Larkin - Small Business Funding Sources

7/21/2019 Larkin - Small Business Funding Sources

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Small Business Funding Sourcesby Dr. Dick Larkin, Certified SCORE Business Mentor Rev. November 3, 2014

Disclaimer

This document is based upon personal experiences and academic research of theauthor. It is provided in an effort to help people become better prepared to manage their

own future as they develop their business plan and begin searching for startup capital.

The writing is not intended to infringe or authorize any infringement of copyright or anyother legal right. Any perceived infringement is purely accidental and, if reported to theauthor, will be quickly corrected.

The author prepared this document as a volunteer SCORE1 Counselor/Mentor workingwith the U.S. Small Business Administration. The writing is therefore included under theFederal Tort Claims Act.

Note

This document is an ongoing project. It summarizes information gathered by the authoras he continues to work with SCORE clients to find funding sources to support theirbusiness plans. It will continue to be modified and, hopefully improved, while hecontinues his research.

If you want the latest version of this document, you can request a copy by contactingthe author at [email protected]. Or, visit KitsapSCORE.org/small-business-funding-sources

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1 SCORE: Service Corps of Retired Executives

http://kitsapscore.org/small-business-funding-sources





mailto:[email protected]

mailto:[email protected]



Definition of a Small Business

A company requesting SCORE Counseling/Mentoring or help with a Small BusinessGrant or Loan must fit within the U.S. Small Business Administration (SBA) definition ofa “small business.”

The SBA defines a small business as one that is independently owned and operated, isorganized for profit, and is not dominant in its field. In addition, a “small business”requesting SCORE or financial SBA support must fall within the following criteriaexamples, dependent upon the industry:

Industry Maximum employees Note

Manufacturing 500 to 1500 depending upon the productmanufactured

Wholesaling 100 to 500 depending upon the productbeing provided

Industry Maximum annual sales Note

Services $2.5 to $21.5 million depending upon servicebeing provided

Retailing $5 to $21 million depending upon productbeing provided

General, Heavy Construction $13.5 to $17 million depending on type ofconstruction

Special Trade Construction $7 million

Agriculture $0.5 to $9 million depending on the agriculturalproduct

Typical Uses for Small Business Loans

Provided by Community Capital Development:

• Equipment, furniture, and inventory

• Manufacturing or Technology-based production needs

• Working capital – Needed for business operations

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• Commercial or mixed-uses real estate -- to purchase, renovate, refinance, or forreal estate projects

• Franchises – for start-up or purchase of an existing franchise

• Contract financing – to contract for goods or services (for payroll or to purchaseequipment or supplies to complete or partially complete a contract)

• Construction or contractor receivables – provide accounts receivable financingfor businesses that have contracts as prime or sub-prime contractors with publicsector agencies

• Cash flow restructuring – to help restructure debt to a manageable level forexisting businesses

Small Business Administration (SBA) Loan Guarantee Programs

General Overview

The SBA does NOT provide free money, government grants, or no-interest loans. TheSBA does not even lend funds directly to business owners. All SBA financial aid isbased upon a relationship between the business owner and a loan officer at a bank,credit union, or nonprofit financial intermediary. The SBA guarantees repayment of aportion of an SBA loan to an approved creditor in the event of default.

After a business has developed a relationship with an SBA approved loan officer, thereare several avenues to help provide capital sources to start or expand a small business.

Note: SCORE Counselors/Mentors can provide the name of an SBA approvedLoan Officer in your area.

Loan Program Comparison

SBA loans are provided to for-profit companies with a good credit rating.

Program 7(a) loans 504 loans

Maximum $5 million $5.5 million

% of Guarantee by the SBA 85% to $150,00075% over $150,000

40%

Required use of proceeds Expansion, renovation, newconstruction, purchase landor buildings, purchase equip.,fixtures, working capital.

Long-term fixed-asset loans

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Program 7(a) loans 504 loans

Required to qualify Must be a for profit business& meet SBA size standards;borrower must show goodcharacter, good credit

management, and ability torepay. Heavy emphasis oncredit history.

For-profit businesses that donot exceed $15 million intangible net worth.

Note: 504 loans are provided through Certified Development Companies (CDC)which are licensed by the SBA.

Community Advantage (Sometimes referred to as Micro-Loans)

Loans and grants available through a “certified community development financialinstitution.” They provide access to capital and business assistance to low-income,women and minority entrepreneurs and small businesses in distressed and underserved

communities.

Their loans which are guaranteed by the SBA, are controlled by strict community-basedcriteria and require attendance in training sessions to develop a business plan. Theirloans typically range from $5,000 to $100,000, while their SBA guaranteed loans can beup to $250.000.

A micro-loan source for the SBA and the Kitsap SCORE branch office is:

Community Capital Development1437 S. Jackson StreetSeattle, WA 98144(206) 324-4330 – Ask for Christopher [email protected]

Note: It is advantageous to have worked with a SCORE counselor beforecontacting Christopher. He expects a business owner to have a Business Plan

prepared in advance that will not require a great deal of modification to support a

loan request.

Like SCORE, CCD is affiliated with the SBA. Their mission is to provide micro loans andgrants to individuals trying to develop a new business, or expand an existing smallbusiness.

They are prepared to support the needs of individuals with a “less than perfect” credithistory.

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They work with clients on a one-on-one basis, using two phases to their process.

Phase one The client works with a CCD business consultant to “perfect” theirbusiness plan in order to make it functionally ready to submit for afinancial loan or grant.

Phase two The client works directly with a CCD loan advisor to determine theirfinancing options. The loan advisor works with them throughout theloan or grant process.

Paperwork requirements needed to work with CCS:

• Start-up business – needs a completed Business Plan

• Existing business - needs a complete Marketing Plan

Counties served by CCD (Identified as distressed and/or underserved communities):

Adams, Chelan, Douglas, Ferry, Grant, Island, King, Kitsap, Kittitas, Klickitat,Lewis, Lincoln, Okanogan, Pend Oreille, Pierce, San Juan, Skagit, Snohomish,Stevens, Thurston, Whatcom, and Yakima.

Target niche for CCD:

• Start up business (0-6 months)

• Business under 2 years in operation, not yet bankable

• Established businesses, in operation greater than 2 years, but facing newchallenges

Investment criteria used by CCD

The Five C’s of financing:

Character Owner’s business character as reflected on a personal credit report

Capacity Owner’s ability to be successful with the business. Proven bypristine business plan, thought-out business model, experience inthe industry, and solid financial statements

Capital The owner’s contribution of at least 20% of the requested financingamount

Collateral Acceptable collateral to back the loan in case of default

Cash flow The businesses ability to pay its owner, employees, and service thedebt while leaving sufficient operating cash

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Loan application checklist (material required for loan processing):

1. Completed and signed Loan Application

a. Loan need

Explain why you need the loan – be as specific as possible. Include the

amount of cash you need to cover 3-6 months of operating expenses; an

itemized list of starting inventory (with cost), including furniture, fixtures,

equipment, advertising, and marketing materials.

Note: it may be helpful to include pictures.

b. Collateral

List all personal and business assets that are available to secure your loan

request. Include all business assets at cost and personal assets at market

value. If real estate will be used as collateral, include the latest appraisedvalue.

2. Completed business plan (for a start-up) or Marketing plan (for an existing

business).

3. Projected financial statements

a. Cash flow: Month-by-month projections for 12 months of operation

b. Balance sheet: Include a current and/or start-up balance sheet which

includes the use of the loan proceeds and the loan amount.

c. Income statement: A 12 month statement which reflects the months

addressed in the cash flow projection.

d. Key assumptions: A complete description of any issues that affect the

financial projections.

4. Business financial statements: If available, provide at least 3 years of fiscal

statements including a balance sheet, income statement, and the most current

interim statements (must be within 45-60 days of date of application). All

documents MUST be signed and dated.

5. Business Tax Returns: If available, provide for the past 3 years.

6. Completed and signed Personal Financial Statement (for each person with 20%

or more ownership in the business).

7. Personal Tax Returns: Provide 3 years of complete personal tax returns for each

person with 20% or more ownership, signed and dated, including all supporting

schedules.

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8. Resume: Describe your ability as the loan applicant to successfully operate your

business, include a description of business skills acquired from previous work

experience, training and education for each person owning 20% or more of your

business.

9. Licenses: Provide a copy of your state and city business licenses, if in business,and copies of professional licenses. Include a copy of your unsigned lease

agreement if appropriate.

10.Corporate, partnership, or LLC operating agreements.

11.Additional information may be required.

Government Grants

Definition:

An award of financial assistance in the form of money by the federal government

to an eligible grantee with no expectation that the funds will be paid back.

The term does not include technical assistance which provides services instead

of money, or other assistance in the form of revenue sharing, loans, loan

guarantees, interest subsidies, insurance, or direct appropriations

The Small Business Innovation Research (SBIR) office is a government agency that

gives grants. The SBIR specializes in small businesses looking for funding for high-risktechnologies.

The catch: The technology must meet the research and development needs of

the federal government.

Founded in 1982, the SBIR recently awarded $1.5 billion to startups, with grants

going to software, biotechnology, health-care and defense companies. So if

you're planning on opening a pizzeria, you might have trouble with this one.

But there are federal grants awarded to food and nutrition companies. For instance, a

pizzeria that caters to children and specializes in serving nutritious, healthy pizzas maybe able to win a grant. You can also check with your state or local government to see

what's available--start with your local or state chamber of commerce.

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Crowdfunding

Definition:

The act of fundraising by using the Internet or a similar network to solicit funds

from a large pool of potential donors.

The author has done extensive research into the use of crowdfunding to finance a small

business. This document only mentions crowdfunding as an option to consider, but

WITH CAUTION. The author suggests NOT getting involved with crowdfunding without

the support of legal experts and financial consultants to develop a thorough

understanding of what crowdfunding is and how it works. The primary area of concern

for a small business using crowdfunding relates to very strict rules which are enforced

by the Securities and Exchange Commission.

Bibliography

Community Capital Development Website

Entrepreneur Magazine Website

SBA.gov Web Site

SBA Loan Summary Table, October 2013, Version 2

Yahoo Website Dictionary

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