By Maria Coyne
Susan owns a successful independent bookshop in an upscale suburb. She has built a loyal clientele that thirsts for both best sellers and the classics. She has excellent cash flow, a solid business plan, and several trusted employees.
But, she isn’t totally content. She wants to expand her “empire,” but she isn’t well versed on how to finance an expansion. Whom should she trust for advice? Should she borrow money? If so, where should she look?
Maybe you know someone like Susan, or maybe you are Susan — or will be in a few years. Funding resources abound for women business owners looking to expand their operations. It’s just a matter of looking in the right direction and asking the right questions.
Your first question might be, what exactly do I want to do with this business?
Determine the Scope of Your Expansion
Your first step is to determine what “expand” means to you.
It’s best to begin by examining your plan and bouncing ideas off your trusted advisors, people like your partner, investor, banker, or accountant. You might even want to think about forming and using a formal or informal board of advisors.
Research demonstrates that the use of a board is a common characteristic in women-owned firms that have grown to generate $1 million or more in sales. In Susan’s case, she and her advisors will explore the best ways to expand intelligently; they will consider the investment and its expected risks and potential returns.
Should she add a coffee shop? Should she rent the retail space that has just become available next door and expand her shelf space? Should she start selling nationally and/or internationally on the Internet? Should she really dream big and think about opening additional locations?
After carefully considering each potential scenario and determining which has the greatest chance for success, you then will need to consider how you will finance your project.
To start, think back to how you got started. Did you have family and/or friends who invested in your business? Are those same people willing and able to continue their support? Is now the time to take on a partner or investor?
You might consider engaging outside investors, such as a business partner who will become a part owner. Although you would not be the sole owner in this case, such a move could help provide financial stability. In addition to financial support, a business partner may bring particular strengths or skills, or worthwhile personal connections that could help you grow your business. If you do not want a partner to have such an active role in the business, you may be able to find someone who is willing to co-sign a business loan without business ownership.
Improve Your Cash Flow
After assessing the amount of expansion capital you can contribute, combined with any help that family and friends might be able to offer, you may find that you still don’t have quite enough funding to grow your business as planned. If that’s the case, think about ways to better manage cash flow so you can reach your goals faster. Among your options are:
- bootstrapping;
- establishing better terms (slower) with your vendors and suppliers;
- establishing better terms (faster) with the people paying you; and
- leasing, rather than buying, any new equipment you might need. (This can help preserve cash and there may even be associated tax benefits.)
The Business of Borrowing
Many small businesses use personal financing sources to start their businesses. Options such as credit cards or home equity loans may help you get off the ground, but the objective should be to switch that debt into the business’ name as soon as possible to help establish the creditworthiness of your business.
It’s always a good idea to keep your personal and business accounts separate and to keep good records of your business expenses. Once you have a couple of years of business experience and financial statements, you should definitely consider bank business financing options. Work closely with your banker to determine the best solution for you; some of the options you may consider might include government-guaranteed or conventional loans and lines of credit.
The most well known government-guaranteed loan programs are those offered by the U.S. Small Business Administration (SBA). These programs tend to be an excellent fit for growing companies, which might have less collateral to offer to secure the loan or might like to make a lower down payment in order to secure cash.
The SBA provides funding to qualifying businesses — including small family-owned firms — that otherwise might not be able to access the financial resources they need to grow and prosper. The SBA guarantees major portions of its loans, thereby reducing risk to banks that are its lending partners.
Designed to meet the specific needs of business owners, the SBA’s loan programs — 7(a), 504, and Express — offer features that are attractive to many growing businesses, including longer terms and lower down payments than conventional business loans. Also, flexible repayment options are available, including monthly installments of principal and interest. There is no balloon payment or large principal balance to pay at the end of a series of smaller payments, and with prior arrangement, borrowers may pay interest only for up to six months. Further, the SBA guarantee fee may be financed, and there are no points.
For more information and to find out if you might qualify for an SBA loan, you can contact your local SBA district office directly, or call an SBA preferred lender. (Visit http://sba.gov for details.)
Banks do offer “conventional” commercial loans and lines of credit. There are manypossible financing scenarios that use conventional products, and it is best to work with a banker who understands your business, as well as your plans and goals for success.
High-Growth/High-End Options
If your company is experiencing very rapid growth, you have some additional investor options.
One of these outside investment resources is an angel investor. Typically, an angel is a high-net-worth individual, or someone who has teamed with a small group of investors, and is interested in investing in a company with high growth potential. An angel can provide valuable advice and input based on personal experience, but an angel also will demand sufficient information about your business, your management team, and your market. The angels will be looking for an average return on equity of 10 percent to 15 percent above the S&P 500 before committing to any investment. They can be elusive and difficult to locate.
Venture capital firms, on the other hand, are focused on high-risk and high-growth companies and most often are seeking to invest at least $1 million. They may be willing to invest a smaller amount if you have a particularly promising business plan. These firms are expecting that the business will be sold or taken public within three to seven years, thereby providing a significant and speedy return on their investment. In return for their substantial infusion of capital, they will most likely want a large portion of the company’s equity and a position on your board of directors.
There is no silver bullet for taking your business to the next level.
As you seek funding to grow, you might be able to use resources from family or friends, or even your own assets. Other options include an SBA or conventional commercial loan or line of credit, a business partner, or an outside investor.
As you weigh the risks and benefits of each of these options and determine what makes the most sense for your individual business case, remember to enlist your financial advisors to help you understand your options. Whether you have a bookshop, a machine tool shop, or a building and construction company, finding funding sources can be manageable and shouldn’t take too much time away from running your business.
Maria Coyne is national executive for Key4Women (www.keybank.com/html/I-5.html) and spearheads KeyBank’s women-owned business program. Coyne, who also leads Key’s SBA program, manages Key’s strategy to deliver its full array of financial products, services and networks to women-owned clients and prospects. She can be reached via e-mail at Maria_Coyne@keybank.com.
So, You Want to Apply for a Loan?
Power Answers to the 5 Toughest Questions Your Banker Will Ask
By Maria Coyne
One of the biggest challenges small business owners face is financing an expansion. Traditional sources of capital, such as personal resources or funds raised from family and friends, often aren’t enough, and you may need to approach a bank for a loan. When that time comes, an understanding of what the bank will want and need to see is crucial. Let’s take a look at some of the questions banks tend to ask and how to answer them.
Do you have a five-year business plan?
For your own sake, and for the bank’s sake, your answer should be “yes.” Banks will want to see your plan to ensure that you’ve thought through the potential risks and opportunities ahead. It should include sales forecasts, repayment ability, and cash flow projections. If you’ve been in business for a while, they’re going to want to see a history of your performance. Not only can a detailed business plan help you organize your business, understand your competition, and focus your efforts on appropriate markets, it also can mean the difference between being accepted for a loan and being rejected.
What steps do you need to take to achieve your five-year business plan?
When applying for a loan, you should be prepared to explain how the capital you’re seeking will impact your business. Will it boost sales? Will it help you expand to new markets? Will it help you modernize facilities or technology that will make you more competitive? If you’re going to use it to hire more employees, how much will your sales need to increase to justify the new employees’ salaries? Show cause and effect as much as you can.
How do (or will) you stack up against your competitors?
You must demonstrate to a bank that you understand your industry and competition, as well as the overall market size and trends within it. You should be able to profile competitors and the marketplace to show that you understand who else is selling similar products and services and where the holes are in their approach that will allow you to make inroads. This will give the bank a feel for whether there is room for another player in your market and whether your strategy fills a niche.
What makes you distinctive in the marketplace?
Here, th e bank is asking you to provide a product analysis that details how your product or service differs from what is already in the marketplace. You should describe specifically the resources, raw materials, and skills you will need to deliver your product or service. You also should describe the types of facilities you’ll need, their locations, and their operating costs, as well as the rationale for your choices. Explain in detail your strategy for gaining profitable market share, including how you will price, sell, distribute, and promote your product or service. Provide a detailed month-by-month sales forecast for the first year and a more general projection for the next two to three years.
Can you describe the depth of your management team, as well as your management succession plan?
It’s important to show that you have access to a group of advisors, such as business and financial experts, who offer you sound advice when you need it. The ability to tap into these resources may be critical to the success of a small business. Do the advisors to whom you regularly turn (e.g., your banker, CPA, and attorney) provide you with the information or networking opportunities you need? If you answer “no,” you are not taking full advantage of the resources available to you. Advisors are an integral part of your business when something happens unexpectedly. The bank also will be interested in their backgrounds and in your management team and staffing plans.
In summary, remember when you apply for a business loan that the spotlight is on. Whether you shine or crack under the scrutiny will depend upon how well prepared you are.
Your banker is making a long-term investment in you, and it’s important to present a convincing case that you are prepared to make your business work. If you convince your banker of that, you’re likely to be on your way to owning, running and growing your own business.
(This article is reprinted from the Spring 2005 edition of Enterprising Women magazine. Copyright 2005 Enterprising Women Inc. Reproduction in whole or part is prohibited, except by express permission of the publisher.)
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