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Business 101

Assessing Financial Needs

By: ERINN MORGAN
Eyecare Business February 1, 2008
business 101

Assessing Financial Needs

by Erinn Morgan

The key to the success of any small business lies in its owner's ability to obtain and secure small business financing. Service-oriented categories like optical often choose a financing combination of credit cards and a bank line of credit, but there are many other types of financing available as well.

Following are six options.

FUNDING FORMULA
Owners often ask for too much or too little capital. To make sure you do neither, apply the following formula to your business.
  • Determine your projected sales over the next year.
  • If you're a new business, determine your startup costs—that is, one-time costs for expenses like beginning inventory and supplies; advertising and promotion; permits, licenses and related fees
  • Add in your company's recurring costs, like rent, utilities, and wages.
Then, do the math: By subtracting your startup and recurring costs from your projected sales, you'll be able to determine if your firm will be operating at a profit or loss, then calculate exactly how much money you'll need to reach your financial goals.

YOUR SAVINGS/CREDIT CARDS

1 Banks, lenders, and investors like to see small business owners who are willing to put up money for their own ventures, so the first step on the road to financing should be your own pocket.

Whether it's from personal savings, credit cards, or a second mortgage on a primary home, entrepreneurs often look to their own resources for money before asking others for help.

DOCUMENTS
You'll Need to Share
Banks and investors will, most likely, want to see the following:
Balance sheets
Cash flow statements
Income statements
Detailed projections of your company's financial activity

FRIENDS AND FAMILY:

2 The next step on the financial trail will be your circle of friends, family, and colleagues, many of whom may be willing to chip in to help get you off the ground or assist with its expansion.

Be sure to document the deal and include a feasible payback date in either a lump sum or payments over a predetermined time.

BANK LOANS OR LINES OF CREDIT

3 Traditional lending institutions will assess you for a loan using the "4C" system. The 4 Cs are Capacity, Collateral, Credit, and Character. Consider each of the following prior to approaching a lending institution.

Partners and Investors WORKSHEET
Self-Test: are you ready to take the plunge? Answer the following questions (yes or no) to help you determine if your company is partner- or investor-friendly. While this is not an exhaustive evaluation, it will help you to start thinking along the right lines. If you think of any other criteria that are unique to your business, write them down on a separate piece of paper as you go along.
  1. Do you currently have other family members, partners, or investors involved in your business?
  2. If so, would you characterize the relationship(s) as mostly agreeable or mostly volatile?
  3. Have you ever felt that key employees ask too many questions about how you run your business? If so, does it make you uncomfortable?
  4. Are you open to suggestions from others, including people you may not like?
  5. Have you ever granted your key employees stock in your company as a bonus or a gift?
  6. Do you employ an independent certified public accounting firm to audit your company's books and produce an audited financial statement? If not, would you feel comfortable doing so?
  7. Have you ever ignored the advice of your lawyer or accountant, whether the result was a success or failure?
  8. If you run several related businesses, is each one kept separate, with no comingled funds or other blurring of the lines between them?
If you find a common theme in your answers revealing that you are open to outsider input, your business may be receptive to partners and investors. On the flip side, if your answers show an aversion to outsider interference, you may want to think twice about pursuing partners or investors for your business. It may be wise for you to consider some alternative growth-financing options.
  • Capacity refers to your ability to make repayments on your debt, and is a function of your earnings and cash flow.
  • Collateral refers to assets the bank can take if you default on the loan.
  • Credit is all about your credit history—the better it is, the better your chances are of getting a loan.
  • Character counts as banks are a good bet for businesses that either have a long-standing relationship with a banker in the community or have been in business for two years or more.

SMALL BUSINESS ADMINISTRATION

4 The SBA is an independent agency of the federal government that aids, counsels, assists, and protect the interests of small businesses. It also provides loans to small businesses using less exacting criteria than commercial lenders.

Programs include the LowDoc for loans up to $150,000 and the Microloan, which covers amounts ranging from $100 to $25,000.

The SBA is best known for its 7 (a) Loan Guarantee Program, under which the association guarantees most of the loan. This helps businesspeople that have inadequate collateral and helps to extend the repayment term and covers amounts that range up to $2 million.

ANGEL INVESTORS

5 Angel investors are private investors who will fund growing companies in exchange for a healthy share of the profits.

Angels are normally successful businesspeople. Their benefit to a company is twofold. Not only can they provide you with a capital infusion, but they often are a source of seasoned business advice as well.

VENTURE CAPITALISTS

6 These firms help expanding companies grow in exchange for equity or partial ownership. However, they will usually not consider financing of under $5 million. EB

Information courtesy of the Small Business Administration.

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