources can help:

Sample business plans – Over 500 free sample business plans from various industries

Business plan template – This fill-in-the-blank business plan template is in the format preferred by the SBA and banks

Start a business – An easy to follow six-step process for starting a new business

Business Plan Pro – My company’s step-by-step software makes it fast and easy to create a business plan, regardless of your business planning experience

Laws protect inventions with patents, creative works with copyright, and trade names with trademarks, however protecting an idea is a different matter. I don’t think you really can protect a business idea in any practical way. If it is a good idea it will be copied. That’s in the nature of business. Your only hope is to launch it yourself and execute the idea so well that your imitators are scared off.

Business ideas aren’t protected
In 30 years of business and consulting, I’ve never heard of any laws to protect business ideas. Laws protect inventions with patents, creative works with copyright, and trade names with trademarks.

The closest thing to it that I’ve ever heard is recent rulings on “business model” patents related to the Internet and Internet businesses. What I’ve heard is that some patents have been granted for specific flow of information and commerce on specific Internet sites. If you’re serious about that you’d have to talk to a patent attorney.

Real investors don’t sign NDAs
You also hear a lot about “non-disclosure” agreements (NDA), legal documents in which parties agree not to tell secrets that they disclose to each other. These are used a lot in business development and are a good idea in many business occasions. Non-disclosures are often impractical and hard to enforce, but they are used anyhow.

Real investors don’t sign NDAs. They don’t have to because ideas are cheap and plentiful. They don’t want to because an NDA could be used against them for nuisance lawsuits, even if they didn’t disclose. And they really can’t sign an NDA because they can’t afford to promise they won’t do a similar business with somebody else. The next person in the door, right after they turn you down, might have a similar idea and a more convincing business plan. Each time they signed an NDA they would be ruling out some kind of future business, and they can’t afford to do that.

Please remember, however, that I’m not an attorney. My view on NDAs is not an attorney’s opinion. Furthermore, do understand that I am not saying that you should forget about NDAs entirely, I’m just sharing my disappointment for how often they are rejected and how little protection they really afford. It’s a fine point, but important. Do work with an attorney on this.

Good ideas will be copied
So in the business world good ideas are copied all the time. Most successful businesses are copies. Look at sports utility vehicles, or fancy coffee shops, or websites selling books or CDs, or web-based free email. Every good idea gets copied. Expect it.

A personal guarantee (PG) is requested by lenders in order to ensure that they get paid any debt issued to a corporation or LLC. The personal guarantee is signed by an individual typically involved in the business. In most cases it’s one of the owners, officers, or board of directors.

The National Association of Credit Managers (NACM) publishes a monthly magazine for credit managers. The credit managers are the individuals creating the criteria for which an approval of credit will be determined. In several issues the editors and writers of the magazine tell the credit managers that getting a personal guarantee is vital to the credit decision process. According to the NACM, an individual not willing to provide a personal guarantee is someone who doesn’t believe in their business and not worth providing credit to; they are high risk.

Although from a credit grantors standpoint you want a personal guarantee, from a small-business owner’s stand point you don’t want to provide a personal guarantee if at all possible. As a small-business owner, you will almost always be asked for a PG when applying for credit under your corporation or LLC. The reason why is that the debts of a corporation or LLC are not the debts of the individual owners or officers of the company. This is part of the corporate veil of the entity. So credit grantors want to make sure they hold someone liable, individually, in case the company doesn’t pay.

There are ways to get around using a PG.

First, negotiate. Obviously the smaller the business granting the credit, the more likely they are to waive the PG. The larger the business, such as a bank, the less likely they are to waive the PG. I personally have negotiated with landlords of commercial office space, corporate vehicle leases and loans, and vendor credit where I had the personal guarantee clause removed. It wasn’t always my first choice of a building or vehicle, but I did get what I wanted without a PG.

The second thing you can do to stop using a PG is to find companies already willing to offer credit without it. In the last seven years at Business Credit Services, we have researched over 75,000 companies nationwide who grant credit and determined which ones require a PG and which ones don’t. We have also tracked which companies require a personal credit check or business credit check and which ones don’t. For members of the Business Credit Builder program, our coaching staff matches up the clients’ business and those on our vendor list. We provide a resource for finding companies that will issue their business credit.

Although I personally like to minimize the amount of times I personally guarantee debt in our business, I understand the need to use a PG from time to time in order to get the credit lines or loans I want and need. The key is to know when to use the PG and when not to. If you don’t have to use it, don’t.

Article provide by Business Credit Services, Inc.

One of the most important tasks of a small business owner is finding capital for their business. Unfortunately, most business owners are clueless when it comes to finding money, and most self-proclaimed experts they may listen to are equally misguided.

The bottom line is you need capital for your business. Your capital needs will change over time, which is why you as a business owner need to build a strategy for capitalizing your business from the beginning. This is where most business owners drop the ball. They come up with great concepts, good marketing, hire the right people, but they ultimately fail because they never planned for their capital needs.

Digging your financial well
Think of capitalizing your business as digging a well. The wise business owner won’t dig a well that only satisfies short-term needs, but will dig the well as deep as possible or at least lays the groundwork for doing so.

There are at least five layers of the financial well for your business. It starts with the personal assets of the principals. To me, this is the worst possible layer, though the most commonly used. Sometimes there is no other choice, but my preference is to build businesses using other people’s money.

The second layer is the three F’s: Friends, Family, and Fools, another commonly exploited source of funds. The next three layers are credit, loans, and investors. While there should be some order to this, usually business owners are all over the board when it comes to the deeper layers of the well. The biggest tragedy is when business owners wait until it is too late to look for capital. They usually end up out of luck. The reality is no one wants to give you money if they know you need it. Your best bet is to dig your well when you are yet to need the water.

Not all money is created equal
The most important lesson I can impart to you is the fact that all money is NOT created equal. As you look at sources of capital for your business you need to consider the following:

• Debt vs. equity. Any capital that you receive is either going to be debt or equity. Equity requires the surrendering of ownership. You need to be clear on what type of money you are obtaining. For the most part, banks and businesses deal with debt, and investors deal with equity. Equity gives the investor a percentage of future profits. So while it may feel like free money, this is the most expensive capital you can get for your business (if you are successful!).
• Control. Does the money reduce your control? Bringing on investors or partners will lessen your control. A lender may request financial oversight or independent audits. You need to be aware of what you are giving up.
• Security. How is the lender or investor securing the money? Are you personally guaranteeing it? Is there a blanket lien on your assets? If you default, who will they go after for repayment?
• Transferability. Can you transfer the capital to the next business owner? In other words, is the capital for you or is it for the business? It won’t do you much good to sell a business if all the working capital is still tied to you.
• Ease of attainment. How easy is it to get? And how much time will you need to invest in order to secure the capital that you need? Team. Are you adding players to your team that are invested in your success? Pierre Omidyar sought VC money for eBay, not because he needed it, but because he wanted help building a world-class team. Sometimes bringing on investors and surrendering control is exactly what you need to do.

Build a foundation for your business
Regardless of the capital you seek, you must start by building a foundation for your business. As a general rule, you need to separate your personal and business activities as much as possible. The first step is to incorporate. You need to be a corporation (S or C) or LLC if you are serious about raising capital for your business. Without a corporation you are limiting yourself to personal loans in Tier 3, which we will discuss later. You have no options for the other tiers and won’t be taken seriously anyway. Investors can’t invest in a sole proprietorship: You need to have shares or membership units if you want to bring on investors. From this you can see that if you haven’t incorporated you have seriously handicapped your business.

You will give life to your corporation by establishing a corporate credit profile, which belongs to the business that is separate from yourself and your personal credit profile. The process of building business credit will help to ensure that you have the fundamentals in place. The fundamentals include operating in a manner that lends legitimacy to your corporation. The business financing or credit industry has a standard of what a legitimate business should look like, if you don’t meet that standard you are going to be shut out of many financing options. So the next smart step is to build business credit.

The four tiers of financing
There are four tiers of financing available to small business owners. It is important to be familiar with each tier and to develop a strategy for financing your business that cleverly uses these tiers. Here is a brief summary of each:

• Tier 1: basic trade credit. The largest source of capital in the world is business or trade credit. These are companies granting business credit without the need for a personal or business credit check and they rarely require a personal guarantee. Tier 1 is the most basic trade credit and when a corporation is rightly prepared, it will serve as a building block for establishing credit for that corporation. Going after Tier 1 financing without building a business credit profile can be a disaster, but if you are rightly prepared you can benefit greatly from this source of capital.
• Tier 2: advanced trade credit. Like Tier 1, this is the capital extended by businesses to businesses. The difference is that Tier 2 companies will conduct a business credit check before extending credit. Tier 2 usually includes larger credit lines, longer terms and in some cases can be used for equipment financing. If you need to purchase something that is created or sold by another company, chances are you can finance it with the first two tiers of financing.
• Tier 3: bank lending. This is the best-known type of business financing. Typically banks offering unsecured business lines of credit. A personal and business credit check and personal guarantees are required. The most basic level of bank financing, for the most part, is score and business history driven. For larger lines and loans, you need to be prepared with a good business plan and financials. Banks and credit card companies are Tier 3 lenders.
• Tier 4: investors. Tier 4 is a move outside of institutional lending and commercial credit to the world of venture capitalists, angel investors and other private investors. This level requires much more sophistication and a business that is out-performing or will out-perform its industry peers. As a general rule, these investors want businesses that have been around a couple of years and can provide detailed financials and growth strategies.

Article provide by Business Credit Services, Inc.

I hate debt. I don’t like the feeling of owing anyone money. Though I was repeatedly taught in my youth to avoid debt like the plague, I didn’t listen very well — I was nearly $1m in debt at age 25! Some things are learned the hard way. As much as I dislike debt now, not all debt is created equal: there is both good and bad debt. Most of us have too much bad debt. I think it is fair to say that we can all use a little refresher in what constitutes good debt vs. bad debt.

Good debt
Good debt is debt on assets that are earning income for you at a rate greater than the cost (interest) on the debt. Large corporations use something called the hurdle rate to determine if an investment is worthwhile. The hurdle rate is simply the cost of capital. If the hurdle rate is 15%, then only investments or purchases bringing in more than 15% would be considered “good debt.” If you are using a credit card for “good debt,” you better have a great return!

In addition to positive returns, good debt includes anything you truly need but cannot pay for in full without wiping out your cash reserves. From a cash flow perspective, however, you should only take loans for which you can afford the monthly payments. Purchasing equipment for your business would be a wonderful example of this kind of debt. Most equipment pays for itself with the revenue it produces, so structuring a lease or financing program with manageable monthly payments is a wise usage of good debt.

Bad debt
In contrast to good debt, bad debt does not create an income greater than the interest of the debt. Bad debt also includes debt you’ve taken on for things you don’t need and can’t afford. Most of these purchases don’t just fail to produce a greater return than the interest expense, they produce no return at all! Some even produce a negative cash flow. Most importantly, bad debt doesn’t help you grow your business.

Your financial success in business and life will largely be determined by your ability to discern between good and bad debt. I’ve interacted with many business owners who have problems with bad debt, but I’ve met a lot who shun all debt. Both types of business owners are going to have limitations to what they can do with their business. Embrace good debt. It will give you the leverage you need to take your business to the next level.

Article provide by Business Credit Services, Inc.

In his book, The Seven Habits of Highly Effective People, Dr. Stephen Covey recounts a conversation with a man who hated attending out-of-town training events. The man explained that his wife calls and hounds him on every detail of the day, whom he dines with, etc., and that he felt imprisoned by it. He also volunteered to Dr. Covey that he met his wife at a similar event at the same time he was married to someone else. Dr. Covey then gave one of my favorite quotes as counsel to this man: “You can’t talk your way out of a problem that you behaved yourself into.”

This truism is extremely relevant for business owners who are trying to obtain capital for their business. I’ve chatted with business owners that want a couple million dollars, unsecured with no personal guarantees, no business plan, and personal credit in the 500s. As much as I want to help these people, the most valuable thing I can say to someone like this is to GET REAL! Your personal credit demonstrates your propensity to meet your financial obligations and is an indicator of how risky it is to do business with you.

Just because you have poor personal-credit doesn’t mean that you are a bad person; there are a lot of reasons why someone’s credit may have tanked. Nonetheless, your credit score is a fact that you have to deal with. Maybe you realize that this is a negative, and you need to take action to improve it – something that you need to behave your way out of. Successfully maintaining a good business credit score can demonstrate you are a good business risk.

Banks and investors make money by making safe bets. They are not in the business of handing out money to those who simply ask for it. You need to “behave” if you want to obtain capital for your business. You do that by building good personal and business credit, establishing a positive track record as an entrepreneur and running a professional business with not just a vision, but a plan for success.

Article provide by Business Credit Services, Inc.

Asking for business capital from people you know is very different from putting in a loan application at the bank. The good news is that you already have a personal relationship, so chances are they won’t run a credit check or ask you to put up your home as collateral, and may even give you a good deal with a low interest rate. The bad news is that the whole process – from asking to repaying – can be emotionally charged and an administrative hassle.

Here are the Top 10 Tips on how to navigate these potentially rough waters to access the capital you need:

1. Look for entrepreneurs. Seek an older, wealthy individual who has been or still is an entrepreneur. Studies show that these folks are most likely to make informal loans and investments in the businesses of people they know.
2. Pay close attention to the personal relationship. Don’t ask for money from people who can’t afford to lose it — such as those on a limited, fixed income — especially if you know they’ll have a hard time saying no to you. Also, be sure you’ll both feel OK about it when you owe this person money. Trust your gut and don’t take money from someone who will be a thorn in your side.
3. Be prepared. Have a business plan ready. Grandma Rose deserves a good description of how you plan to use the money, as well as when and how you will repay her. Decide in advance of the request how much you need, what interest rate you’ll pay, and what kind of repayment plan and security you can offer.
4. Use email to introduce your business idea. Email is a great way to cast a wide net, gently and informally. Describe your concept and invite anyone interested to contact you for your business plan. Follow up with those folks, discuss your need for capital, and ask if they have any suggestions on how to raise it.
5. Ask for advice. If it’s too hard or awkward to ask for money directly, ask for advice. Explain what you’re trying to do, describe what you need and ask for suggestions on how to accomplish your goals. You’ll be surprised at how many of these conversations actually end with an offer of financial support.
6. Suggest a range, instead of a fixed amount. When you finally start talking about money, let your supporter decide the amount by providing the range needed. If you don’t feel comfortable using a range, suggest up to three options.
7. Offer a competitive return. Offer an interest rate that is better than what the person could earn in a similar-term financial investment. For example, if the return on a 5-yr CD is 4.5%, offer 7% to really grab their attention. Chances are, you would have to pay 8 or 9% to borrow from a financial institution, or more on your credit card, so it’s still a good deal for you.
8. Make the request informal. If you make the request in person, be yourself, describe your business and your passion for it, describe your fundraising effort and gauge their interest. Indicate why you thought of them in particular. But don’t confuse informal with unprepared. Show the person that you’re prepared with a business plan, and have ready the financing options you hope they’ll consider.
9. Make the agreement formal. The secret to successful private lending is to treat the agreement you reach the way you would if it were with a stranger. If it’s a gift, you only need a letter from the giver. If it’s a loan, you need a promissory note signed by the borrower and a plan for repayment. If it’s an equity investment, you need a stock purchase agreement. When you formalize the agreement, both parties feel more confident because expectations are clear and both parties’ interests protected.
10. Offer to have the loan managed by a professional. Companies like CircleLending can formalize and manage your private loan, all the way down to sending you an email to remind you that monthly electronic funds transfer from your bank account to your lender’s is about to occur. Having a third party creates a neutral buffer to handle the business of the loan, allowing you to keep it arm’s length from the personal relationship.