July 11, 2009

Private Equity Capital For Small Business

Effective from today, small businesses that would otherwise have difficulty securing private equity or venture capital may find funding easier to get as a result of changes made as part of the American Recovery and Reinvestment Act to the U.S. Small Business Administration’s Small Business Investment Company program.

“The Recovery Act expands SBA’s venture capital program to increase the pool of investment funding available to the Small Business Investment Companies licensed by SBA,” said SBA Administrator Karen G. Mills. “We believe those companies will be better equipped by these changes to help sustain and grow small businesses for their next important growth steps.”

SBICs are privately owned and managed venture capital firms which are licensed and regulated by SBA. SBICs use a combination of funds raised from private sources and money raised through the use of SBA guarantees to make equity and mezzanine capital investments in small businesses. There are approximately 338 SBICs with $17.4 billion in capital under management.

The changes made as part of the Recovery Act are:

• The Recovery Act makes SBICs eligible for greater SBA guaranteed funding and requires SBICs to invest 25 percent of their investment dollars into “smaller” businesses. Also, the amount of funding an SBIC may invest in a single small business is set at 10 percent of an SBIC’s total capital rather than the previous limit of 20 percent of an SBIC’s private capital only. This translates to an effective 50 percent increase in funding available to a single
business by an SBIC.

• Maximum SBA funding levels to SBICs will increase up to three times the private capital raised by the SBIC, up to a maximum of $150 million for single SBICs, or up to $225 million for multiple SBICs that are under common control. The cap for all licensees was set at $137.1 million before the Recovery Act.

• These limits are even higher for SBICs that are licensed after October 1, 2009, that certify that at least 50 percent of their investments will be made in small businesses located in low-income areas, up to $175 million for single licensees and up to $250 million for jointly controlled multiple licensees.

• Changes made to the SBIC program under the Recovery Act are
permanent.

Industry associations have commended SBA for these changes and SBA continues to encourage new SBICs to apply for licensing and actively participate in the program.

The SBIC program was created to stimulate the growth of America’s small businesses by supplementing the long-term debt and private-equity capital available to them. Since the SBIC program’s formation in 1958 through April 2009, it has invested approximately $56 billion in more than 106,000 small businesses in the United States. For more information about the SBA’s Investment Division and SBIC program, go to www.sba.gov/INV or call 1-800-
U ASK SBA.

Posted by David at 5:46 AM | Comments (0)

May 30, 2009

Seven Keys Every Entrepreneur Must Know About Business Angels When Seeking Private Investment

If you are looking for money to start or fund a business, one of the options open to you is finding angel investors. The difference between venture capitalists and angel investors is straight forward: a venture capitalist is a professional supplier of business capital, whereas an angel investor is much more likely to be a private individual interested in backing one or more specific business start-ups. Here are some tips to make sure you find yourself in the company of good angels:

Make sure they can afford it

You should never allow an angel investor to back your business if you aren't certain that they are rich enough to never get a penny back. This is for both moral and legal reasons. Moral, because so many new start-ups fail and you don't want the investor's losses on your conscience. Legal, because there are laws against persuading little old ladies to give you their savings.

Make sure they are sophisticated investors

What you really want is an angel investor who has knowledge and expertise in your industry. Yes, you want their money... but you also want their experience, contacts and expertise. Also, if you want to raise venture capital later on, it will be much harder if you show up with a long list of unsophisticated investors.

Don't think it will be any easier

Raising money from angel investors is no easier than raising it from venture capitalists. They care as much about liquidity as venture capitalists do – maybe even more because they are investing their personal, after-tax money.

Understand their motivation

Angel investors differ from venture capitalists because, typically, angel investors have a double bottom line. Usually, they are successful entrepreneurs who have made it and now want to pay back society by helping the next generation of business people. Thus, they are often willing to invest in less proven, riskier deals to help entrepreneurs get started.

Help them to live vicariously

One of the rewards of angel investing is the ability to live vicariously through an entrepreneur's efforts. Angels want to relive the thrills of entrepreneurship while avoiding the firing line. They enjoy helping you, so seek their guidance frequently.

Make your pitch is understandable to the angel's spouse

The usual membership of an angel's investment committee consists of one person: a spouse. So, if you've got a complicated product, make sure it's comprehensible to the angel's husband or wife.

Be nice

More often than venture capitalists, angel investors fall in love with entrepreneurs. The entrepreneurs may remind the investors of their sons or daughters, or even fill the position of the sons or daughters they never had. If you are seeking angel capital, then you're probably not a proven moneymaker, so you can't get away with acting like an idiot. Be nice until you're proven – although you should really be nice even when you are proven.

See here for more information on small business finance

Posted by David at 10:04 PM | Comments (0)

May 17, 2009

Six Most Effective Solutions To Bootstrapping In A Down Economy

Bootstrapping is where you decide that, for one reason or another, you aren't going to raise venture capital but will fund your business yourself... possibly on a very tight budget. It rather went out of vogue during the boom years when angel investors, venture capitalists, banks and others were simply throwing money at every new venture that seemed to come along. But now, in these harder times, I think bootstrapping is back. Here are a few hot tips for the would-be bootstrapper.

1. Focus on your cash flow, not your profitability. Everyone assumes that profits are the key to survival. If you could pay the bills with theories, this would be fine. But the reality is that you pay your bills with cash; so focus on your cash flow.

2. Forecast from the bottom up. Many people look at the total market for their product and then assume that they will win a certain percentage of it. For instance, the dog food market in the UK is worth £1 billion. Someone forecasting from the top down might say that they were going to go after 5% of that market. Someone forecasting from the bottom up would say, "I think I can sell my dog food into 100 outlets and that each one will sell £1,000 a month. I think we both know whose forecast is likely to be more accurate."

3. Start out as a service business. Say you want to build a software company. Provide consulting and services based on your work in progress software. This has two advantages. First you get immediate revenue and true customer testing Second, once the software is fiels tested, you can flick the switch and become a product company.

4. Focus on function, not form. Yes, it is wonderful if you can create a product like the Apple iPod or the Rolex. But as a bootstrapper it may be better to focus on a product that provides a very tightly defined function. A stapler that works, instead of one that just looks good, for instance.

5. Understaff. Many entrepreneurs staff up for what could happen, best case. Bootstrappers understaff, knowing that all hell may still break loose.

6. Go direst. The optimum number of mouths between a bootstrapper and his customer is zero. Of course, retailers provide great customer reach and wholesalers provide distribution. But e-commerce was invented so that you could sell direct and reap greater margins

David
Small Business Resource

Posted by David at 11:37 PM | Comments (0)

April 26, 2009

What Is a Credit Score That It Discriminates Based on Your Nationality?

If you're an ex-pat American running a profitable business in the UK don't be surprised that your nationality will affect your business’s credit score. To find out why continue reading this article.

First, let's answer the question what is a credit score and the credit ratings process.

A credit rating or credit score is a measure of the financial risk of a business to providers of finance and credit and the probability of the business defaulting on loan finance. Credit rating agencies take the following main factors into accounts to arrive at the credit rating or credit score for a business:

. The transactional history of the business
. The promptness of the business in meeting payments to suppliers, repaying loans and other financial obligations
. The structure of the company's debt: whether loans are secured (on business assets or assets of the owners of the business) or unsecured, the amount of debt the business is carrying and the repayment profile or history;
. Cash flow, working capital and the net worth of the business;
. The size of the business (number of employees, profit and loss plus balance sheet values including the background of the directors or owners of the business.

To calculate credit score ratings, a UK credit rating agency will enter the data, based on the above factors, into a credit scoring model to produce a credit score or rating.

Former Wall Street banker Alexander Kelly who heads Powerchex, a profitable employment screening start-up business in the UK, has accused Creditsafe UK, a credit rating agency, of unfairly penalising her young business by using her nationality in giving her business a lower than expected credit rating. Kelly claims that Creditsafe UK was unjustified as her business has being doing well in the downturn and it is rated highly by other business information suppliers.

Creditsafe UK told Alexander Kelly that neither she nor her fellow director was of UK origin and this was among the factors affecting her company's rating. Other factors mentioned were the small number of directors (Powerchex has two), that the company is not part of a group and that it is trading in an area with higher than average number of insolvencies among companies of similar size.

Kelly said: "I think this is discriminatory and disadvantages companies by using criteria that have nothing to do with financial performance or, viability of the company". Kelly also notes that the business is ranked in the top 20 per cent of companies by Dun & Bradstreet, the US based rating agency, and Creditsafe UK did not cut the ratings of her competitors that have worse balance sheets.

So, the crux of the matter is that credit rating agencies use different models in calculating credit scores and whether in recession or good times, it's important for a small business to protect its credit rating irrespective of the different models being used to calculate credit ratings. It's a good idea to get testimonials from providers of finance and suppliers to reinforce the credit worthiness and good management of your business.

David
Small Business Resource

Posted by David at 5:02 PM | Comments (0)

September 13, 2006

Manage Your Small Business Well or The Consequences Could Hit You Where It Hurts

Imagine having the chance to run as state senator but because of bad financial management of your family business, you face the prospect of having to stand down. Well that's exactly what has happened to Joy Padgett, R-Coshocton.

Joy Padgett's aspiration as state senator has been temporarily halted because she has to explain her family’s $1.16 million of personal bankruptcy filing.

I don't want to go into the political aspects of this story, instead you can read it for yourself. There’s a lesson here for you as a small business owners.

If you run a small business it pays you to diversify your income – “don't put all your eggs in one basket.” Try to build more than one business to mitigate or reduce the risk of failure. This is critical if your pension is directly dependent on the success of your business. If one business fails, your pension is still safeguarded because you have other businesses to rely on.

You should also ensure you have good management in place to manage your business. Don't make the mistake in believing you have the all skills to manage a growing business. You must hire good people who have the range of skills to develop / expand your business.

Finally, develop a succession plan. This is vital if you want to manage your exit in an efficient manner that mitigates your tax liability and the handover of the business.

Statistically nearly eighty percent of small businesses fail within three years of starting up. The main reasons for failure are lack of cash and poor management.

Joy Padgett blames her family’s personal bankruptcy on the failure of Main Office Supply Co., the Coshocton-based small business she and her husband owned and operated for 30 years.

She said when every bit of her husband's retirement is built into the company and that is suddenly gone, it is a shock to your system.

Note: It's not enough to want to start a business and make money; you must be savvy enough to make your business a success and to extract the benefits of your hard work. Associate with winners, brainstorm with winners, hire the services of winners, hire good managers, continually tweak you game plan and know when to exit.

David
Small Business Resource

Posted by David at 1:12 PM | Comments (0)

January 17, 2006

Raising Funds For Small Business Schemes

Small business owners find it hard to raise money before they prove their product but there are ways around this

Small companies require capital. Small companies’ starting up especially innovation-based companies that present high risk and reward frequently need considerable more capital than the founder's wallet holds. This means that small business entrepreneurs have to seek other investors - and the success of the business will be heavily influenced by the extent to which they take account of the needs of these investors when drawing up a business plan.

Investors need a return on their investment. The return they can expect is largely governed by the amount of risk the investment presents: the greater the risk, the greater the reward.

Investors usually measure return using based on IRR or internal rate of return. This shows the return in terms of the annual percentage over the lifetime of the investment.

Oversimplifying slightly, an IRR of 60 per cent means investors receive the sum of the original capital for each year of the investment.

Smart investors do not rely solely on IRR, though, because it contains assumptions that can be misleading. Also, and much more importantly, most of the variables upon which IRR depends are hard to know in the early stages of investment - especially how long the investment will last and what the selling price will be.

It’s important to realize that investors are never merely making an investment in your company. They are building a portfolio of investments, which they view as a group. They know that the vast majority of the small companies will fail, that some will succeed and that only a few will be very successful. So every small company in a portfolio has to be potentially a big winner, because those big winners are covering the losers.

Some simple arithmetic illustrates the investor's hurdle. Let's say an investor intends to put £1 million into each of 10 companies for five years. The investor requires a return equal to the average return for early stage investors in venture capital in the USA, which is an IRR above 20%. That means his total fund must double in size in five years. Assuming six of ten companies fail and two companies achieve a 20% IRR, the other two must each return IRR of 140%. In other words, they must be worth £8 million in five years. That is breathtaking growth.

While smart investors may not depend on IRR, smart entrepreneurs will ensure that their proposition shows the potential for an IRR of the sort that investors want to see.

In the UK, the difficult for start-up small business entrepreneurs is compounded by the fact that the types of capital available for investment are variable, and not necessarily targeted at them. There is, for instance, an abundance of low-risk capital, such as bank loans.

There is also an abundance of funding for the purchase of companies or for management of an established division of a large company to buy the division. Once again, the risk of such a transaction is lower because the business already exists and can be analyzed.

There is a third category of capital available for innovation companies that establish themselves. They have already built a product or service (thereby diminishing technical risk), they have made some sales (diminishing market risk) they have an effective management team (diminishing people risk), but have not yet hit the fast-growth curve. Although these companies are still put in the high-risk category, they present an attractive balance of risk and reward from the investor's point of view.

It is very hard to find investors for start-up small companies that do not have the finished product or service, have not sold anything and have not hired the people who will be critical to running the business. It is harder to find investors when they are most needed.

In this situation, the only way for a small business start-up to get capital is for the entrepreneurs to focus their attention on demonstrating to the investors that they understand the risk factors, and present a robust business plan with whatever data they can find to show that the risk will diminish.

Not having the finished product should not stop a small business entrepreneur from illustrating what the likely demand for it will be when it is ready to sell. Prospective customers can be approached; their problem or need can be analyzed, the cost of the problem can be measured, and their willingness to purchase a product that is designed to solve it can be properly established.

In short, although there is not easy way to get venture capital for small business start-ups, it can be done. Those entrepreneurs who succeed are those who can empathize with the investor - they understand and support the investor's needs as well as their own.

Summary of Wooing Investors:

1. Try to empathize with prospective investors: if you understand what they want, you are more likely to succeed in the long run.
2. Ensure that your business can deliver investors with a good internal rate of return. That means an IRR of 20%.
3. Make clear to investors that you understand the risk factors of your business
Prepare a robust business plan showing how the risks will diminish over time.

Posted by David at 2:29 PM | Comments (0)

November 14, 2005

Small Business Entrepreneurs Are Key To Britain’s Future

Everyday I get 400 or so visitors to my website all searching for small business ideas. Of those who arrive, the majority is looking for government grant or small business finance. I point them towards Business Link, the DTI, and Local Enterprise Agencies, but they come back to my web site because they meet blank walls.

How on earth can Gordon Brown expect entrepreneurs to take their ideas and build businesses that create wealth for this country when many aspiring entrepreneurs cannot even navigate the first hurdle to starting a small business?

I watch with envy at the American system for helping small businesses with grants, loans and Small Business Innovations Research funding. The Small Business Administration (SBA) that's responsible for providing grant / loan funding operates within a legal framework and is empowered to champion all small businesses; every type of small businesses including those owned by ethnic minorities. The SBA is set targets and is evaluated on performance.

Compared to the SBA and associated State structured funding agencies our system falls way short. Not only that, entrepreneurs in the UK are confused about where to go for funding and whether they’ll even qualify.

Every week I receive announcements of yet another small US companies being granted Small Business Innovations Research (SBIR) funding that allows them to research and develop innovative technological and other products with the USA government as possible stakeholder.

When I read about our research grant scheme that is suppose to be equivalent to the USA's SBIR scheme I smile because I know there's no comparison. Our scheme falls way short!

When I read about young Londoner's not wanting to start a business of their own, but would rather work in paid jobs because they are adverse to stress, I'm saddened because at the same time, young people in the USA are winning prizes for showing entrepreneurial flair and starting businesses.

If the Chancellor or Prime Minister in waiting truly believes that entrepreneurs are the key to Britain’s future my advice to him is "don't tinker with tax incentives, instead create an environment that supports, encourages and mentors budding entrepreneurs to build thriving businesses"

David Davis
Small Business Resource

Posted by David at 2:14 PM | Comments (0)

May 17, 2005

UK Small Business Finance

Are you looking for finance assistance for your UK small business? Don’t worry, you’re in good company. Most small businesses look to outside sources of finance at some point during their existence.

Whether it’s to launce a new product line, expand into a larger operations center, or to acquire commercial vehicles or other equipment necessary to remain in business and stay competitive, there likely are sources of UK small business finance ready and available to help. The British Banking Association maintains a list of approved UK Small Business Lenders and has set up a search page at Money Facts Online

Even if your UK small business has been denied finance by traditional lending institutions, there are other sources your small business can pursue. While securing the needed finance is a tedious and time-consuming task all by itself, properly managing the funding once it is made available can be equally daunting. Every business owner needs solid financial management skills or needs to seek out someone with these skills so crucial to the success or failure of any business.

What types of finance options are available to the UK small business?

Business loans are probably the most common form of business finance arrangement. As with any type of loan, however, the monies distributed must be repaid, with interest, over a period of time. Grants differ from loans in that they are an outright distribution of cash and do not need to be repaid. Grants are awarded to those businesses that can show the monies will ultimately be used in a manner that will further economic growth. Another aspect of grants is that they won’t cover 100% of a business’s financial needs. A business must be able to prove it has the ability to match the amount being awarded.

There are also several sources of EU funding available to help finance UK small business specializing in agriculture, the environment, transportation, education, technology, communication, and information technologies.

Venture capitalists are always on the look out for innovative businesses so if you’re a UK small business seeking finance assistance, don’t forget to investigate these sources. In addition to providing financial assistance, many venture capitalists also provide other types of assistance such as growth and management. Also check into regional venture capital funding, a source of funding provided to small and mid-sized businesses that demonstrate a clear potential for growth.

Getting paid on time is sometimes a significant finance-related problem many UK small business owners face which is why the Late Payment of Commercial Debt Act was passed in 1998. This law allows small businesses to collect interest on late payments. While it’s better for a business to be paid on time, the ability to collect interest does offer some financial consolation.

UK small business finance programs are available to businesses willing to locate in economically depressed areas. Why? Because it’s in everyone’s best interest to turn these types of areas around. The swing from depressed area to vibrancy often begins with one willing company.

If your UK small business needs finance assistance, you’ll be able to find it. You will, however, have to prove your business is worthy of such an investment first.

David
Small Business Resource

Posted by David at 1:45 PM | Comments (0) | TrackBack

March 11, 2005

Starting a Small Business Aided By Family Finance

Starting a small business by borrowing from relatives is often the only way to get started.

Take James McAnerney who decided to open his own business, he needed €50,000 to buy into a franchise but without a track record approaching the bank would not be easy so he looked closer to home to raise the start up finance.

Mr MCAnerney said , “I reckoned franchising was the way to go rather than start a business from scratch, I found Cartridge World within four weeks.”

Mr MCAnerney had less than half the finance required himself so he decided to borrow the rest from his family.

Just more than 18 months ago he opened his first Cartridge World store in Dundalk about 18 months ago specialising in recycling printer cartridges at bargain prices.

“I had the option of going to the bank but I would have been able to give only projections,” he said. “It was easier to borrow from my family with the promise that, after one year’s trading, I would be able to get a bank loan to pay them back.”

Many successful small businesses look to family and friends for start up finance says Pat Delaney, the director of the Small Firms Association.

Delaney says it's a good idea, “It is probably the biggest source of start up capital available to very small companies.”

Delaney pointsout that there's plent ofthis type of funding available to finance start ups given that the first generation has inherited wealth.

Michael Dwyer is another small business entrepreneur who used a mix of family loan when setting up Pigsback.com, the online marketing portal says usingfamily finance can work well for those who follow a few rules.

Some of the rules include:

. If you are asking your family to invest, you must put in your own
capital too. This shows that you are committed.
. If funding is really an investment make it clear to your family
members that this is an investment that should be written off.
. Get family members to put in only as much as they are prepared to
risk.

If you are considering starting a small business and you're interested in raising finance from family members read Bank on family members for a helping hand

David
Small Business Resource

Posted by David at 9:23 AM | Comments (0) | TrackBack