Transcript Diane Holtaway - Rutgers Food Innovation Center

Finding Funding Sources for
Client Start-Ups and Expansions
2008 Community Food Security
Coalition/FoodBin Conference
Diane Holtaway
Capital…A fundamental need for establishing a
new business ….
•
•
•
•
•
•
•
•
•
Personal Cash shortfalls
Credit card limits
No available cushion
Late receivables
Cash on delivery
Large upfront security deposits
Start-up operating costs
Long sales cycle
Large working capital needs
2
. . . Or For A New Business, Expansion or
Venture?
• A client has a strong business
idea with great financial
potential?
• There’s a ready market that
needs this product or service?
• Client is ready to expand their
business – facilities, production,
open up new markets, etc.
• Client desires to launch a new
product
3
The Reality of Small Business Financing Today
Over 2/3 of small businesses feel that they are being
affected by the credit crunch.
National SBA 9/2008
4
The Reality of Small Business Financing Today
• Nearly 1/3 of small businesses feel bank loan
interest rates and fees are higher than 6 months
ago.
National SBA 9/2008
5
The Reality of Small Business Financing Today
• According to a Federal Reserve Survey, nearly 2/3
of banks have tightened lending standards to small
businesses.
Federal Reserve Survey 2008
6
Funding A Business Today
• Who Can Help ?
• Spectrum of Funding Sources
• Presenting Your Company To The Financial
Community
7
The Good News: Funding is still available
You just have to
harder
…..and prepare better than the
competition
8
First Ask: Why Might Investors/Bankers Say
“No”
• Team
• Concept and Market
Potential
• Underestimation of
Startup Costs
• Pumped-up Revenue
Projections
• Competition
• Communication Skills
• Sustainability
• Trust
• “Big Picture”
• Risk
• Willingness to Share
Control
• “Fit” within Investment
Criteria
9
First Ask: Why Might Investors/Bankers Say “No”
• Businesses want money for nothing. They want money without any
strings attached. “Give me a check but don’t tell me how to run my
business”
• Business owners overvalue their company. Many entrepreneurs look
at how much control they are willing to relinquish and base their
valuation on owning at least 51% of the company after they take in
outside capital (pre-capital value + cash = post-capital value)
• Companies need more money than they actually think they do. Need
to partner with an investor whose deep pockets can write a check at
a crucial moment.
Adam Borden, Managing Partner, Bradmer Foods LLC, VC firm
10
Funding Your Business
• Who Can Help?
• Spectrum of Funding Sources
• Presenting Your Company To The Financial
Community
11
The Funding Spectrum
Startup/Early Stage
Growth Stage
Later Stage
• Grants:
― Federal USDA
― Foundations
•Commercial/Asset Loans
―Commercial, S&L banks
―Assets based lenders
•Venture Capital
―Large funds; to
restructure capital
•
―
―
―
―
•Government Loans
―Federal SBA
―State economic develop.
•Strategic Partners
Small Loans
Family & friends
Personal loan - banks
Federal SBA & USDA
State & community
economic develop.
• Credit Cards/ Vendors
― Major cards
― Vendor cards/terms
(Caution – keep current)
•Angel Capital (<$1 M)
―High net worth investors
―Designated funds
•Venture Capital (>$1 M)
―Small to medium funds
(Usually industry focus)
―Corporate funds
•Strategic Partners
•Initial Public Offering
―Commercial banks
―Investment banks
•Commercial/Asset Loans
―Commercial banks
―Asset based lenders
•Public Bond
―Commercial banks
―Investment banks
―State economic authority
12
State economic development programs include low interest loans, loan guarantees, tax incentives, bridge financing, temporary real estate locations,
entrepreneurial training, and other support.
The Funding Spectrum
Startup/Early Stage
• Grants:
― Federal USDA
― Foundations
• Small Loans
― Family & friends
― Personal loan banks
― Federal SBA
― State & community
economic develop.
Credit Cards/
Vendors
― Major cards
― Vendor cards/terms
(Caution – keep
current)





•


Just thinking of an idea? Have a
management team? business plan?
Talk to friends and family
Visit SBA, SBDC or Business Incubator
and consider services and programs
Network with industry trade associations
Perform risk assessment: personal,
market and financial
Meet service providers (lawyers,
accountants, business advisors)
Maybe meet financial providers (banks,
SBA, economic development groups,
angel investors )
13
Fine tune business plan
Financial Risk Assessment:
Can the Money be Paid Back?
Debt Financing
• Character / Credentials – trustworthy, industry knowledge, business
experience
• Credit History – good credit history
• Cash Flow – profit levels high, low working capital, low capital
requirements
• Capital – equity resources available
• Collateral – real estate, equipment, account receivables
14
The Funding Spectrum
Later Stage
•Venture Capital
•Strategic Partners
•Initial Public Offering
•Commercial/Asset
Loans
•Public Bond
Ready to enter a large new market? Major
plant expansion? Acquisitions?
 Network with service providers and
trade associations
 Meet with large venture capitalist,
commercial and investment banks,
economic development groups
 Prepare comprehensive offering
document, private placement
memorandum – i.e. fancy business plan
 Identify and consider strategic partners
15
Which Type Of Funding Is Best?
GRANTS
Very Early Stage
EQUITY
High Business Risk
Advantages
• No interest
• No repayment
• Helps raise matching
funds
Advantages
• No interest
• No required repayment
• Equity provides security
for banks and customers
Disadvantages
• Limited dollar amount
• May be difficult to
obtain because of
qualifications
• Often not available if
don’t get match
• Reports required
• Reimburse expenses
Disadvantages
• Ownership dilution
• Possible transfer of
control
• Possible dividends would
affect cash flow; nondeductible
• Usually investor has
board representation
DEBT
Low Business Risk
Advantages
• No ownership dilution
• Interest cost known
• Interest tax deductible
• No board representation
Disadvantages
• Must be repaid
• Must pay interest
• Covenants may be
restrictive
• Rarely available at early
stage without collateral
• May require warrants
• Reports required 16
Government Funding Programs
17
Economic Development Serves All Stages of
Growth. . .
Example, NJ Economic Development Authority (NJ EDA):
 Focus: Business development, job creation, community revitalization; small business core focus
 Types of Funds: Bonds, loans, loan guarantees, incentives
 Amounts: Purchase or Renovation of a Building; machinery or equipment for business growth: Loans up to
$1.25 million; loan guarantees up to $1.5 million for a total EDA exposure of $2.75 million
 Additional: Loan opportunities for business growth in urban municipality (see njeda.com)
 Incentive Grants: to Businesses creating at least 25 new jobs in NJ; 10 in the tech or biotech sectors
 Rates: variable or fixed, longer repayment schedules than traditional lenders
 Eligibility: 5 to 100 employees, 1-5 years in business, partial to women and minority owned businesses,
technology and life sciences, manufacturing, logistics, financial services, arts, tourism and retail
 Collateral: Assets-financed and personal guarantees
18
SBA Programs
•
The Small Business Administration provides loan guaranties, through private lenders
and non-profit institutions, for viable small businesses that have real potential, but
cannot qualify for loans from traditional sources.
• 7(a) program:
– Business plan required
– Guarantee : up to 150K 85%; 75% of loans over $150,000 to $2.0MM
– Use of funds: expand or renovate facilities, construction of new facilities, land
and buildings, machinery, equipment, lease improvements, working capital
– Terms: 7 years or less, 2.25% above prime (max), 7-25 years 2.75% above
prime (max), usually 10 year maximum
– Individual negotiates best rate
– Eligibility: Operating for profit, Qualifies as small business
– Collateral: Must pledge sufficient assets
19
SBA Programs
• Micro loans:
– $1,000 to $35,000 – Avg. $13,000
– Available through SBA intermediaries – for ex. in NJ, the
Cooperative Business Assistance Corp., Regional Business
Assistance Corp, Greater Newark Business Development
Consortiums
– Business Plan required
– Collateral required
– Rates – between 8-13%
20
SBA Programs
• 504 Program:
– Focus: Business expansion and job creation
– Long term, fixed rate mortgage financing for acquisition and or renovation of
capital assets, including land, buildings and equipment
– Characteristics:
• Business plan required
• Lower down payment – 10%
• Rate usually below market rate – (Sept. rate 6.5%)
• Use of Funds: Construction/renovation, purchase of facility or capital
equipment
• >$50,000 to $4.0MM
• Eligibility: Small business, for profit, retail, service, wholesale or
manufacturing
• Collateral: assets-financed
– www.sba.gov
21
SBA Has Strong Lending Track Record
•
SBA – Ben & Jerry’s
– Initial expansion loan was awarded to assist this rapidly growing
ice cream manufacturer.
•
Business & Industry Guaranteed Loan Program
– Barrel O’ Fun Snack Food Company, Perham, MN received $11.5
million to construct 95,000 sq. ft. building and buy equipment, to expand
production and warehouse capacity
• Hampshire Pet Products, Joplin, MO, a manufacturer
of dog biscuits and treats, received $9.5 million to
add equipment and expand production and
employment.
22
Why SBA May Not Guarantee a Loan
• Applicant has poor credit
• At least 20% equity required (not
borrowed)
• Business plan must demonstrate pay
back according to loan terms
• Initial lack of collateral
23
USDA Business & Industry Guarantee
Loan Program
•
Goal: to create jobs and stimulate rural economies by providing financial backing
for rural businesses
•
Guarantees 80% ($5MM or less) of loan made by commercial lender
•
Amount: up to $10MM to any one borrower
– Exceptions: $25 MM under certain circumstances, and up to $40MM for rural
cooperatives that process value-added agricultural commodities
•
Geographic limitation: Only designated rural areas
•
Use of funds: working capital, machinery and equipment, buildings and real estate
and certain types of debt refinancing
•
Eligibility: Any legally organized entity, including a cooperative, corporation,
partnership, trust or other profit or non-profit entity
•
Terms: Maximum 30 years, real estate; machinery and equipment, 15 years or
useful life; working capital 7 years or less
24
USDA Focuses On
Rural Areas
• Bed & Breakfast Inn,
Lambertville, NJ
$335,000 USDA B & I 80%
Guaranteed Loan to purchase
this business
• The Catering Company, Retail
Food Sales & Catering,
Blawenburg, NJ $350,000 USDA
B&I 80% Guaranteed Loan to
Purchase & Renovate
25
Take Advantage of State Agency Services &
Networking
– General/Small Business Financing - Loans and Guarantees, bond
financing export financing
– Environmental Issues, such as site selection services, from “prime
sites to brownfields”
– Geographic & Urban Redevelopment programs
– Clean Energy Programs – financing and assistance
– Work force training and funding – job creation & retention incentives
– Energy tax credits (firms > 500 fulltime employees)
26
Funding Your Business
• Who Can Help
• Spectrum of Funding Sources
• Presenting Your Company To Funding
Sources
27
A Business Plan Is A Good Place To Start
1.
2.
3.
4.
5.
6.
Business overview and focus
Industry and competitive assessment
Marketing plan – who is the customer?
Operations detailed growth plan
Management and employees
Financial projections and analysis
28
1. Business overview and focus
• Clearly describe your firm and goals
Be focused, Be realistic, Know yourself, Know
where you want to go and how you plan to get there.
• Understand the Features and Benefits of your Product – “Features
Tell, Benefits Sell”
• Demonstrate your business’ competitive advantages
29
2. Industry and competitive assessment
• Describe the industry size, growth and environment
• Describe competitive and substitute products
• Demonstrate your business’ competitive advantages
30
3. Marketing plan – who is the customer?
•
•
•
•
Who is the customer? Be Clear!
What is the customer’s need?
What is your product’s value proposition?
Detail marketing plan to reach customer
– Direct marketing, collateral, ads, website, public relations, word-ofmouth, etc.
• Sales and distribution strategy
• Competitive and value pricing
31
4. Operations detailed growth plan
• Detailed operating plan includes goals, milestones, and resources
needed
• Identifies regulatory issues, facility and technology requirements, key
vendors, strategic partnerships and service providers
32
5. Management and employees
• Competent and passionate management team; and employee growth
plan
• Detailed staffing requirements, including seasonal and temporary
staffing issues
• Identify regulatory issues and trade related issues
33
6. Financial projections and analysis
Forecast Must Answer :
• How much does your business
need?
• How will you spend the money?
• How will you pay it back?
Financial Forecast Must Mirror
Operating Plan
34
Target Presentation to Audience
GRANTS
Stage
EQUITY
DEBT
High Business Risk
Low Business Risk
Product
Clear/differentiated
Clear/differentiated;
patent preferred
Clear/differentiated
Industry/
Competition
Of interest to
grantor
Large market; clear
competitive advantage
Market size to match
profit potential
Marketing/Sales
Operations
Management Management
credentials key
Financials
Becoming more
important
Return on
Investment
Becoming more
important
Reasonable strategy
Details thought out
Strong emphasis on
5 C’s and impressive
in-person meeting
Critical to show
enough detail and
reasonable estimates
Critical to hit target
ranges that vary with
type of business
Emphasis on
5 C’s and recommend
in-person meeting;
Necessary to show
credibility with
enough detail and
reasonable estimates
Focused on ability to
repay debt and adhere
35
to covenants
Rutgers Food Innovation Center
Contact Information
• Lou Cooperhouse, Director
[email protected]
• Diane Holtaway, Associate Director, Client Services
[email protected]
– Phone 856-459-1900
– Fax – 856-459-3043
– 450 East Broad Street
Bridgeton, NJ 08302
Website: www.foodinnovation.rutgers.edu
36