Funding Your Business

HOW TO PREPARE AND WHERE TO GO TO GET

THE CAPITAL YOU NEED TO BUILD YOUR

BUSINESS

Getting Prepared

Prepare monthly financial statements

Profit & Loss Statements

Balance Sheets

Cash Flow Statements

Track key measurement ratios

A/R DSO, Inventory turnover, A/P DPO

Accurate record keeping is key! If you can’t do

it yourself, get a bookkeeper

Update your business plan

Figure Out What You

Need

Use of proceeds

What do you need capital

Cover operating losses

Buy inventory

Purchase real estate or equipment

Current and projected cash flow

Are you making money or operating at a loss

How quickly will your expenditure pay for itself

What best meets your needs

Equity or Debt: Short-term, long-term or line of credit

Sources of Capital

Debt

Friends and family

Credit cards

Personal loans

Bank financing

Home equity loans

SBA loans

Online marketplace

loans

Equity

Savings, insurance

surrender value

IRA

Home equity loans

Friends and family

Government grants

Partners

Angel investors

Crowdfunding

What Traditional Lenders Look For

The Six “C”s of Credit:

Character: reputation of the borrower

Capacity: management expertise/experience

Collateral: unsecured assets sufficient to cover loan

Capital conditions: prevailing interest rates and market sentiment

Cash flow: capacity of the business to repay

Credit reports: a credit score of 700+ is desirable

Quality of personal guarantee

Minimum of two years in business unless loan is fully

collateralized

Bank Loans

Long-term loans

Virtually any (legal) financing need

Set repayment schedule, generally 1-5 years

Interest rates generally a spread over Prime rate

with current rates from 6-14%

Pre-payment penalties generally apply

Short-term loans

Good for expenditures with short-term paybacks like

inventory purchases

Term of 3-18 months

Higher APR than long-term loans

Bank Loans Continued

Equipment Financing

Loans up to 100% of equipment value

Usually fixed rate financing with fixed payments

Repayment schedule set to expected useful life of

the equipment financed

Equipment leasing may be more attractive

depending on ability to use tax benefits associated

with ownership

Pre-payment penalties generally apply

Bank Loans Continued

Line of credit financing

As needed access to a specific amount of

financing like a credit card or home equity line

Generally a lower rate than credit cards, but not as

low as a home equity line

Can be secured or unsecured depending on the

quality of the borrower

Terms of up to 5 years

Personal loans for Business

Highly dependent on credit score

Home equity loan is best (least expensive) source

Other Sources of Funds Accounts receivable factoring

Factor buys your accounts receivables

Upfront payment of 50-90% of A/R value

Remainder paid when collected minus service fee (generally 3%) and a charge related to the time the A/R is outstanding (e.g., 1% per week)

Much more expensive that bank loans – APRs as high as 100+%

Pluses – bad credit not a problem, rapid funding and minimum time in business is 6 months

Merchant cash advance

Cash advance in return for a fixed percentage of credit card receivables until repaid

Bad credit not an issue and minimum time in business is 6 months

Very quick way to get cash, but most expensive way to borrow – median APRs in mid 60% range

Average repayment in 8-9 months

SBA Programs What is an SBA Loan?

SBA loans are not made directly to borrowers by the SBA

SBA provides guarantees to banks and lenders which make loans to small business owners

These guarantees protect lenders from losses on a portion of loans which may not be repaid, reducing the risk they face when lending to small businesses

What types of loan programs are available?

7(a) loans

CAPLine loans for seasonal needs

CDC/504 loans for major fixed assets

SBA Express loans (no collateral for loans up to $25,000)

Microloans

Do you qualify as a small business?

SBA size standards by industry

7(a) Loan Program

Maximum Amount:

$5,000,000

Use of proceeds Leasehold improvements, inventory, working capital,

FF&E, real estate, debt refinance

Term: Up to 20 yrs. for real estate and up to 10 yrs. for other

uses

Interest rate: Maturity: < 7 yrs.: Prime plus 2.25%

Maturity: >/= 7yrs.: Prime plus 2.75%.

Loans between $25,000-$50,000 add 1.00%

Loans under $25,000 add 2.00%

Fees: $500-$1,000 non-refundable packaging fee

SBA guarantee fee: </= $150M: 0% of gtd. amount

>$150M </=$700M: 3%

>$700M 3.5% of gtd. amount up to $1MM;

>$1MM 3.75% of gtd. amt.

7(a) Program - Continued

Servicing fee guarantee: 0.473% of outstanding balance of guaranteed

portion of loans over $150,000. QUALIFYING

VETERAN OWNED BUSINESSES – 50% of fees

Equity: Minimum 10% of total real estate costs;

otherwise, determined on a case by case basis

Pre-pay penalty: Only on loans with terms greater than 15 years

in which case penalty of the first 3 years (5%,

3%, 1%)

Collateral: All available assets.

Special purpose 7(a) loans: International trade loan program Export

working capital trade program

7(a) CAPLines Program Maximum amount: $5,000,000

SBA Guarantees: Same as basic 7(a) loans

Use of proceeds: To meet short term and cyclical working capital needs.

Four distinct programs: Contract Loan Program

Seasonal LoC Program

Builders Line Program

Asset-based Line Program - Small Asset- based Line Program (up to $200,000)

Term: Up to 5 years for revolvers and term loans

Interest rates: Same as 7(a) loans

Fees: Same as 7(a)

Equity: Depends on lender and circumstances

Pre-pay penalty: N/A

Collateral: Financed assets

SBA Express Loans Maximum amount: $350,000

Use of proceeds: Real estate purchase, refinance and construction, business

expansion, acquisition, M&E, franchise

Fees: SBA Guarantee fee of 0% for loans </= $150,000 3% for loans

between $150,000 and $350,000.

QUALIFYING VETERAN

OWNED BUSINESSES

Guarantee fee is currently waived on loans up to $350,000

Term: Up to seven years with maturity extensions permitted

SBA turnaround time: 36 hours

Interest rate: Negotiated between borrower and lender with maximum caps

set by SBA (P+6.5% for loans </= $50,000; P+4.5% for loans >

$50,000

Equity: Minimum of 10%

Pre-pay penalty: N/A

Collateral: May not be required for loans up to $25,000; above $25,000 as

required by lender (LTV up to 100% on equipment and 85% of

business acquisitions

SBA 504 Program Maximum amount: $5,500,000

SBA guarantee: SBA guarantees 100% of Certified Development

Company’s (CDC) 2nd lien loan

Use of proceeds: Real Estate, LT fixed assets, M&E and certain soft costs

(inc. interim loan interest)

Fees: Approximately 3% of debenture

Term: Up to 20 yrs. for real estate, 10 yrs. for equipment; fully

amortizing

Interest rate: Fixed at the time of closing based on a spread over

Treasuries (yearend 2015 rate quoted was 4.778%)

Equity: Minimum 10%, plus 5% for single use buildings and 5%

for businesses < 2 yrs. old

Prepay Penalty: Yes, for the first half of loan term

Collateral: 2nd lien on asset being financed, collateral assignment

of insurance and additional assets at CDC/SBA discretion

USDA Business & Industry Loans

Purpose: USDA program creates and maintains employment in rural communities to improve the local economic environment

Maximum amount: $25,000,000 if rural area with less than 50,000 population

USDA guarantee: 80% up to $5MM; 70% between $5mm and $10MM and 60% over $10MM.

Use of proceeds: Working capital, M&E, building and real estate and certain types of debt refinancing but no lines of credit or funding of golf courses, racetracks, churches, financial services and agricultural production,

Fee: Initial fee of 3% of guaranteed amount; annual renewal fee currently 0.5% of outstanding principal; and reasonable and customary fees negotiated between the borrower and lender

USDA B&I Loans - Continued

Term: Up to 30 years for real estate; machinery

and equipment up to 15 years; and up to

seven years for working capital Loans must

be fully amortized – though reduced

payments are possible for the first three

years.

Interest rates: Negotiated between lender and borrower.

Rates may be fixed or variable.

Equity: Minimum of 10% for existing business and

20% for new business.

Prepay penalty: Negotiated between borrower and lender

Collateral: Must have a documented value sufficient

to cover the loan on a discounted

collateral value. Personal and corporate

guarantees generally required.

Micro Loan Program

Maximum amount: Up to $50,000

SBA guarantee: SBA provides funds to non-profit intermediaries who make the loans

Special programs: Veterans, people with disabilities, Native American, minority, and women owned businesses

Use of proceeds: FF&E, working capital, supplies, no real estate

Fee: No guarantee fee; other fees established by lender

Term: Up to 6 yrs.

Interest rate: 8.99% and up

Equity: Up to lender

Prepay penalty: None

Collateral: Determined by the intermediary

Special qualifications: Include credit score above 575, no bankruptcies in the last 12 months, no late payments on rent/mortgage in the last 12 months. Borrower must certify to intermediary that he has attempted to acquire credit from private sources before applying for a microloan

SBA’s 8(a) Business Development Program

The 8(a)program helps small disadvantaged businesses win sole-source government contracts

23% of gov’t contract $s are set aside for small businesses

Contracts limited to $4MM for goods and services and $6.5MM for manufacturing

Eligibility requirements

Business must be 51%owned by a US citizen(s) who are socially and economically disadvantaged

Owners must be of good character and the business must demonstrate potential for success

Social disadvantage: most minority groups

Economic disadvantage determined case by case upon review of the individual’s and business’s financial status

Mentor-Protégé Program

Eligible businesses (protégés) get paired up with successful businesses (mentors) to enhance the capabilities of the protégés improving their chances for success

The 8(a) program requires a 9 year commitment

Is the 8(a) Program right for my firm? Setting expectations video or address any questions to 8aquestions@sba.gov

Select SBA Lenders

Bank of America 888-287-4637 7(a), 504 and SBA Express loans

BB&T 800-758-0038 7(a), 504 and SBA Express loans

BDC of SC Peter Shand 803-744-0305 7(a) and 504 Loans

Celtic Bank Terry Crispin 850-236-5168 7(a) and 504 Loans; other types

CSRA Business Lending Diane Masters 706-210-2011 504 Loans

First Citizens Bank Jason Rabun 803-502-5641 7(a), 504 and SBA Express loans

Georgia Bank & Trust Rob Bissell 706-481-1650 7(a) and 504 Loans

Regions Bank 803-642-1409 7(a), 504 and SBA Express loans

Security Federal Bank Josh Booth 803-644-2688 7(a) and 504 Loans

Southern Bank & Trust Susan Yarborough 803-648-2004 7(a) and 504 Loans

State Bank & Trust Darrell Byrd 706-951-5414

TD Bank, N. A. Molly Jones 803-251-1972 7(a), 504 and SBA Express loans

United Community Bank Mike Sandusky 803-461-3807 7(a) and 504 Loans

Wells Fargo Bank 803-642-6600 7(a) and 504 Loans

Other Lenders/Lending Platforms

USDA B&I Lenders:

Celtic Bank Terry Crispin 850-236-5168

Security Federal Bank Josh Booth 803-644-2688

TD Bank, N. A. Molly Jones 803-251-1972

United Community Bank Mike Sandusky 803-461-3807

MicroLoan Lenders:

Accion USA Andrea Lerace 212-387-0377 (SC)

ACE Loans Vonda Echols 678-335-5600 x 123 (GA)

Online Marketplace Platforms

Biz2Credit

Fundera

Lendio

Sources of Equity Capital

Traditional sources of third party equity

Family and Friends

Government and Institutional Grants

Angel Investors

Non-traditional sources

Crowd funding

Angel Investors Organized angel investing is a reasonably recent

phenomenon which grew out of a financing gap created by the increasing size of venture capital funds

In the 1960s and 1970s venture funds tended to be small with total capital of $10-$75MM. As such, VCs generally made investments of $250m - $5MM

In the 1990s and the 2000s venture firms grew rapidly, fueled by relaxed ERISA regulations and Internet boom returns

Today, venture capital firms control as much as $10s of billions of institutional funds, resulting in the need to invest much larger sums in early stage companies - the largest venture funds have investment minimums of $10s of million

The resulting gap between friends and family investments of $10M - $150M and multiple millions has spawned an investor class of approximately 370 organized groups in the continental US

What Angels in the SE Look for

Investment size: $200M - $2MM

Equity ownership: 20%-40%

Desired traits: Capital efficient, scalable concepts with intellectual property protection, e.g., technology companies. Market tested companies with initial sales traction

Security: Convertible Preferred Stock providing preferential standing on major business issues

Governance: Board seat(s)

Desired returns: 50% plus on any one investment, and portfolio returns of mid-20%

Investor style: Active – the right angel investors can add tremendous value to company management with industry specific expertise and contacts

Providers of Angel Funding

CSR Angels, LLC Peter Buckley 203-807-3663

CSR Angels is part of the South Carolina Angel Network (SCAN) with 8 affiliate groups across SC and in Asheville, NC with total membership of over 220 accredited investors

As of the end of 2015 SCAN has invested in 45 companies in the Southeast

AngelList Funding application online

Founded in 2010, AngelList provides entrepreneurs with access to investor syndicates online

According to Wikipedia, its syndicates have invested over $100mm in US startups as of the end of 2014

Atlanta Technology Angels Funding application online

ATA operates in a similar fashion to CSR Angels where a professional staff assists its accredited investor members with evaluating early stage companies in the Southeast with particular emphasis on GA-based companies

Crowdfunding What is it?

As the name suggests, crowdfunding involves getting a large number of investors to back a cause or company, a task made easier by the Internet

When did it start?

While the first instance of crowdfunding happened in 1997, when Marillion, a British rock group designed a website to raise money for its US tour (Wikipedia), crowdfunding as a viable alternative source of funding came into its own in the late 2000s

How big is crowdfunding?

According to Crowdsourcing.org the industry grew from $6.1B in 2013 to $16.1B in 2014 and was expected to reach $34.4B in 2015.

Major types of crowdfunding

Rewards or donations-based programs

Generally, arts, civic and charities focused sites like Indiegogo and GoFundMe

Debt-based programs

Borrowers borrow capital on a personal or corporate basis on terms which are generally looser than those of traditional lenders, but at higher rates.

Major players in this market include LendingClub, Prosper and Kabbage, among others

Equity-based programs

Funding startups and other business ventures though platforms such as, EquityNet, Crowdfunder and SeedInvest

Passage of Title III of the JOBS (Jumpstart Our Business Startups) Act at the end of 2015 is expected to lead to explosive growth in the category as “non-accredited” investors are allowed to invest in private transactions.

Juniper research suggests equity crowdfunding will grow from $1.1B in 2015 to $8.2B in 2016

Donation/Rewards-based Crowdfunding

Indiegogo

Founded in 2008, Indiegogo operates a rewards-based platform which allows people to raise money for ideas, charities and businesses

Funding of projects must be approved and there is a strong preference for arts and new product ideas

Examples: “Let’s Give Karen – the bus monitor – H. Klein a Vacation!” raised $703,833, “Restore (Martin Luther) King Chapel Now” – raised over $5MM from 282 backers and Sondoes Elictri Bike raised over $6MM from almost 16m backers

Indiegogo charges a 5% platform fee and 3-5% on PayPal transactions

GoFund Me

Launched in 2010, GoFund Me is one of the largest donations-based crowdfunding platforms, raising over $444MM in 2014

Top 5 areas for funding are medical, educational, volunteerism, personal emergencies and sports teams; however, there is a category for business as well. It appears that funds can be raised for anything that captures the imagination of the donors

Most fundraising goals are less than $25m

GoFund Me also charges a 5% fee on funds raised and a processing fee of approx. 3%

Select Debt Platforms

OnDeck

OnDeck began operations in 2007 and has delivered more than $3B in business loans to over 700 industries

Prosper

Founded in 2005, Prosper.com has funded over $5B in personal loans

Prosper is the largest peer to peer (P2P) lender, matching individual and institutional investors with borrowers

Kabbage

Kabbage, founded in 2009, has delivered more than $1B in loans to small businesses, using equity and debt capital raised from institutions

For those interested in learning more about Peer-to-Peer lending see SBA Office of Advocacy Issue Brief Number 10

OnDeck Lending Profile

Products: Short-term loans, long-term loans, lines of credit

Maximum amount: $250,000, $500,000, $100,000

Use of proceeds: Working capital, M&E, building and certain types of debt refinancing

Fee: Initial fee of 2.5% of the loan amount

Term: From 3 months to 36 months.

Interest rates: Negotiated between lender and borrower. Stated fixed rates between 6% and 36%. APR from 9% to 98% according to a recent regulatory filing

Qualifications: For Short- and Long-term loans; 1+ year in business, revenue of over $100,000 and a personal credit score of 500+; for line of credit 1+ years in business; revenue over $200,000 and a credit score of 600+

Process: Application takes as little as 10 minutes and funding can happen in 24 hrs

Equity: N/A

Prepay penalty: None

Collateral: Blanket lien on business and personal guarantee

Fees: Initial fee of 2.5% of the loan amount and a maintenance fee of $20 per month

Repayment: Fixed daily or weekly payments drawn directly from checking account

Prosper Lending Profile

Products: Long-term personal loans

Maximum amount: $35,000

Use of proceeds: Debt consolidation, medical expenses, vacation, special occasions and small business loans

Fee: Closing fee of 0.50% to 4.95%

Term: three or five years

Interest rates: Based on Prosper credit rating APR from 5.99% to 36.99% - Average 2015 rate 13.3%

Qualifications: Proprietary Prosper credit scoring, but lowest FICO score is 640

Process: Application takes as little as 10 minutes and funding within 14 days (generally 3-5 days). If less than 70% of the loan is spoken for the loan has failed

Equity: N/A

Prepay penalty: None

Collateral: No collateral

Fees: Initial fee of 2.5% of the loan amount and a maintenance fee of $20 per month

Repayment: Fixed monthly payments drawn directly from checking account.

Kabbage Lending Profile Products: Permanent Line of credit

Loan amount: $2,000 to $100,000

Use of proceeds: Inventory, equipment purchase, expansion, etc.

Fee: Initial fee of 2.5% of the loan amount

Term: Six or 12 months.

Interest rates: Negotiated between lender and borrower. APR from 5.99% to 36.99% according to a recent regulatory filing. Nerdwallet says APRs range from 20% - 113%

Qualifications: FICO score of at least 660

Process: Application takes as little as 10 minutes and funding can happen in 24 hrs

Equity: N/A

Prepay penalty: None

Collateral: Blanket lien on business and personal guarantee

Fees: Initial fee of 2.5% of the loan amount and a maintenance fee of $20 per month

Repayment: Fixed daily or weekly payments drawn directly from your checking account.

SeedInvest Profile

National online equity crowdfunding platform founded in 2012 which provides investment opportunities to accredited and non-accredited investors following the passage of the JOBS Act which became effective at the end of 2015

Seedinvest employs a strict vetting process, granting access to their platform to only 1% of applicants – companies must demonstrate “proof of concept”with a maximum allowable of $5MM

This is an “all or nothing” platform which charges 7.5% of funds raised in addition to as much as $5,000 in deal expenses

Crowdfunder Profile

Los Angeles-based platform founded in 2011 that has funded 58 companies with an average of $1.8MM

The company charges a one-time fee of $399, as well as premium plans, Gold and Platinum at a monthly cost of $299 and $999, respectively

The Gold Plan allows for a maximum raise of $500M; the Platinum Plan allows for unlimited raises

Platform is a take all model and campaigns run for 60-90 days with the ability to extend the end date.

EquityNet Profile

Founded in 2005 and based in Fayetteville, AR, EquityNet claims that o over100,000 registered investors, entrepreneurs, and government entities and has raised over $240MM ($115MM in the last 12 months) in capital for its clients

The platform is a take all model, meaning you do not have to raise 100% of your goal to receive contributed funds

EquityNet does not facilitate transactions

Instead of charging a % of funds raised, EquityNet charges a monthly subscription fee starting at $199 per month for its

premium Enterprise Analyzertm business plan software (there is a free basic version)

Conclusion

There are many sources of financing available to

the well-prepared and tenacious entrepreneur

The Internet has made things easier, but watch

out for scams - the seeker of funds, or anyone for

that matter, is well served by applying common

sense and discretion when searching the web for

opportunities

Remember: if you get stuck, SCORE’s mentors

stand ready to help

Good Luck!