1. business and industrial

Welcome to Building a Business Plan.
The intention of this presentation is to give you an overview of the information
needed to develop and produce a written business plan.
While attending the sessions you will be moving forward with the work on your
business plan and developing the necessary documents to seek financing if
needed.
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Excerpted from: SBA Small Business Loans Explained–Availability, Eligibility and the Application Process
by CaronBeesley at www.Business.gov
What is a Government-Backed Business Loan?
First, let's dispel one myth - the government does not (generally) directly provide business owners with loans . Instead, it
provides a guaranty to banks and lenders for the money they lend to small businesses owners (and you'll find information
here on what the SBA officially considers "small"). This guaranty protects the lenders interests by promising to pay a
portion (the percentage varies by the type of loan) if the business owner defaults on the loan.
Essentially government-backed small business loans alleviate the risk associated with lending money to business owners
and entrepreneurs who may not qualify for traditional loans - thus opening up lending opportunities to thousands of
entrepreneurs, start-ups, growing businesses, minorities, and veterans.
Is My Business Eligible for a Loan?
While each loan has its own specific qualification criteria, you will need to talk to your bank or lender about your
eligibility. But before you set up your first appointment with a loans officer, use this Small Business Loans and Grants
Search Tool (from Business.gov) to help you build a picture of what government-backed financing your small business
might be eligible for based on your business profile and needs.
While most banks and lenders offer SBA loans, you would be advised to approach a bank that been through this process
before and is also either a Certified Lender or Preferred Lender. That certification means they have a contractual
relationship with the SBA and participate in the Certified Lender (CLP) / Preferred Lender (PLP) programs - in other
words, they have a proven track record of processing SBA-backed loans and know what they are doing!
And don't necessarily think you need to stick to the big name banks. In fact, some of the larger banking institutions were
hardest hit by the recent economic collapse and slowed their business borrowing significantly. Many smaller community
banks and credit unions can offer local market knowledge and may be more flexible to your needs. Take a look at this
Business Week slideshow (based on SBA data), which lists the *Top Small Business Lenders of recent years.
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How to Register as a Federal Contractor
Step 1: Obtain a D-U-N-S Number
Before you can bid on government proposals, you'll need to obtain a couple of registrations. First, you will first need to
obtain a Dun & Bradstreet D-U-N-S Number, a unique nine-digit identification number for each physical location of your
business. D-U-N-S Number assignment is free for all businesses required to register with the federal government for
contracts or grants. Visit the D-U-N-S Request Service to register.
Step 2: Register Your Business
Secondly, you'll need to register with the federal government's Central Contractor Registration (CCR), the primary
database of vendors doing business with the federal government. Federal acquisitions regulations require all prospective
vendors to be registered in CCR prior to the award of a contract; basic agreement, basic ordering agreement, or blanket
purchase agreement.
Next, you'll need to fill out the Online Representations and Certifications Application (ORCA), in which you provide
additional information about your company and its business activities. The Federal Acquisitions Regulations, Section
52.212-3, Offeror Representations and Certifications - Commercial Items, explains the information that you'll be asked on
ORCA.
How to Find Contracting Opportunities
Once you've made all necessary registrations, you can begin seeking out business opportunities.
FedBizOpps
All federal contract solicitations with a value of $25,000 are published on FedBizOpps : Federal Business Opportunities.
Government agencies publish the solicitations on FedBizOpps, and provide detailed information on how and when
vendors should respond.
GSA Schedules
Many government agencies establish government-wide contracts which simplify the procurement process for federal
agencies by allowing them to acquire a vast array of products and services directly from commercial suppliers. The
largest government-wide contracts are established by the U.S. General Services Administration under its GSA Schedules
Program. GSA establishes long-term contracts that provide over 10 million commercial supplies and services that can be
ordered directly from GSA Schedule contractors or through the GSA Advantage! online shopping and ordering system.
Vendors interested in becoming GSA Schedule contractors should review the Getting on the GSA Schedules page, in
order to understand the process involved in obtaining a GSA Schedule contract.
GSA schedule vendors can submit their contract proposals, offers and modifications over the Internet via GSA's eOffer
system.
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The Small Business Administration provides small business counseling and training through a
variety of programs and resource partners, located strategically around the country.
Women's Business Centers (WBCs) Women's Business Centers represent a national network
of nearly 100 educational centers designed to assist women start and grow small businesses.
WBCs operate with the mission to level the playing field for women entrepreneurs, who still face
unique obstacles in the world of business. WBCs also work with male entrepreneurs so contact
them for assistance if you are in their area. The West Virginia WBC also excels in training, both
online and instructor-led. Check out their web site at www.westvirginiawbc.org.
SCORE The SCORE Association (Service Corps of Retired Executives) is a resource partner of
the SBA dedicated to entrepreneur education and the formation, growth and success of small
businesses nationwide. There are more than 10,500 SCORE volunteers in 374 chapters operating
in over 800 locations who assist small businesses with business counseling and training. SCORE
also operates an active online counseling initiative. For West Virginia‟s SCORE locations, go to
www.wvscore.org.
Small Business Development Centers (SBDCs)
The Office of Small Business Development Centers (SBDC) provides management assistance to
current and prospective small business owners. SBDCs offer one-stop assistance to individuals
and small businesses by providing a wide variety of information and guidance in central and
easily accessible branch locations. The program is a cooperative effort of the private sector, the
educational community and federal, state and local governments and is an integral component of
Entrepreneurial Development's network of training and counseling services. In West Virginia, go
to www.sbdcwv.org for more information and office locations.
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The process of creating a plan forces you to take a realistic, objective, unemotional look
at your business, your business project, or your venture in its entirety.
The final, completed business plan is the vehicle or the tool for communicating your
ideas to others and may serve as the basis for your financial proposal.
Putting it down on paper is the key! In most cases, people put things on paper and that's
the first step to taking nebulous thoughts and making them become concrete realities.By
taking an objective look at your business, you can identify its areas of strength as well as
its areas of weakness, and you can pinpoint your needs, or you can pinpoint stuff that
you might normally overlook throughout the course of your business. A business plan
will help you spot problems before they arise.
There are three basic things a business plan will do for you:
It will help you red-flag problems
It will suggest ways to solve those problems
It will help you avoid the problems altogether
It doesn't really do you any good to pay to have somebody else do your business plan for
you because when you thoroughly research and pull your business plan together, you get
an enormous amount of information about your business. And information promotes
knowledge. And knowledge promotes confidence. And confidence gives you
enthusiasm, and it makes you the best salesman for your business.
The SBDC is your partner in completing the BP and Loan package.
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A business plan will help work through these issues so you will have a higher
success rate.
If you‟re not in business yet, a good business plan will give you four different
pieces of information:
•It will tell if your idea makes sense. The important variable to consider is net
profit.
•It'll tell you if you really have a chance in the marketplace.
•It'll tell you whether or not you're kidding yourself.
It will tell you whether you're capable -- physically, mentally, and emotionally -to take on the chores of running and operating a small business
Your business plan can help you avoid going into a business venture that is
doomed from the start. It will help you find out if there is enough profit
potential; or if the market is right.
Your business plan will provide information needed by others who evaluate your
venture or business, especially when you need money or financing. A thorough
business plan will automatically become a complete financing proposal that will
meet the requirements of most lenders.
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These are the components of a complete business plan. Each has its role to play
in explaining what your business is and how it works.
This is the information the prospective investors, whether banks, government
agencies, venture capitalists or individuals will want to see before putting their
money in your hands.
Each section has important information and should not be overlooked or left out.
We will in this session cover the Business Description and an overview of
remainder of plan.
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l.
Cover Page (I page)
a .Name of company and status
b. Address
c. Phone Number
d. Principals (Principals are the owners of the business.
Anybody who owns 25% or more of stock should be on this
cover page)
e. Logo (A visual display or icon that people will identify with
your company)
f. Submitted to (for financing only)
This is the information needed for a cover page. Keep it simple and make it eye
catching and visually appealing.
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We will in each session be covering one of these four main parts of a winning
business plan.
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Describe the business: Tell what your business is; how you plan on running it; and why you think
it will be successful. Include:
-The type of business (retail, wholesale,
manufacturing, or service-oriented)
-Business status (whether it is an old
business or a new effort)
-Form of business (sole prop, limited
partnership, or corporation)
-Why it will be profitable.
-When you plan to open or start
-What your hours of operation are going to be.
-Whether or not it's seasonal
Location synopsis
•Location will make or break you. Check out the address. Will it fit nicely into an advertising
campaign? will people remember it? Other features around you might play an important part
(e.g., "We're right next door to McDonald's)
•After the address, you want to consider the physical features, i.e., what floor you're on, what kind
of window space do you have, how many square feet? Do you have air conditioning, heating, and
plumbing? Are you on a corner? Are you on a one-way street? Is there ample parking? Are you
leasing or owning? Do you have a copy of the lease?
•The next part is going to be renovation. List your required renovations and get your quotes. Are
they valid for 30, 60, 90 days, etc.?
•What's the neighborhood like: residential, industrial, or downtown commercial? Is there a
possibility for co-op advertising? Can you benefit from other business' overflow?
•Describe other areas that you've looked at for comparison. How does this location affect your
operating costs?
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Basic Structures
Sole Proprietorship
The sole proprietorship is a simple, informal structure that is inexpensive to form; it is usually owned by a single person
or a marital community. The owner operates the business, is personally liable for all business debts, can freely transfer all
or part of the business, and can report profit or loss on personal income tax returns.
Limited Liability Company (LLC)
The LLC is generally considered advantageous for small businesses because it combines the limited personal liability
feature of a corporation with the tax advantages of a partnership and sole proprietorship. Profits and losses can be passed
through the company to its members or the LLC can elect to be taxed like a corporation. LLCs do not have stock and are
not required to observe corporate formalities. Owners are called members, and the LLC is managed by these members or
by appointed managers.
General Partnership
Partnerships are inexpensive to form; they require an agreement between two or more individuals or entities to jointly
own and operate a business. Profit, loss, and managerial duties are shared among the partners, and each partner is
personally liable for partnership debts. Partnerships do not pay taxes, but must file an informational return; individual
partners report their share of profits and losses on their personal return. Short-term partnerships are also known as joint
ventures.
C Corporation (Inc. or Ltd.)
This is a complex business structure with more startup costs than many other forms. A corporation is a legal entity
separate from its owners, who own shares of stock in the company. Corporations can be created for profit or nonprofit
purposes and may be subject to increased licensing fees and government regulation than other structures. Profits are taxed
both at the corporate level and again when distributed to shareholders.
Shareholders are not personally liable for corporate obligations unless corporate formalities have not been
observed; such formalities provide evidence that the corporation is a separate legal entity from its shareholders. Failure to
do so may open the shareholders to liability of the corporation's debts. Corporate formalities include: issuing stock
certificates; holding annual meetings; recording the minutes of the meetings; and, electing directors or ratifying the status
of existing directors.
Corporations should always be assisted by a qualified attorney.
Sub Chapter S Corporation (Inc. or Ltd.)
This structure is identical to the C Corporation in many ways, but offers avoidance of double taxation. If a corporation
qualifies for S status with the IRS, it is taxed like a partnership; the corporation is not taxed, but the income flows
through to shareholders who report the income on their individual returns.
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A market is simply any group of actual or potential buyers of a product. There
are three major types of markets.
3The Consumer Market. Individuals and households who buy goods and
their own use or benefit are part of the consumer market. Drug and grocery
items are the most common types of consumer products.
3The Industrial Market. Represents individuals, groups, or organizations
that purchase your specific product or service for direct use in producing
other products or for use in their day-to-day operations.
3The Reseller Market. Represents middlemen or intermediaries, such as
wholesalers and retailers who buy finished goods and resell them for purpose
of making a profit.
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Excerpted from www.wikipedia.com:
In the early 1960s, Professor Neil Borden at Harvard Business School identified a number of company performance
actions that can influence the consumer decision to purchase goods or services. Borden suggested that all those actions of
the company represented a “Marketing Mix”. Professor E. Jerome McCarthy, at the Michigan State University in the
early 1960s, suggested that the Marketing Mix contained the four elements of (1) product, (2) price, (3) place and (4)
promotion.
Product The product aspects of marketing deal with the specifications of the actual goods or services, and how it relates
to the end-user's needs and wants. The scope of a product generally includes supporting elements such as warranties,
guarantees, and support.
Pricing This refers to the process of setting a price for a product, including discounts. The price need not be monetary; it
can simply be what is exchanged for the product or services, e.g. time, energy, or attention. Methods of setting prices
optimally are in the domain of pricing science.
Placement (or distribution) This refers to how the product gets to the customer; for example, point-of-sale placement or
retailing. This third P has also sometimes been called Place, referring to the channel by which a product or service is sold
(e.g. online vs. retail), which geographic region or industry, to which segment (young adults, families, business people),
etc. also referring to how the environment in which the product is sold in can affect sales.
Promotion This includes advertising, sales promotion, including promotional education, publicity, and personal selling.
Branding refers to the various methods of promoting the product, brand, or company.
These four elements are often referred to as the marketing mix,[5] which a marketer can use to craft a marketing plan. The
four Ps model is most useful when marketing low value consumer products. Industrial products, services, high value
consumer products require adjustments to this model.
Services marketing must account for the unique nature of services.
Industrial or B2B marketing must account for the long term contractual agreements that are typical in supply chain
transactions.
Relationship marketing attempts to do this by looking at marketing from a long term relationship perspective rather than
individual transactions. As a counter to this, Morgan, in Riding the Waves of Change (Jossey-Bass, 1988), suggests that
one of the greatest limitations of the 4 Ps approach "is that it unconsciously emphasizes the inside–out view (looking
from the company outwards), whereas the essence of marketing should be the outside–in approach".
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People: Any person coming into contact with customers can have an impact on
overall satisfaction. Whether as part of a supporting service to a product or
involved in a total service, people are particularly important because, in the
customer's eyes, they are generally inseparable from the total service . As a
result of this, they must be appropriately trained, well motivated and the right
type of person. Fellow customers are also sometimes referred to under 'people',
as they too can affect the customer's service experience, (e.g., at a sporting
event).
Personalization: It is here referred customization of products and services
through the use of the Internet. Early examples include Dell on-line and
Amazon.com, but this concept is further extended with emerging social media
and advanced algorithms. Emerging technologies will continue to push this idea
forward.
Peer-to-Peer: This refers to customer networks and communities where
advocacy happens. The historical problem with marketing is that it is
“interruptive” in nature, trying to impose a brand on the customer. This is most
apparent in TV advertising. These “passive customer bases” will ultimately be
replaced by the “active customer communities”. Brand engagement happens
within those conversations. P2P is now being referred as Social Computing and
is likely to be the most disruptive force in the future of marketing.
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The first step in identifying your target market is understanding what your
product/services have to offer to a group or people or businesses. To do this,
identify your product of service‟s features and benefits. A feature is a
characteristic of a product/service that automatically come with it. By knowing
what it has to offer and what will make customers buy, you can begin to identify
common characteristics of your potential market.
For example, there are many different consumers who desire safety as a benefit
when purchasing a car. Rather than targeting everyone in their promotional
strategy, a car manufacturer may opt to target a specific group of consumers with
similar characteristics, such as families with young children. This is an example
of market segmentation.
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Excerpted from an article at www.entrepreneur.com
Target Market
Definition: A specific group of consumers at which a company aims its products and services
Your target customers are those who are most likely to buy from you. Resist the temptation to be
too general in the hopes of getting a larger slice of the market. That's like firing 10 bullets in
random directions instead of aiming just one dead center of the mark--expensive and dangerous.
Try to describe them with as much detail as you can, based on your knowledge of your product
or service. Rope family and friends into visualization exercises ("Describe the typical person
who'll hire me to paint the kitchen floor to look like marble...") to get different perspectives-the
more, the better.
Here are some questions to get you started:
Are your target customers male or female?
How old are they?
Where do they live? Is geography a limiting factor for any reason?
What do they do for a living?
How much money do they make? This is most significant if you're selling relatively expensive or
luxury items. Most people can afford a carob bar. You can't say the same of custom murals.
What other aspects of their lives matter? If you're launching a roof-tiling service, your target
customers probably own their homes.
Today's consumers are more marketing-savvy than ever before and don't like to be "lumped"
with others--so be sure you understand your target market. While pinpointing your market so
narrowly takes a little extra effort, entrepreneurs who aim at a small target are far more likely to
make a direct hit.
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Once upon a time, business owners thought it was enough to market their products or
services to "18- to 49-year olds." Those days are a thing of the past. Because the
consumer marketplace has become so differentiated, it's a misconception to talk about
the marketplace in any kind of general way anymore. Now, you have to decide whether
to market to socioeconomic status or to gender or to region or to lifestyle or to
technological sophistication. There's no end to the number of different ways you can
slice the pie.
Further complicating matters, age no longer means what it used to. Fifty-year-old baby
boomers prefer rock 'n' roll to Geritol; 30-year-olds may still be living with their parents.
People now repeat stages and recycle their lives. You can have two men who are 64
years old, and one is retired and driving around in a Winnebago, and the other is just
remarried with a toddler in his house.
Generational marketing, which defines consumers not just by age, but also by social,
economic, demographic and psychological factors, has been used since the early 80s to
give a more accurate picture of the target consumer.
A newer twist is cohort marketing, which studies groups of people who underwent the
same experiences during their formative years. This leads them to form a bond and
behave differently from people in different cohorts, even when they're similar in age.
For instance, people who were young adults in the 50s behave differently from people
who came of age during the tumultuous 60s, even though they're close in age.
To get an even narrower reading, some entrepreneurs combine cohort or generational
marketing with life stages, or what people are doing at a certain time in life (getting
married, having children, retiring) and physiographics, or physical conditions related to
age (nearsightedness, arthritis, menopause).
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Understanding your firm‟s USP or unique selling proposition. And I can already
tell you that if you say price, you are behind in this game. Small businesses
cannot compete on price.
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This is Problem Number 1 when starting to develop a marketing strategy for your business. Most people will point to a
feature, and expect customers to “get it.” However, what really sells, either a service or a product, is the Benefit of the
product, not its features.
According to Allen Weiss, founder and publisher of MarketingProfs.com, the first thing to note is that product features
reside in the product, while benefits reside in the customer.
For example: A car can have 4-wheel drive (a concrete attribute) and provide a benefit to a customer of being able to go
various places.
Example: A computer can have a microprocessor with a fast clock speed (a concrete attribute) and provide the benefit of
being able to get your job done faster.
Benefits are always abstract, and they are often the result of a cluster of product attributes, some of which may be abstract
attributes. For example, think of safety (say in a car). There is a cluster of concrete product attributes (e.g., air bags,
brakes, and body construction) that give rise to the more abstract concept of the benefit of safety. But note that "safety"
can also be applied to the car (so it‟s an abstract product attribute). Many times, abstract product attributes are closely
related to benefits. When they are, you do not get much benefit out of making a distinction between attributes and
benefits.
Given this discussion, you can see that it is often easier to think about what a customer buys by thinking along the
continuum of concrete versus abstract ideas, regardless of whether we label it an attribute or a benefit. Since we are
primarily interested in the abstract ideas (since this is what customers really buy), you might use the term "factor" rather
than attribute or benefit, just making sure that the factor is abstract. In this tutorial, however, we will tend to use the term
"benefit" to refer to these abstract ideas (i.e., both abstract attributes and benefits).
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EXAMPLE
Bounty: The Quicker Picker-Upper--- It saves you time.
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EXAMPLE
Minivan--- Honda Odyssey was named the Top Family Car of the Year, according to Cars.com.
Buy it is not the top seller. Chrysler's Town & Country does that, by „blurring the lines between
home and auto.‟ Meaning? It‟s more Family-Friendly. You can take your kids on the road, and
not be tortured by them! Includes 2 DVD players (one for each row of seats), and can easily be
re-configured with its Stow-n-Go seating.
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You need to be asking yourself these questions
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You must build a team of experts to assist in your business success
Explain here your qualifications and those of others who will be working with
you
Also discuss the lawyer, accountant and insurance agent you have and what you
expect from them.
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This is because you are going to have to sell yourself first and then your work.
Cover these and ask for others
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Professional development should be a constant. Get help where you need it.
Network to learn more about being in business. Attend training whenever
possible. Hire help when needed.
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Many people dream of someday owning their own business, and a small
percentage of these people actually realize this dream. Unfortunately, many of
these business ventures fail within the first few years of existence. There are
several reasons why businesses do not survive, but two of the most common are
a lack of sufficient capital and poor planning by management.
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The first order of business is to write down all the expenses you will incur
during the start-up period. The start-up checklist on this page should help in
determining expenses.
TIP: When calculating monthly utilities, phone, and rent expenses, remember
to include such items as deposits. In addition, you will often be required to
make a half- or full-year payment on such items as insurance if you are a startup.
Hand out copy of checklist
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Determine how many people you need to see on a daily basis to make the
numbers work. Is this number realistic given your type of business, location,
prices, etc?
Determine the cost of replacing the merchandise sold (Cost of Goods Sold or
COGS). Are your margins high enough to cover monthly expenses?
WARNING: Competing solely based on price can be risky. You may end up in
a price war with diminishing margins. Whoever has the deepest pockets usually
wins this war.
It is important when developing projections, to include a page of projection
assumptions. A page full of numbers makes little sense to a lender looking at the
package for the first time.
Go through step by step example of this process. Use computer to project
worksheet and discuss and fill in the amounts. 45 minutes here
After you have all your information together, have someone else read it to see if
it makes sense. Make any necessary corrections, and make a few copies of the
package. Call and make an appointment with your lender (do not drop by
unexpectedly!) to discuss your package.
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The science of pricing is using a cash breakeven analysis to determine if prices
make sense
Should give you an idea of how much customers are likely to spend
Limits of time and money to sell and make purchases
Need to determine when higher sales will take place and establish peaks and
slumps
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For the most part, there are two ways to finance your business: equity and debt.
Equity financing occurs when the owner sells interest in the business to outside
investors in exchange for ownership rights. These investors see the potential in
the business and are willing to invest.
Debt financing occurs when the owner enters into a contractual agreement with
a lender to repay borrowed money. This is the most common way businesses are
financed. If payment is not received, the lender can take legal action against the
owner to collect the amount that is owed.
As mentioned earlier, one of the main reasons businesses fail is due to lack of
sufficient capital. To prevent a cash flow crunch during your start-up period,
carefully determine your financial needs before you start the business.
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Please note that the U.S. Small Business Administration does not offer grants to
start or expand small businesses, though it does offer a wide variety of loan
programs. While the SBA does offer some grant programs, these are generally
designed to expand and enhance organizations that provide small business
management, technical, or financial assistance. These grants generally support
non-profit organizations, intermediary lending institutions, and state and local
governments.
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When asked, “what do you look for in a banker”, many entrepreneurs might say
“someone who will loan me money”. While this approach may work in the
short-term, it is important to develop a long-term relationship with a lender or
lending institution. As your company grows and prospers, many financing
opportunities will arise. It is important that your lender is as interested in the
long-term success of your company as you are.
So how do you find the right one? There are several ways:
•Go to other small businesses and ask about their bankers. If their relationship is
strong, the business owner will likely tell you to talk to his or her lender.
•Look for institutions near your business location. Convenience can be very
important depending on what type of business you are starting.
•Ask for annual reports from the lending institution. You want to choose a bank that
will be around when you need them.
•Remember that banks make money by making loans. They are looking for
customers. Shop around and get the best deals on interest rates, checking accounts,
service fees, etc.
•Most importantly, find someone that you are comfortable with. Hopefully, this will
turn into a long-term, mutually beneficial relationship.
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Your credit report determines how you will be perceived by potential lenders
and suppliers. You should know what appears on your credit report because you
may find errors that you will want to have corrected. To get a copy of your
personal credit report, refer to one of the three major credit bureaus. In addition,
it is very important for business owners and entrepreneurs to make sure their
business credit report is accurate before they submit a credit application. To get
copies of your business credit report, contact one of the business credit reporting
agencies including D&B eUpdate.
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To determine if you qualify for SBA's financial assistance, you should first understand some basic credit factors that
apply to all loan requests. Every application needs positive credit merits to be approved. These are the same credit factors
a lender will review and analyze before deciding whether to internally approve your loan application, seek a guaranty
from SBA to support their loan to you, or decline your application all together. Within Eligibility Topics we‟ll review:
When applying for a loan, you must prepare a written loan proposal. Make your best presentation in the initial loan
proposal and application; you may not get a second opportunity.
The 5 C's of Credit: Your bank is in business to make money. Consequently, when a bank lends money it wants to
ensure that it will be paid back. The bank must consider the 5 "C's" of Credit each time it makes a loan.
Capacity to repay is the most critical of the five factors. The prospective lender will want to know exactly how you
intend to repay the loan. The lender will consider the cash flow from the business, the timing of the repayment, and the
probability of successful repayment of the loan. Payment history on existing credit relationships - personal and
commercial - is considered an indicator of future payment performance. Prospective lenders also will want to know about
your contingent sources of repayment.
Capital is the money you personally have invested in the business and is an indication of how much you will lose should
the business fail. Prospective lenders and investors will expect you to contribute your own assets and to undertake
personal financial risk to establish the business before asking them to commit any funding. If you have a significant
personal investment in the business you are more likely to do everything in your power to make the business successful.
Collateral or guarantees are additional forms of security you can provide the lender. If the business cannot repay its loan,
the bank wants to know there is a second source of repayment. Assets such as equipment, buildings, accounts receivable,
and in some cases, inventory, are considered possible sources of repayment if they are sold by the bank for cash. Both
business and personal assets can be sources of collateral for a loan. A guarantee, on the other hand, is just that - someone
else signs a guarantee document promising to repay the loan if you can't. Some lenders may require such a guarantee in
addition to collateral as security for a loan.
Conditions focus on the intended purpose of the loan. Will the money be used for working capital, additional equipment,
or inventory? The lender will also consider the local economic climate and conditions both within your industry and in
other industries that could affect your business.
Character is the personal impression you make on the potential lender or investor. The lender decide subjectively
whether or not you are sufficiently trustworthy to repay the loan or generate a return on funds invested in your company.
Your educational background and experience in business and in your industry will be reviewed. The quality of your
references and the background and experience of your employees will also be considered.
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Debt financing, as mentioned earlier, is the most common means of funding business
start-ups. Some sources include: Commercial Banks; Commercial Finance Companies;
Equipment Manufacturers; State and Local Economic Development Agencies; Life
Insurance Companies.
When approaching a lender for debt financing, it is important to have the following
information:
• A detailed business plan.
• A financial plan including three years of income and cash flow projections.
• A list of “uses of funds” for the business
• The source of your equity injection (remember, you will be required to have
10 – 25% equity in the project).
• Personal Financial Statement for all 20% owners (see sample form)
• Personal Tax Returns for past three years (all schedules)
• A copy of your credit history with explanations for any derogatory
accounts.
Be able to answer any questions the lender may have.
TIP: Be honest with yourself and with your lender. It is better to say “I‟m not sure
about that, I‟ll get back to you”, than trying to bluff your way through the interview. In
most cases, the lenders will see your bluff and think you are trying to hide something.
This is not the best way to begin your relationship with a lender. Instead, be prepared
and confident with your plan. You have to sell your plan to the lender.
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Terms for a working capital or inventory loan should be appropriate to the borrower‟s ability to
repay up to 7 years. If written justification, may be up to 10 years. When maturity exceeds 10
years, lender must document the loan file that the reasonable economic life of the assets acquired
is greater than 10 years and final maturity must not exceed the useful economic life or 25 years,
whichever is less.
Bank alone = 3 years. With SBA = 7 years.
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Loan Repayment: In your loan package, you should provide a brief written statement indicating
how the loan will be repaid, including repayment sources and time requirements. Cash-flow
schedules, budgets, and other appropriate information should support this statement.
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Collateral: You should be prepared to list all real property and other assets to be held as
collateral. Few financial institutions will provide non-collateral based loans. All loans should
have at least two identifiable sources of repayment. The first source is ordinarily cash flow
generated from profitable operations of the business. The second source is usually collateral
pledged to secure the loan.
To the extent that worthwhile assets are available, adequate collateral is required as security on
all SBA loans.
Collateral can consist of both assets which are usable in the business and personal assets which
remain outside the business. Borrowers can assume that all assets financed with borrowed funds
will collateralize the loan. Depending upon how much equity was contributed towards the
acquisition of these assets, the lender also is likely to require other business assets as collateral.
For all SBA loans, personal guarantees are required of every 20 percent or greater owner, plus
others individuals who hold key management positions. Whether or not a guarantee will be
secured by personal assets is based on the value of the assets already pledged and the value of
the assets personally owned compared to the amount borrowed. In the event real estate is to be
used as collateral, borrowers should be aware that banks and other regulated lenders are now
required by law to obtain third-party valuation on real estate related transactions of $50,000 or
more.
Certified appraisals are required for loans of $100,000 or more. SBA may require professional
appraisals of both business and personal assets, plus any necessary survey, and/or feasibility
study.
Owner-occupied residences generally become collateral when:
1) The lender requires the residence as collateral;
2) The equity in the residence is substantial and other credit factors are weak;
3) Such collateral is necessary to assure that the principal(s) remain committed to the success of
the
venture for which the loan is being made;
4) The applicant operates the business out of the residence or other buildings located on the same
parcel of land.
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SBA provides a number of financial assistance programs for small
businesses. They have been specifically designed to meet a business‟s key
financing needs including the need for debt financing (loans), equity financing
(investment/seed money), and surety bonds. (SBA does not provide grant funds
to finance small businesses). SBA addresses these needs through the following
three broad finance programs.
Debt Financing – SBA’s Loan Programs: SBA does not make direct loans – it
works with thousands of lenders and other intermediaries, which generally will
make the loan with SBA guaranteeing the lender that the loan will be repaid.
Additionally:
SBIC Financing – SBA’s Small Business Investment Company
Program: SBICs are privately owned and managed investment funds, licensed
and regulated by the SBA. SBICs are similar to venture capital, private equity
and private debt funds.
Surety Bonds – SBA‟s Bonding Programs: The Surety Bond Guarantee (SBG)
Program was developed to provide small and minority contractors with
contracting opportunities for which they would not otherwise bid. The U.S.
Small Business Administration (SBA) can guarantee bonds for contracts up to
$2 million, covering bid, performance and payment bonds.
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