By Kevin Keahy
Access to Capital, securing funding for your business, continues to evolve and change on an ongoing basis. The good news is many of the changes happening are targeted for the small business community, including start-ups, businesses that need operating capital, and businesses that are looking to expand and grow. Navigating this capital landscape can be challenging, to say the least. This month’s article recaps traditional and new sources of funding for business. Ready, set, here we go:
The most common measures include self-financing your business, or friends, or family loans. Another way is utilizing credit cards (not a recommended way).
Traditional Lenders: Banks & Credit Unions
We work with most of our local banks and credit unions on an ongoing basis. Most of them require completed business plan and loan application information that includes a personal financial statement on each borrower, three years of most recent tax returns on each borrower, and a credit report on all borrowers. If it is an existing company current profit and loss reports, including income statements and balance sheets, three years of most recent tax returns, and other information we can assist with. An application showing positive cash flow (past, present, projected future) is the easiest to evaluate for approval.
(Community Development Financial Institution). A private sector financial institution that focuses on personal lending and business development efforts in local communities. CDFI’s focus on serving the needs of the poor and working class within urban and poor rural communities, as many of these citizens are underserved or ignored by traditional commercial banks and lending processes. A local CDFI organization in our region is Craft 3. Website is craft3.org. Craft3 specializes in helping borrowers who cannot get needed financing from traditional sources.
State Government Economic Development Loan
There are several type of loans here. For example, the Oregon Business Development Fund (OBDF) is a revolving loan fund that provides term fixed-rate financing for land, buildings, equipment, machinery and permanent working capital. Participants must create or retain jobs and must typically be a traded-sector business in manufacturing, processing or distribution. The program gives preference to projects located in rural and distressed areas and to small businesses with fewer than 100 employees. Check out the Business Oregon website at oregon4biz.com. We can also help you go through the different lending options here.
SBA, Col-Pac, and USDA loan guarantee programs
Most often, entrepreneurs seek an SBA guarantee when a conventional lender feels that the prospective borrower has insufficient collateral to support the small business loan request. The SBA loan guarantee works as a substitute for the needed collateral and provides the lender with satisfactory security to support the loan. If the borrower fails to repay the loan, the lender can recover the guaranteed portion of the loan from the SBA.
The Columbia-Pacific Economic Development District (Col-Pac) is a private non-profit organization established to assist in diversifying and strengthening the economy and livability of Northwest Oregon. The District covers all of Clatsop, Columbia, and Tillamook counties and the western part of Washington County. Col-Pac also has a seven member Loan Administration Board that oversees the District's Revolving Loan Fund. Certified by the U.S. Economic Development Administration (EDA) as a recognized Economic Development District, Col-Pac offers a range of economic and community development services, technical assistance, and referrals in carrying out its mission.
USDA. United State Department of Agriculture. The purpose of the Business &Industry Guaranteed Loan Program is to improve, develop, or finance business, industry, and employment and improve the economic and environmental climate in rural communities. This purpose is achieved by bolstering the existing private credit structure through the guarantee of quality loans which will provide lasting community benefits.
This is where people can pre-purchase products, buy experiences, or simply donate. While this funding may in some cases go towards helping a business, funders are not allowed to invest and become shareholders via rewards-based crowdfunding.
The practice of funding a project or venture by raising monetary contributions from a large number of people, typically via the internet. One early-stage equity expert described it as “the practice of raising funds from two or more people over the internet towards a common Service, Project, Product, Investment, Cause, and Experience. The crowdfunding model is fueled by three “players”: The project initiator who proposes the idea and/or project to be funded; individuals or groups who support the idea; and a moderating organization (the "platform") that brings the parties together to launch the idea.
This is something that must be researched and vetted thoroughly to ensure you are working with a reputable company with realistic payback interest amounts.
Community Public Offering
When a company raises capital by marketing its shares directly to its own customers, employees, suppliers, distributors and friends in the community. Direct Public Offerings are an alternative to underwritten public offerings by securities broker-dealer firms where a company's shares are sold to the broker's customers and prospects.
The 5 C’s of credit that every lender looks at
CHARACTER... the character of the individual requesting a loan. Most bankers would agree that this is the most important of the five C's. If you are not someone to be trusted, then the bank doesn't want to deal with you no matter how good the deal is. Character includes the past credit history of the company and the principle individuals involved.
CAPACITY... What is your financial strength and track record? What do your financial statements (your history) show in the way of being able to take on more debt? What do your projections (of the future) show in the way of servicing that debt? The primary source of repayment is cash flow for short term loans (for example, taking on an inventory loan for a peak selling season, selling the inventory and repaying the loan) and profits and depreciation for long term loans.
CAPITAL... How much are you asking for and how much of your own money will you be investing? (You must be willing to invest money of your own.) When you are determining the amount of money you need, you need to have done your homework and know exactly what you need. Be conservative in the projections of your income and liberal in the projections of your expenses. You need to be able to document your need and the amount.
COLLATERAL... What is available to support the primary source of repayment? If you are not willing to sign your house over as collateral, for example, then the banker will interpret that as you not being 100% confident of the venture. If you are not willing to invest your resources, it is unlikely they will be willing to lend their depositor's resources. Collateral is the banker's "back door" source of repayment. Know what is available to pledge. Usually, a personal guarantee from the owner of the business is required.
CONDITIONS... What is the economy doing and how will it affect your company? What industry are you in? Who is your competition? How unique are your goods and services offered? Conditions also include governmental industry controls, pending legal action affecting the company and the believability of the company's marketing plan.
The key here is to not get overwhelmed by the process, but to focus on the end result. Our Clatsop Community College Small Business Development Center advisors will assist you with the steps to take, resources to use, and also work creatively with you to find the best avenue or combination of funding options that are best for you and your business. Always FREE and CONFIDENTIAL.