Archive for the 'Banking - Investors - Capital' Category

Investor search mistakes to avoid, part 2

Last week I introduced you to a list of mistakes businesses make when searching for investment capital. The list came from a book by my friend, Andrew Sherman, titled, Raising Capital. As we learned, there’s more to acquiring capital than a business plan.

So now let’s take a look at the rest of Andrew’s list, and, like last time, each one is followed by my thoughts.

Mistake: Not understanding the investor selection process.
Don’t deliver information with a fire hose when a pitcher is preferred. If there is interest, investors will request the full details as needed.

You’ll need three documents: an initial, one-to-three-page executive summary (the pitcher), an intermediate 10-page (+-) model, and a long one with all numbers and research (fire hose). Deliver the last two only when requested.

Mistake: Too little research and analysis.
You must have market/industry research and analysis to back up your assumptions and projections. Investors don’t value promises or hunches. Don’t show extensive data until requested, but reference and summarize what you’ve learned in the short models.

Mistake: Underestimating the funding chronology.
If your funding requirements and the investor’s investment schedule are not in sync, guess who makes adjustments? Remember, to an investor, urgency sounds like desperation. And this will be true for crowdfunding as well.

Mistake: Being afraid to share your idea.
Sherman says you can’t sell if you can’t tell. Get a non-disclosure agreement that fits your project and use it. Investors not only expect to sign an NDA, they won’t respect you if you don’t give them one.

Mistake: Being dollar-wise and investor foolish.
Trick question: Which is the best alternative: a) $1 million from investors who know nothing about your industry; or b) $500,000 from investors who have industry background and contacts? Since the value of an investor relationship is usually more than cash, “b” is often the correct choice. Consider all forms of investor participation when evaluating an offer.

Mistake: Getting hung up on initial ownership and control.
Establishing ownership and control is where most investment negotiations break down. Here’s a handy rule: He who has the gold makes the rules, which usually includes control. Business founders are typically better served focusing more on the investor exit plan and less on initial control.

Accomplishing a successful investor relationship requires thoughtful preparation plus skillful negotiation.

Write this on a rock … Know the rules before pursuing an investor search.

Investor search mistakes to avoid, part 1

Small business capital comes from three primary sources:

1. Profits left in the business;
2. Debt, like a bank loan;
3. Equity investment.

For most small businesses the third source is, and has been the founder’s investment.

In recent years, this option has become more robust and multi-faceted in the form of outside investors, whether venture capital, angel investors, and even with crowdfunding. The challenge is developing a capitalization strategy that matches the right sources with the short and long-term goals of the founder.

It must be said that while many elements of finding and acquiring investor capital are similar to getting a bank loan, the former takes longer and is more complex. In his book Raising Capital, Andrew Sherman addresses this issue with a list of common mistakes entrepreneurs make searching for investor capital. This is the first of two articles where I’ll identify Sherman’s “mistakes” and follow each one with my thoughts.

Mistake: Using an investor search that’s too broad.
Each investor has an interest and related strategy. An investor that likes medical ventures won’t be a prospect for your retail idea. Qualify each investor prospect before making contact.

Mistake: Misjudging the time involved.
Part of Murphy’s Law states that everything will take longer than you think. Alas, Mr. Murphy is alive and well in the investment marketplace. It usually takes months, not weeks, to find, approach, and get an answer from investors. Even crowdfunding will take more time than you think. And remember, like prayers, sometimes the answer is “no.”

Mistake: Falling in love with your business plan.
Every mother’s baby is beautiful. But your plan is not your investor prospect’s baby. Expect that your business plan will have to be adjusted before you get funded. So be prepared to accept that changes will come with the capital.

Mistake: Taking financial projections too seriously.
First let’s establish the prime financial rule: All projections are wrong! Of course, you can show projections you believe are achievable. But also include a conservative set that shows your break-even point if things don’t go as planned.

Mistake: Confusing product development with sales.
Investors love real customers and real sales. Even sales projections based on history will be highly scrutinized. But projections based on projected sales will be highly doubted.

Mistake: Minimizing the management team.
A good management team can fix a bad plan, but a bad team can ruin a good one. Unless you’re asking investors to contribute management expertise, don’t seek investor capital without a qualified management team.

Next week, more investor search mistakes.

Write this on a rock …
Make your own mistakes, not these.

6 steps that can make a banker your champion

At some point in your career as a business owner, you’ll need a business loan; probably from a bank, but perhaps from a non-traditional source, like a crowdfunding lending platform. Allow me to help maximize your chances of getting the loan by introducing you to the fundamental underwriting elements any lender will use when considering your loan proposal. Meet the “Six Cs Of Credit.”

1. Character – What’s the character of the borrower? To a community bank, character still means a lot. For larger banks, digital credit scoring dominates the approval process and this “C” is less compelling as an analog factor. Regardless, the appraisal of your character will always impact the loan approval process. Guard it well.

2. Capacity – What’s the ability (read: cash flow) of the company to repay the loan? A banker once told me if he could see only one loan proposal document he would ask for the projection of cash flows, because that’s where he could see if there would be enough cash to repay the loan. Remember, profit is an accounting concept. Bank payments are made with cash, not concepts.

3. Capital - Is the loan amount justified by the financial strength of the borrower? For example, sales volume, profitability, CASH FLOW, retained earnings, the underlying value of the asset being purchased, etc. If you’re unsure about your capital appraisal, take your banker to lunch and talk about it.

4. Collateral - This is the bank’s fall-back position. Collateral is whatever a banker can get you to pledge as their Plan B in case you default. But remember: Once you give a banker collateral, getting a partial released prior to payoff is like getting a she-bear to hand over her cub.

5. Coverage - Bankers are prepared to take certain risks, and the interest rate and terms are based on the level of risk with which they feel comfortable. When possible, banks look for opportunities to shed or minimize that risk, like various kinds of insurance products. Be prepared.

6. Conditions - Bankers ask themselves, “Does it work? Do we like this deal?” You can improve your chances by explaining how you’ll use the money, how it will help you grow your business, create more jobs, strengthen your market position, make more money, etc. Practice your pitch on someone before you go “live” with your banker(s). If a banker doesn’t understand your deal and how you’re going to make it work, you won’t get the loan.

The title of the shortest book in the world is “Loan Officer Courage.” Help a bank become your champion by showing you understand and support their underwriting process.

Write this on a rock … Improve your loan chances by understanding the Six Cs of Credit.

How to get a bank loan: Part Two

Since most businesses have been deleveraging post-2008 financial crisis, you could be forgiven for getting rusty at how to ask for a loan from bank. But as the economy picks up and you need growth capital, it’ll be handy to brush up on your banking skills.

Last time, I used the customer qualifying process as an analogy for how to work with your banker to get a loan, and offered the first three of six loan request factors: Who makes the decision, what do they need and how do they want it? Now let’s talk about the last three.

What motivates them?

All banks need to make loans, but all banks don’t like the same kinds of loans. Some banks make working capital loans, and some don’t. Most banks make real estate loans, but each one has its own profile of what kind of real estate they like. And all banks like to loan money for things with serial numbers, like vehicles and equipment. In your first meeting, what the banker says about your proposal should indicate their level of interest in your type of loan. But if not, it’s okay to ask.

Banks will fight for loans, but they’ll kill for deposits. Checking account deposits are virtually free money to a bank, a portion of which they use to make loans. They like personal checking accounts, but LOVE business accounts. A bank’s motivation increases with your daily deposits if you place your operating account with them. You should know the value of your deposits to a bank and use that information to negotiate rates and terms.

How motivated are they?

You can tell how motivated a bank is by how helpful the loan officer is.  Her excitement is no foreteller of success, just of motivation.  But if she seems indifferent or unmotivated, that’s probably not a good sign.

A deal that couldn’t get through the front door of Bank A this morning, could be received with a red carpet at Bank B this afternoon. So be prepared to take your proposal to more than one bank. And be sure at least one of the banks you make a loan proposal to is an independent community bank.

What do I have to do?

Bankers love field trips. Give your banker a demonstration of the new equipment the loan is for, or take them to see the real estate you want to buy. Show them how the object of your loan request will help you grow your business, profits and deposits.

The best way to get a business loan is to do your homework, anticipate what your banker needs and get them what they ask for. And if the bank that was loyal to you when you needed them doesn’t have the best deal — but it’s a deal you can live with, “dance with the one that brung ya.”

Write this on a rock …

Understanding how banks make business loans will improve your chances of getting one.

How to get a bank loan: Part One

One of the markers of this post-recession, so-called recovery has been the practice of deleveraging. Across the economy, from consumers to businesses large and small, debt has become something to get rid of.

Out here on Main Street, this trend has manifested in a dramatic drop in bank borrowing by small firms. Indeed, for more than a half decade, survey after survey has shown that less than 5% of business owners report their borrowing requirements have not been met, while the majority say emphatically they don’t want or need a loan. Consequently, there’s a pretty good chance your business hasn’t made a loan request to a bank in a while.

But the economy will eventually kick into an expansion phase, and what has become no less than a de facto moratorium on borrowing won’t last forever. And since most small business growth capital comes from bank loans, even for well-capitalized firms, it’s always good to revisit a few banking relationship fundamentals.

But don’t worry. If you’ve never asked a banker for a loan, or if it’s been a while, getting a bank loan is a lot like the process of qualifying a prospective customer. For example, you want to know these three things:

1. Who decides?

You have the right to ask who is going to make the decision on your loan. Can your loan officer decide, or will it go to the local loan committee or somewhere else? Why do you care? The more people involved in the loan approval process increases the scrutiny of your deal, which means more questions and more time for you to budget from proposal to answer.

2. What do they need?

Your banker will ask for personal and business financial information. They might accept last year’s business numbers, but they could also ask for an interim report. Depending on the size of your request and what you’re using the money for, they may ask for a business plan. If the loan is for real estate, a current appraisal will be required.

Don’t give the bank more than they ask for, but give them everything they ask for. Remember, the quicker your banker gets the information, the quicker you’ll get an answer.

3. How do they want it?

Ask your banker what information can be presented verbally and what needs to be in writing, whether hard copy or electronic. Whether you’re borrowing $5000 for a computer, or $5 million to buy out a competitor, knowing as much as you can about the loan approval process will significantly improve your chances of not only getting a quick answer, but a yes.

Next time, Part Two: What motivates your banker.

Write this on a rock …

Qualify a bank like you do customers, and be sure to do your homework.

The Blasingame Translator for Small Businesses and Banks

Once upon a time, a storm caused two ships to sink in the same area. All on board were lost at sea, save one from each ship, and those poor souls were alive only because they swam to a small island nearby.

As luck would have it, the two men hauled themselves up on the beach at the same time and within sight of each other. But survivor’s elation soon became pensive as they realized that each spoke a language unknown to the other

Immediately both men had the same unspoken thought, “I don’t know this man or the language he speaks, but if we’re going to survive, we have to find a way to communicate and work together.”

In many ways, this tale actually plays out every day. But instead of on the high seas, our story takes place in the marketplace. And instead of mythical shipwreck survivors, our real life players are small business owners and bankers.

Like the survivors in the first story, the excitement of the latter-day castaways about their future prospects turns pensive when they both realize that: 1) they need each other in order to be successful; and 2) they don’t speak each other’s language very well, if at all.

With so much common interest and so little mutual understanding, can these two create a successful survival story? Absolutely, but only if they have the Blasingame Official Translator for Bankers & Small Business Owners. Here are a few examples of how the Blasingame Translator works.

For small businesses to understand banker, they must:
1. Identify their banker as a success partner and their business’ best friend.
2. Stay close to their banker when things are going well, and even closer when things aren’t going so well. 3. Believe that an uninformed banker is a scared banker, and a scared banker cannot, and will not, behave like a partner.
4. Pay attention to what motivates and impresses a banker, like attention to detail.
5. Understand pertinent bank rules and regulations, so you don’t ask for something that can’t be done. 6. Reward banker loyalty with small business loyalty.

For bankers to speak small business, they must:
1. Understand Blasingame’s 1st Law of Small Business: Starting a small business is easy, operating a successful one is not.
2. Understand Blasingame’s 2nd Law of Small Business: It’s redundant to say, “undercapitalized small business.”
3. Understand Blasingame’s 3rd Law of Small Business: A small business is not a little big business.
4. Explain bank rules and regulations, and recommend services and products.
5. In the credit scoring process, always find a way to give small business owners credit for character, past performance and best efforts.
6. Reward small business loyalty with banker loyalty.

Write this on a rock … To avoid becoming marketplace castaways, small business owners and bankers must speak each other’s language.




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