Florida Trend | Florida's Business Authority

Financing

Running out of money is not the primary reason businesses fail, but it can be a contributing factor if you don’t plan ahead for financial stability. Ideally, you have set aside the necessary funds to get your business off the ground. Your next step is to go looking for people and institutions that can provide additional money as your business begins to grow.

 

Venture Capital

Get Investors Interested

Equity financing typically comes from a family member, friend or group of investors who expect some level of control in the business and/or a percentage of future profits.

Venture capital firms or private individual investors called “angels” may be willing to make money available for your venture if they see potential.

Venture capital firms are often controlled by banks, insurance companies and large corporations; angels are generally wealthy individuals who are looking to support “hot” ideas and untapped investment opportunities. In either case, be prepared to present a business plan that is heavy on “wow.” These types of investors will take risks, but only if they truly believe in you and/or your product or service.

Venture capitalists traditionally deal in large sums of money and seek better-than-average returns on their investments; less than 1% of proposals for venture capital are ever actually funded. Individual angels will make smaller investments in business startups, and although looking for good returns, are often less demanding.

See a list of Florida venture capital firms or visit the Florida Venture Forum website (www.flventure.org) for more information.

 

Self Financing

Start at Home

Before you ask friends, family or financial institutions for money, be prepared to tap into your own savings or money market accounts, cash out your stocks, sell your boat, downsize your standard of living and/or take out a second mortgage.

If none of these seems a viable option, pull out your credit card(s). Many small businesses have succeeded by charging their way through the first year or two of operation, but it can be risky. If you go this route, use only cards with favorable interest rates, read all terms and conditions up front, monitor due dates and make every payment on time.

Another option to consider: store credit. Some retailers make it easy for you to furnish your office with no money down and no interest or payments for a year or more. Make that store’s gimmick work for you, but prepare for the day when the bill comes due; failure to meet the repayment terms generally results in heavy penalties and interest accrued from date of purchase. Ouch!

 

Commercial Loans

Borrow the Money You Need

Debt financing consists of borrowed dollars that must be repaid with interest, and the lender generally has no ownership control.

Whether from private or public sources, commercial loan approval is typically based on the business owner’s capacity to repay the loan as indicated by his/her past business experience, personal credit rating, collateral, industry conditions and the profitability of the business itself. You’ll make a better impression on a loan officer if you can present a fully developed business plan (see “Work the Plan”) that shows you’re serious about business ownership and you’ve done your homework.

are often cautious about making loans to business startups due to the high rate of failure associated with new businesses; you may have better luck securing funds from these sources once your business is established. Types of funding available from banks and credit unions include accounts receivable financing, inventory financing, unsecured lines of credit and commercial loans to satisfy special business needs. Some banks also may provide medium- and long-term loans to small businesses to increase working capital, purchase or lease equipment or finance real estate.

are often willing to take higher risks than banks; they typically charge higher interest rates as a result. These firms customarily evaluate loan applications more on the strength of collateral than on a company’s track record or potential for profit.

offers no direct loans, other than for disaster assistance. Financial assistance to small firms from the SBA comes in the form of loans that are made by commercial banks or credit unions; in return, these institutions receive a federal-government guarantee for part of the loan. Applications for SBA loans are treated like any other commercial loan application: the primary deciding factor is an applicant’s ability to repay the loan. While good character, proven management ability, collateral and significant owner equity in a business are all important considerations, they carry less weight than demonstrated ability to pay the money back.

• 7(a) Loan For long-or short-term working capital needs, inventory and equipment purchases, expansion/renovation, starting a business or to refinance existing debt under certain specific conditions.

• CDC/504 Loan Long-term, fixed-rate financing to acquire fixed assets for expansion/modernization by for-profit businesses with a tangible net worth of less than $15 million and an average net income of $5 million or less after federal income taxes for the preceding two years; may be used for land, buildings, machinery and equipment.

• Microloan Funds are made available by the SBA to specially designated intermediary lenders that, in turn, make loans to eligible borrowers. The maximum loan amount is $50,000; however, the average microloan is about $13,000. May be used for working capital or purchase of inventory, supplies, furniture, fixtures, machinery and/or equipment; may not be used to repay existing debts or purchase real estate.

Florida-Based Loan Programs

Microfinance Programs Entrepreneurs and small businesses in Florida with no more than 25 employees and gross annual revenues of up to $1.5 million have access to credit through two microfinance programs administered at the state level.

• Microfinance Loan Program Short-term loans of up to $50,000 are available through administrators selected by the Florida Department of Economic Opportunity; if selected to receive a loan, the borrower must participate in business training and technical assistance provided by the Florida SBDC Network.

• Microfinance Guarantee Program Enterprise Florida Inc. uses state funds to guarantee loans of between $50,000 and $250,000 made by private lenders to entrepreneurs and small businesses in Florida; guarantees cannot exceed 50% of the total loan amount.

For additional information and to apply for either of these programs, www.floridajobs.org/microfinanceprograms.

Know Your Score

If you are starting a business for the first time, you have no business credit history. So lenders and suppliers will use your personal credit score to determine your terms of credit. Know where you stand before you start “shopping” for funds by requesting a free copy of your credit report at annualcreditreport.com.

HOW BANKERS LOOK AT BORROWERS
5 Key Points

Bank loans are a common way to fund a small business, but actually getting one can be difficult. Before making a loan request, consider how bankers evaluate eligibility and adjust your game plan accordingly:

A banker wants to know up front that you’ll be able to repay your loan, so come to your first meeting armed with proof: a written analysis of anticipated cash flow and a description of collateral that could be used as a secondary repayment source.

Obtain a free copy of your credit report at www.annualcreditreport.com and look it over carefully for mistakes and potential “red flags” before meeting with a banker. A missed payment or a period of bad credit due to a medical crisis or other life-altering event won’t necessarily disqualify you from obtaining a loan; attaching a written explanation of the situation to your credit report might help your case.

Equity can be built through retained earnings or the injection of cash from owners/investors. Banks typically like to see that the total liabilities of a business are no more than four times the amount of equity. Don’t assume you can obtain a loan to cover 100% of your financing needs; you will have to put some of your own money into this venture too.

Defined as personal and business assets that can be sold to pay back the loan if necessary. If you are just starting out and have no collateral, you will probably need a co-signer who does.

Bankers do not look fondly on loan applicants who want to open businesses for which they have no experience, unless they can demonstrate that they intend to hire people who know the business or take on a partner with appropriate experience. If you do not have personal experience, get some. Before you apply for funding, work in the business and take entrepreneurial training classes.

 

Special Interest Financing

Targeted Opportunities

If you are black, Hispanic, a female or a U.S. veteran, your business may be eligible for the following specialized funding programs and services.

The Black Business Loan Program provides loans, loan guarantees and/or investments through loan administrators to black business enterprises that cannot otherwise obtain capital through conventional lending institutions. For additional information and applications, visit www.floridajobs.org/BBLP. In addition, Black Business Investment Corporations throughout Florida stand ready to facilitate access to capital for black business owners. See the list of BBIC offices in Florida. Hispanic business owners may find funding information pertinent to their needs through the Hispanic Business Initiative Fund Florida at www.HBIFFlorida.org.

WOMEN No government loan programs exist exclusively for women business owners; however, experience has shown that SBA loans are three to five times more likely to go to women than non-SBA loans. SBA financing options include 7(a) and CDC/504 loans as well as microloans for small-scale financing. On the local level, Women’s Business Centers (WBCs), which are overseen by SBA’s Office of Women’s Business Ownership, can provide assistance in applying for SBA loans and also may provide access to alternative capital financing programs. See a list of WBCs in Florida.

VETERANS Thanks to the VA’s Office of Small & Disadvantaged Business Utilization, a wealth of information on small business financing specifically geared to veterans is just a click away. The Veteran Entrepreneur Portal (VEP) makes it easy for veterans to access federal services and best-practices information about starting, growing and funding a business. For more information, visit www.va.gov/osdbu/entrepreneur/index.asp. And if that’s not enough, the SBA website has a whole section devoted to business resources for veteran entrepreneurs at www.sba.gov/content/veteran-service-disabled-veteran-owned.

 

Enterprise Florida: Financial Support

Helping Small Businesses Grow

Enterprise Florida Inc. (EFI) partners with lenders and other outside organizations to help small businesses access capital through the following programs:

Through the SSBCI Program, small businesses may obtain loan approvals and leverage private capital to cover startup costs; franchise fees; expenses related to working capital needs, business procurement, equipment and inventory; and the purchase of owner-occupied real estate. SSBCI provides lenders with necessary security in the form of a partial guarantee to approve a loan or line of credit.

The EFI-managed Florida Development Finance Corporation was created to be a conduit issuer of industrial revenue bonds (IRBs) for small manufacturers and 501(c)(3) organizations. Proceeds may be used for capital expenditures only, such as the purchase of land, new long-term equipment and building construction/renovations.

The Florida Opportunity Fund provides venture capital for startup and early-stage businesses in two forms: a state-run venture capital fund, which may include other, private investors, that invests directly in businesses; and a fund of funds that invests in other venture capital funds that, in turn, invest in individual businesses. The state’s decision on which form to use depends on many factors, including resources and available talent.

Helps Florida’s small businesses improve their chances of submitting a successful Small Business Innovation Research (SBIR) or Small Business Technology Transfer (STTR) Phase 1 proposal for federal research and development funds; may be used to cover market research, technology consulting services, grant writing assistance, related travel and legal/accounting fees.

Crowdfunding

Raising Capital Outside the Box

The growing popularity of crowdfunding as a way to underwrite small business growth was triggered by passage of the federal JOBS (short for Jumpstart Our Business Startups) Act in 2012. In a nutshell, this act allows private companies to solicit investors on the Web and opens the door for anyone to become shareholders.

In October 2015, the SEC officially ruled that non-accredited investors may invest in startups, a privilege once reserved only for accredited investors. The new rules, which take effect in May 2016, also limit the amount of money an issuer can raise through crowdfunding, impose disclosure requirements on issuers and create a regulatory framework for broker-dealers and funding portals that facilitate crowdfunding transactions.

Should you consider investment crowdfunding? Maybe, maybe not. But at the very least, you should investigate the possibility and take a look at sites like AngelList, Crowdfunder, Early Shares and EquityNet for more information.

Good Advice

“Crowdfunding can be an impactful opportunity ... but the required financials, legal documentation, appropriate platform and registration requirements are substantial.  If equity crowdfunding is of interest to you, make sure you conduct the due diligence and get the proper legal advisors before seeking investors.”
— Jim Taylor, Florida SBDC at USF Connect

Grants

Money Not Easily Obtained

Little federal grant money is available to launch for-profit small businesses. However, some businesses engaged in scientific research and development (R&D) may qualify for federal grants under the Small Business Innovation Research (SBIR) and the Small Business Technology Transfer (STTR) programs if their projects meet federal R&D objectives and have high potential for commercialization. To learn more, visit www.SBIR.gov. Enterprise Florida’s Phase 0 Program may be able to assist your firm in putting together its SBIR/STTR Phase 1 proposal.

Some business grants may be available through state and local programs, nonprofit organizations or other groups. These grants do not necessarily represent “free” money; many require the recipient to match funds or combine the grant with other forms of financing such as a commercial loan. For information about grants available in Florida, visit www.florida.grantwatch.com.