Food Business Entrepreneurial Training Academy

#9: Funding Your Company

Dublin, CA.

May 14, 2018

Alameda County SBDC

Thank you to Our Sponsor

Questions To Get Started

1. Are you a start-up, a seasoned business, or are you

buying a business?

2. Explain the model of the business and your experience

3. How much & what is the money for?

4. What’s your credit report story?

5. What type of collateral do you have?

6. Is the business your sole income?

7. Have you been turned down by a lender & why?

Common Uses for Financing

Start-up Expenses

Build inventory

Finance sales

Permanent Working Capital to

bridge product development

and Sales gap

Growth Capital to expand by

product lines or territories

Debt refinancing

There are three primary ways to get

funding for your business:

Debt/Equity/Crowdfunding

So what’s the difference?

Debt is another word for Loan.

Banks provide you a loan and they

want their money back.

Equity requires you to give up

ownership in your business in

exchange for future cash.

The equity provided is called

“investment”.

Crowdfunding can be debt, equity

or incentives

May or may not involve giving up

ownership

Equity vs. Debt Financing

Advantages

Debt Financing

Advantages:

Relatively Easy & Quick

Maintain control & ownership

Interest & other costs tax deductible

Equity Financing

Advantages:

Unsecured (no collateral)

Share of financial risk (partners)

Less pressure to make monthly payments

May be able to borrow more

Payback is negotiable

Equity vs. Debt Financing

Disadvantages

Debt FinancingDisadvantages:

Interest Costs Expensive

Risk of profits not covering repayment

Must share financial information

Lender Restrictions & Limitations

Equity FinancingDisadvantages:

Risk of destroying personal relationships

Give up part of profits

Give up part of ownership of business

Give up some control of business

Legal restrictions

Equity Financing

Equity Sources

Family & friends

Channel partners

Angels

Crowdfunding

Food for thought

People invest in people they

know and trust

Your Network

Your earliest stage capital is most likely to come from

friends and family and their personal contacts

- Everyone you know and everyone they know

Ask your Family, Friends and Business Associates

about investing

Equity commitments can help you get a loan

- The more equity in place, the “safer” the business will

appear to potential lenders, suppliers, landlords, etc.

Channel Partners = Access to Cash

Companies you buy from and sell to

Go over your business plan with them

Probably won’t make a direct investment

Negotiate for preferable trade credit terms

Lower deposits, more days before bills are due and/or

higher credit lines

Better terms translate into less cash required

Angel Investors

High net worth individual investors (think “Shark Tank”)

Tend to be early investors and more flexible

All have their own processes

There are some formal networks to approach (mostly

technology-oriented)

May associate with incubators and accelerators

Who is passionate about your business/product?

Angel Investors

Can find them almost anywhere, but there are ways to

meet them faster:

Find out where they “hang out”, and network there

– slowmoneynorcal.org

– angellist.com

Angel Investors

Best chance to succeed if you have:

Idea and a Plan

– Opportunity and problem you will solve

Team

– Do you have the key people who can bring the idea

to market?

Product

– Are you past the raw idea stage? Do you have

customer validation?

Valuation

– What is the company worth at this stage?

Angel Investor sites

Slowmoneynorcal.com

angel.co/food-and-beverages/investors

Foodangels.co

Circleup.com

Many more…

Preparing for Equity Financing

Prepare an “elevator pitch” and a “pitch deck”

Cover Page / Name of Company

Problem with current market before your product

Solution with your product

Market size / GO-TO Market

Product/Service and how it works

Business Model / Benefits / Unfair Advantage

Competition / Team / Resume

Projections

Your Ask / Business Loan or Investment $$$

CROWDFUNDING

Crowdfunding

A relatively new source of finance for startups– A Crowdfunding platform can be used to raise money for a

campaign (may include startup funding)

– “Contributors” might not receive ownership, rather they can

receive something of value (tickets to events, t-shirts, etc.)

– Very marketing/social media intensive

– Can also be debt or equity

Recently, the JOBS Act expanded this concept to

provide for money to be raised from investors in

exchange for equity ownership – Signed into law April 2012

– Guidelines effective May 2016

Crowdfunding

Transaction Value in the "Crowdfunding" segment is

forecasted at $1.041 billion in 2018

Transaction Value is expected to show an annual growth

rate (CAGR 2018-2022) of 10.4% resulting in the total

amount of $1.546 billion in 2022

The average funding per campaign in the is forecasted

to be $5,534Source: Statistica.com

Major Crowdfunding Players

Rewards BasedDonation gets you a promised

product

DonationGiving for nothing in return

EquityOwning a part of the project

LendingMoney returned, with interest

Kickstarter GoFundMe Wefunder LendingClub

Indiegogo CrowdRise StartEngine Prosper

PledgeMusic YouCaring Seedinvest Kiva (no interest)

RocketHub Causes Equitynet FundingCircle

Barnraiser GiveForward Rockethub SoFi

Crowdtilt Fundrazer Angel List SoMoLend

Rewards Based Sites

Rewards Based Sites take Off!

2008: Indiegogo

2009: Kickstarter

Rewards Based sites – encompassed arts, social causes, entrepreneurs and small

businesses

Rewards Crowdfundng

Key: Offer benefits that are perceived as high value to

your customer, but that don’t cost you a lot of cash and

time

Examples:

Opening Day Party

Name on the wall, stool, shelf, etc.

Signed items

Equity Crowdfunding

Emerged in 2011 with “Regulation D” Platforms

• Microventures – Tech companies

• CircleUp – Branded consumer products and retail

Prior to 2016, allowed only “sophisticated” investors

• Generally, $1 million net worth other than home

• Or, income of $200,000 last 2 years ($300,000 if

married) and expectation to continue at same level

New Equity Crowdfunding Rules

Beginning May, 2016, Regulation CF allowed

“unaccredited” investors to purchase ownership in

crowdfunded companies

Regulation CF has many requirements before offering

securities and ongoing reporting requirements.

• Likely $10,000-$25,000+ in professional fees to

make an offering

• Ongoing financial reports

New Equity Crowdfunding Rules

Regulation CF has many requirements before offering

securities and ongoing reporting requirements.

- Likely $5,000-20,000+ in fees to make an offering

- Ongoing financial reports

Equity Crowdfunding Sites

Reg CF Deals through 2017

Source: Wefunder

Non-equity Crowdfunding

You can raise debt through the “crowd”:

Kiva.org: up to $10,000 with zero percent interest

- Start with friends/family, finish with the crowd

Prosper.com: peer to peer loans

You can raise funds to be repaid with royalties

Repay with a percentage of sales and a “bonus”

eg., Red Bay Coffee, Crooked City Cider

Crowdfunding Success Factors

Needed:

A good story

A good following (start building that now!)

Media Database

A well conceived campaign (rewards!)

Strong Kickoff

Focus on the campaign daily-spread the word!

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Debt Financing

Debt – Early Stage Companies

Start-up or very early stage companies have limited

options (unless there is substantial collateral):

Kiva.org – “Crowd” lending up to $10,000 at 0% interest

Microloans – SBA sponsored programs that go up to $50,000 and

require no collateral

workingsolutions.org, mainstreetlaunch.org are major Bay Area

lenders in this category

Community Advantage Loans – up to $250,000

Nonprofit lenders including mainstreetlaunch.org (Oakland)

cdcloans.com (San Diego), selected lenders in and out of state

Debt – Early Stage Companies

Other early stage lenders we see regularly:

Hebrew Free Loan (hflasf.org) – up to $50,000 @ 0% interest

Opportunity Fund (opportunityfundloan.org) – up to $200,000

- One year in business

Pacific Community Ventures $10,000 - $200,000

- One year into business and at least one employee

Many other specialized programs

Microloan Borrower

Characteristics:

A microenterprise may be a start-up

Borrower may have had some credit problems in the past

Borrower is not a viable candidate for a bank loan

Microloan application process:

SBA resource partners, SCORE & SBDC, can assist

borrower with financial projections

Borrower discusses financing need with the Microlenders

that serve borrower’s county

Borrower submits completed application to Microlender

Debt – Seasoned Companies

After 1-3 years in business, many options can open up:

Conventional Loans – Every financial institution makes

own policy, sets programs and risk tolerance as they

see fit (within government constraints) – many choices

SBA loans – SBA guarantees part of the loan amount to

the lender, limits lender risk – must be turned down

elsewhere to apply:

– 7(a) Program – up to $5 million, most business

purposes, minimum 10-20% down, rates vary from

prime + 2.75% - 6.5%, 5-10 year term

Expansion Capital Borrowing

Usually an existing business, although startups are eligible:

For each owner of 20% or more of the business, personal credit

must be satisfactory (no recent bankruptcies)

Personal credit score must meet lender’s minimum requirement.

7(a) loan application process:

Written business plan is typically required

SBA resource partners, particularly SBDC, can assist borrower to

prepare financial projections

Borrower contacts 7(a) lenders to discuss financing need

Lender provides application forms & reviews application for

approval prior to submission to SBA

Debt – Seasoned Companies

SBA 504 Loan Program

504 Program – up to $5 million for real estate

purchases, machinery & equipment

10%-20% down from borrower

First mortgage lender lends 50% of the project cost

Second mortgage lender is a nonprofit company

(Certified Development Company or “CDC”) that

provides up to 40% of the project cost at a fixed rate

25 year fixed term

Other Debt Products

Asset Based Financing

– Loans secured by equipment

– Loans secured by your accounts receivable or

inventory

– Loans advancing funds against purchase orders

Merchant Credit Card Advances

– Purchase of your future credit card sales at a

discount

– Quick money, but can be expensive

Non-SBA Loan Programs

Non-SBA loan sources include:

Conventional Loans (Major Banks)

Special Funds and Programs

- Community Advantage (up to $250,000)

- Green Funds

Online Direct Lending Platforms

Peer to Peer Lending

Other

Peer to Peer Lending

Arrangement of lending money to unrelated individuals

with an intermediary

Takes place on online “platforms” that facilitate and

service the loan

Typically unsecured loans

Platforms validate borrower information

Lenders (individuals) choose to whom they loan funds

Kiva Zip, Prosper, Lending Club, Funding Circle, others

Peer to Peer Lending

kiva.org – zero percent loans (great deal!)

lendingclub.com – average loan is $15,000 @ 13.4%

prosper.com –- average loan is $13,000 @ 13.9%

Many others…

Other Financing Sources

Credit cards (watch out!)

Online lenders (watch out!)

Equipment Leases

Accounts Receivable Financing

Trade Credit

“Fintech” Online Lenders

Great convenience, but most often at much higher rates than if you

went through a longer process with a traditional lender – know your

rate!

Beware! Many lenders charge 40-100% APR – you don’t have

consumer protections as a business – this is not a suitable long-

term solution

However, some lender are streamlining the process using

technology and web-based solutions, so not all are at the high rates

In the majority of cases, a bank, credit union or SBA loan will be

lower cost if you qualify

Lending Club Example

How are You Set Up?

Basics:

Bank Account

– Are you separating business and personal?

Payroll Service or Manual payments

Accounting Program

IRS, EDD (UI/ETT/SDI), FTB, City/County License

- Are you “reserving funds” for the payments?

Are you free of liens and claims? If not, are you on a

payment plan?

Build Your Credit

Make sure your credit and public records are clean as

possible – check and correct any errors

Helpful sites:

– nav.com, nerdwallet.com, creditkarma.com,

creditsesame.com

If you need help to build credit:

– ccssf.org

– operationhope.org/oakland

Keep Good Records

Set up a good record keeping system and maintain it

- Use Quickbooks, Xero, even an excel sheet

Don’t hide your income (if you want a loan)

Keep receipts and contracts handy

Debt – Getting Prepared

Check your personal and business credit to find out if you

have anything to clear up or explain:

Nav.com – free business and personal credit reports

Creditkarma.com, creditsesame.com, many others – personal

credit report

Your FICO and business scores will help determine your strategy

Start-ups - need a personal financial statement (pfs), business

plan (10-15 pages is sufficient) and financial projections

Seasoned companies – usually need personal financial statement,

2-3 years of tax returns and financial projections

What collateral do you have? Recent valuation

Considerations for Loan Approval - 3 C’s

Cash Flow

– Start-ups - can you afford to pay back the new monthly

business loan payment, plus your personal bills without

counting on the future projected income of your startup?

– Existing business - are you able to afford the new loan payment

with your existing cash flow?

Credit Story

– What is on your credit report? Need to know when and why any

blemishes happened, what you have done to rebuild your credit

and why it won’t happen again

Collateral

– What type do you have, and are your willing to use it to secure

the loan

Courting Bankers/Investors

Courting the Money

Shop Around!

Find a lender/investor that likes your

type and stage of business

This is a “campaign” that may take a lot

of time

What Documents to Have

A current Profit and Loss Statement and Projected Cash Flow

Credit Report

Current Personal Financial Statement

Itemized Use of Proceeds

List of Collateral and estimated value

Business Plan

Schedule of

Business Debt

Personal and

Business Tax

Returns last 3 years

Copy of leases and

all pertinent

agreements

Debt – Getting Prepared

If a business plan is required, you need to provide the

following elements:

Team/Owners – Resume

Market research – Problem solved, Market Size,

Competition, Who is your customer? Why?

Marketing Plan - Research, Strategy and Execution

Projections with Assumptions and detailed numbers

with your assumptions

What Documents to Bring

A current Profit and Loss Statement and Projected Cash Flow

Current Personal Financial Statement

Itemized Use of Proceeds

List of Collateral and estimated value.

Business Plan

Schedule of

Business Debt

Personal and

Business Tax

Returns last 3 years

Copy of leases and

all pertinent

agreements

Don’t get a “No”

GET:

– A referral

– Qualitative advice on your plan

– Quantitative advice on how to change the numerical

assumptions

– Information on the competition

Bootstrap Strategy

Many clients follow this formula:

Kiva

Crowdfunding Platform

Microloan or Larger Loan

Funding with “Specials” Sites

Don’t do it!

Don’t use sites like Groupon, Living Social, Travelzoo. Etc.

as a source of funding.

Can cheapen your brand

Service issues can arise causing poor reviews

Not likely to be a “sticky” customer

Often cuts margins below cost

THANK YOU!