Friday, December 31, 2010



I know it's New Year's Eve but I'm going to celebrate. Also, I don't post on the weekends and New Year's Day falls on a Saturday this year. So here's my hope for the new year:

Wishing you all a productive, fruitful, cash-flow rich 2011!
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Monday, December 27, 2010

3 Equipment Financing Options That You Can Use For Your Business

By Danica Reynes

Various options, such as funds from private finance companies, bank loans and government loans, are some of the more useful equipment financing options for one's business.

Businesses of all sizes and categories will benefit from equipment financing, from the smallest beauty salon to the largest manufacturer. The enterprises are granted a financial source with which they can use to purchase equipment that is deemed necessary for their business to function. With equipment finance, you will get tax benefits, a smoother and stronger cash flow and less debt. If you are considering equipment finance, make sure that you are well aware of the contract details and the obligations involved. An equipment finance can be secured from different sources and depending on the special needs and situations of your business, you can choose the one that suits you the most.

Funds from various financial companies

Most of the equipment financing is managed by the equipment manufacturers themselves through their close association with private finance companies. These private finance companies provide loan and lease applications to the manufacturer's customers. There is one advantage of the equipment funding obtained from private finance companies. The agreement includes special programs like payment free period or reduced interest rates given for the equipment manufacturer's clients. Additionally, because these private groups specialize in equipment financing, they are able to offer advice regarding the different leasing or borrowing options available. They may help you to determine whether the quality of the used equipment can qualify for the loan. The quality of the equipment is important not only for you as the user, but also for the lender because, in the event that you default on the borrowing arrangement, the lender will have to sell the equipment to recover the amount loaned you. The value of the machinery should cover the loan or else the lender has insufficient collateral.

Equipment financing by banks

Most large banks provide several business financing options. Though the lending goals of both the banks and the private agencies are basically the same, banks grant the loan only if the borrower qualifies for the loan and they ignore the place where the equipment is bought from. You can make inquiry about interest rates in different banks located in your area for comparing and choosing the best among them to improve your business. It makes sense that local banks would have better knowledge of the local business environment. Turn to them for information on what equipment to purchase or where the best bargains are on used equipment.

Loans obtained from the government

Some government agencies may offer equipment financing for businesses. You might have to submit requirements and financial projections that will prove that the additional equipment will help improve the business's operations and financial standing. In some cases, if you are able to show that the equipment purchase will allow you to retain employees or create more job opportunities, you may be able to qualify for loans with lower interest rates through your local economic development agency.

Investment in plant and machinery can show up in the bottom line. If you can choose the right agency to get the equipment finance, you can easily buy that equipment without draining your funds.

About the Author: For more information on equipment finance wa, you may visit


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Friday, December 17, 2010

Venture Capital (Equity) vs. Bank Loans (Debt)

What is APR? APR stands for Annual Percentage Rate.  It's the interest rate quoted by banks in their loan documents. An APR is determinable only when the term or duration (i.e., n in a calculation) and the total repayment are predetermined. The APR for small business (and medium business) bank loans will depend on the length of time the company has been operating, the revenue, operating profit, net profit, and EBITDA (earnings before interest, taxes, depreciation, and amortization - a standardized measure of cash flow) and the consistency of these finance/accounting numbers. The less consistent, the more risk. The more consistent, the less risk. Why? Consistency makes the numbers more predictable and the bankers more confident they'll be repaid. That, of course, assumes that the market and industry are relatively stable. So bankers seek a guaranteed return on their investment (loan) in a business. An APR of 15% means that the bank expects an annual return of 15% on their loan to your company. You have a fairly stable business, their risk is moderate (hence the higher interest rate), and their reward is moderate. A bank further mitigates its risk by securing the assets of the business and/or the business owner(s) as collateral for the bank loan.

In contrast, if you asked a venture capitalist for the APR on their potential investment in your business, they would give you a blank look....or look at you like you were crazy. Why? There isn't one. Venture capital is equity. There is NO APR. It's a win or lose proposition. They either make a return because the business is successful and is later sold or goes public or they don't because the business goes bankrupt, shuts down, or is sold for a loss. Venture capitalists measure their returns as a function of the company’s (or venture's - hence the name venture capital) future performance.  Unlike a bank loan, neither the term nor repayment amount is predetermined (known in advance) in venture capital. The business owner/entrepreneur's risk is limited because there is no personal liability, i.e., no personal guarantees or personal assets used as collateral. Due to the increased risk, the venture capitalist gets an ownership stake in the company. In return for this ownership participation, venture capital firms expect a return of 300% - 500% minimum. If they do not expect to reap that type of reward, they will not invest.
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Wednesday, December 15, 2010

Revenue-Based Financing: An Illustration

Okay, sorry, I got a late start today. But, since I promised, here I am with the revenue-based financing illustration and comparison table.

Comparison Table

SMALL BUSINESS LOAN (Bank financing)
 REVENUE-BASED FINANCING (Royalty financing)
  •  Lending based on APR (Annual percentage rate)
  •  Lending based on a CAP (NOT  an acronym)- sum of total repayments as a multiple of the principal
    •  APR is typically 7-18%. Total annualized repayment will be 50-80% over a 5-7 amortizing year loan.
    •  The royalty on monthly gross revenue is usually 2-10%. The cap is typically 2x - 5x the original/principal investment.
  • For term loans, bank loans have a specified monthly payment.
  •  The monthly payment is based on gross revenue and therefore fluctuates as gross revenue does.
  •  Typically, has strong covenants which are minimum performance measurements contained in the small business loan documents that, if unmet, trigger a loan default.
  •  Typically has very light covenants.
  •  Requires business or personal assets pledged as collateral for the bank loan.
    • Often requires a personal guarantee by one or more of the business' owners.
  •  May require collateral. Will often accept intangible assets (i.e., intellectual property) as collateral when required.
    • Carries no personal financial liability.


Seth W. is the founder, CEO, and majority owner of a up-and-coming marketing company. The firm is cash flow positive. Seth has the opportunity to purchase a marketing software system that will enable his company to expand quickly with minimal bodies. He approached his bank. They like him but his firm has only been in operation for 2 years, has no real tangible assets, and has revenue that varies widely from month to month. (The company primarily gains customers via periodic conferences.) So the bank VP says, "Sorry, we'll keep an eye on you for the future but there's nothing we can do now."

Seth recently read about revenue-based financing and thinks it may be a good fit for his firm. He has his CFO investigate. She finds a firm that's willing to invest at 8% of gross revenues to be repaid over a 5-year period. Seth's firm takes an investment of $150,000 with a cap of 3x revenue - or $450,000 repaid over the term.

Summary: Seth's firm repays a lot more than it would have with a bank loan. However, the overall terms provide the flexibility his company needs with no dilution of his equity. So this option is great for his firm at this stage.
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Monday, December 13, 2010

Revenue-Based Financing

In the last week I've had three exposures to a type of financing I honestly had never heard of. I know, it's hard to believe. Seriously, although I like to consider myself knowledgeable of the myriad types of financing available, I know I don't know them all. And, just as creativity is applied to other business aspects, creativity can be and is applied to the finance realm. (NO, I'm NOT speaking of fiddling with your numbers but of taking a creative approach to solving a problem or resolving an issue. In this case, the issue is financing your company's growth.)

The "new" type of financing I've recently learned of is called revenue-based financing. Revenue-based financing, also called royalty financing, is repaid based on a percentage of revenue, typically 2-6% of gross revenue, on a monthly basis. Since revenue can fluctuate month over month or year over year, revenue-based financing has variable payments. This variability makes it attractive to rapidly growing small businesses that do not have predictable cash flow, operating profits, or even gross revenues. For example, gross monthly revenue may be deal-dependent and therefore chunky.

Unlike a bank loan, repayments are capped like some hybrid (blended equity and debt) investments. The cap is usually 2x - 5x the total principal investment amount. If the original investment was $200,000, then the repayment will be $400,000 to $1,000,000. The repayment is based NOT on an interest rate but on the specified cap amount. Unlike the typical bank loan, there is usually no personal financial liability (i.e., no personal guarantees required) and the financing documentation is usually covenant light. This means that there are few onerous financial maintenance requirements for the business. Like a bank loan, the financing  may be secured by business collateral. Unlike a bank loan (except those provided by banks like Silicon Valley Bank which often lend to technology and biotech firms), intangible assets may comprise the bulk of the collateral.

Lastly, due to the large variability in revenue, typically the deal size is a relatively small percentage of revenues, usually 10-25% of historical revenue.

On Wednesday I'll provide an example to help illustrate how and when revenue-based financing is used. I'll also provide a table comparing it to typical bank loans.
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Wednesday, December 8, 2010

Fan-Funding and Donations

Typically I write about how small to medium businesses can raise capital. That's my area of expertise. I don't typically help business start-ups. I know how to take something that's already in existence with at least some customers and operations and think creatively and strategically to access funding.

However, every once in awhile I come across something I find interesting that may actually help start-ups. This is one. If you are a creativity-based business start-up, a concept called fan funding may be just what you need to tap into to get your enterprise up and running. There are websites now available that go far beyond the MySpace era.

If your idea or business start-up is related to fashion and design, check out Designers can go here and upload their collections along with their funding needs for production. Customers or others can "invest" (my quotation marks) $50 - $500 in the design(s) that appeal to them.

If your business is music-related (i.e., you are an artist or a producer of artists), check out Sellaband. Fans or wannabe fans can support their favorite artist(s) by investing in the music project. Fans can actually remove their funding commitment at any time BEFORE the funding goal is reached. After the goal is reached, the project is a go, so the money cannot be returned. Any return will be due to record sales (i.e., record royalties, live performances, etc.)

Happy fan-funding!
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Monday, December 6, 2010

Tap Your Customers via Direct Public Offerings (DPOs)

Do you need to raise capital to grow your company but have not been able to access bank financing...or have not been able to access sufficient bank financing? Have you tried tapping into your existing customer base? No, this time I'm not talking about customer pre-pays (I'll come back to that topic again in a few months). I'm speaking of offering customers an ownership stake in your business through direct public offerings or DPOs. DPOs are governed by SEC Regulation D Section 504, which allows companies to raise up to $1 Million every 12 months. Using this financing technique, called a SCOR or small corporate offering registration, the SEC allows state security administrations (usually through the state's secretary of state) to register these DPOs and allow share prices to be as low as $1. Currently, 47 of the 50 states in the US allow businesses to use SCOR to raise capital.

  • You give up a smaller portion of equity for the same amount of capital that angel investors would inject. You typically even give up less than you would using a more traditional private placement.
  • If you are growing rapidly, you are most likely funneling much of your operational cash flow into expansion. This is equity so you don't have to worry about repayment or hiccups with your expansion plan resulting in difficulty with loan repayments or covenant violations.
  • Since you are marketing to your target or current customers already, you get to align your marketing efforts with your money-raising efforts. Typically, raising money pulls the owner's or CEO's (and CFO's) focus from the day-to-day business to funding the company which can cause problems.
  • Your current customers know you and your target customers are getting to know you. Part of raising money is getting people to believe in the ongoing health of your company and your product or service. Customers (or potential customers) are already there.
  • You get experience that you can leverage when doing a larger private placement or actual IPO later on in your company's growth plan.
  • Typically, since you register a SCOR with the state and not the federal government, your customer or other potential share buyer must come from the state in which you register. If you have national or regional customers, and therefore want to include more states, the expense will increase accordingly.
  • How will your customers (and others) get their investment and return on investment back? You may need a well-communicated exit plan or stock re-purchase plan if you encounter a lot of resistance to waiting indefinitely for a payout.
If you have an established customer base and/or are adept at marketing and PR, a direct public offering may be just the method you need to raise capital to expand your business. More companies are now taking advantage of this option due to the significant drop in bank lending to small and medium businesses.
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Thursday, December 2, 2010

Turnaround Consultants

Again, in continuing with the previous them on taking action and restructuring your business -before its's too late - if you are encountering financial and operational issues - So how do you engage a turnaround consultant and where do you find them?

I'll answer the second question first. Where do you find turnaround consultants? First, ask your banker or other debt provider. Since most banks and loan providers have workout groups that often hire turnaround consultants and turnaround firms themselves to assist with problems loans, they will often have a list of at least 3 consultants that they would highly recommend. If you don't have a good relationship with your banker, then ask another banker you know from your personal circle for a reference. Ask your accountant or CPA firm, especially if your firm engages in any forensic accounting. Ask your board of advisors or directors. If you have none of these relationships, check with TMA or ACTP for turnaround consultants for consultants in your area. Then check the Better Business Bureau (BBB) to make sure they don't have any complaints filed against them or, if they have, those complaints were satisfactorily resolved.

The Turnaround Management Association (TMA), - many turnaround consultants and related professionals belong to this group. TMA also separately oversees and provides the CTP (Certified Turnaround Professional) designation. For a list of CTPs in your area, click here.

From the TMA website "CTPs have a proven track record and years of experience in working with companies or large business units that are in financial crisis. CTPs must be or must have held positions such as, but not limited to, turnaround practitioners, consultants, workout lenders, or attorneys and must demonstrate competency in the legal, financial and management aspects of a turnaround."

How do you engage a turnaround consultant? After finding one (on your own or through referrals), call. Sounds simple, right? But that is often the hardest step. Make the phonecall. Set up a meeting or conference call. (Turnaround consultants can have an extremely heavy travel schedule, especially in recessionary periods.) Briefly highlight the issues as you know it and get their preliminary insight. If you like what you hear, request resumes and references. After that, if you both agree to move forward, the next step is to meet in person and for them to tour your location, talk to employees, and see the current financial statements - and all supporting information. Then you move to an agreement in which you discuss with the turnaround consultant the scope, the time frame, the expected outcome. This will require a detailed discussion where EVERYTHING, as you, your board, management team, etc. knows it. If there are hidden ticking time bombs that you omit, the turnaround consultant cannot truly help. This is where the consultant will tell you whether or not the business is salvageable and what's the plan for salvaging the business. The final agreement will outline payment terms, whether or not the consultant(s) will take over C-level positions, etc.

In a true restructuring when a company is several months away from bankruptcy, the turnaround firm often slots people as the CFO, COO, and/or CEO. They MUST have control of the company to effect the turnaround. Constantly having to get decisions approved by the original CEO or COO slows down the process when time is absolutely of the essence. Also, existing management is what got the company into trouble. They need to step aside and allow the consultants/interim management to make the necessary changes and decisions that will return the company to a healthy state and back into their control as soon as possible.
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