The Type of Funding Available
We can help you develop the strategies, research, goals and objectives for use of funds and position to attract capital. We always begin with your proposal by drafting a clear and brief explanation of who you are, your business background, the nature of your business, the amount and purpose of your request, your requested terms of repayment, how the funds will benefit your business, and how you will repay a loan.
When planning financial needs for your business you often need to understand where you business is in the stage of growth along with who are the best sources of funding for that level of business. The following information will help you determine where your business is and the different types of funding available to you.
STAGES OF CORPORATE FUNDING
- Seed Stage Funding: The beginning stage including planning, research, prototype development and even formation of the company’s technology deployment, structures and management teams. Typically seeking personal loans, angel capital or alternative financing like credit cards, second mortgage or other loans.
- Early Stage Funding: When a company has typically completed its “seed stage” with a product, management team, proven concept usually with no positive earnings or cash flow yet.
- First Round Funding: A company may have finished its preliminary R&D, seeking financing to continue growth and momentum. Sometimes called start up financing at this stage.
- Follow-on Funding: Companies often require several rounds of funding. When a private equity firm has previously invested in a particular company, in many instances it can “follow-on” by providing additional funding at a later stage.
- Second Round Funding: When an established company is preparing itself for an exit strategy such as future leveraged buyout, merger, acquisition or public offering; additional funding is often required to prepare the business for this next level of growth. Also called intermediate funding for a mature stage company.
- Later Stage Funding: Funds are needed to support major expansion or new product development by an mature business. Company is profitable or breaks even. This is a fund investment strategy that generates financing for the expansion of a company that is producing, shipping, and increasing its sales volume. Later stage funds often provide the financing to help a company achieve critical mass in order to position itself for an Initial Public Offering (IPO).
- Mezzanine Funding: Refers to the stage of a company’s venture financing when its progress requires additional funds in order to initiate its next stage of financing or to position itself for an Initial Public Offering (IPO). Investors entering in this round have lower risk of loss than those investors who have invested in an earlier round. Mezzanine level financing can take the structure of preferred stock, convertible bonds, or subordinated debt.
- Wash-out Round Funding: A financing round where previous investors, the founders, and management experience a reduction in the value of their investment. The new investor usually gains majority ownership and / or control of the company following a washout round. Wash-out Rounds are sometimes referred to as a “burn-out round” or a “cram-down round
There are many types of structured financing available including:
- Accounts receivable funding (or factoring) where the owner receives funds for the business based on the account receivables and the client’s credit card history. typically you will need to show proof of all customer’s with open accounts credit application and screening history.
- Acquisition financing using equity to acquire the stock or assets of another business.
- Alternative financing including EB5, New Market Tax Credits (CDE), presales, high risk lenders and more
- Angel Investors using like start up and range from $50,000 to $500,000 and usually not looking to be in control of your business, they seek long term returns and majority invest less than $50,000 Can be a single accredited investor or an angel group of like minded individuals.
- “A” Round funding refers to Series “A” Preferred stock used to secure venture capital investments. After “A round is completed, Venture capitalists may invest additional money in “B” ,”C” and even “D” rounds.
- Bank loans (Debt) from traditional commercial banks and do not like risk so they follow similar guidelines such as positive cash flow for 2 years, positive tangible net worth usually not to exceed 2:1 ratio, good credit history, up-trends in your business industry, experienced financial management team (CPA’s included), owner’s willingness to repay the debt and personal guarantees.
- Bridge loans are short term loans to cover gaps during continual operations or investment process
- Cooperatives: Businesses that organize themselves as cooperatives of consumers, producers, or workers have a huge fundraising advantage – members put up capital to join and receive financial and other benefits in return. Member capital can be contributed in installments, making it possible for people of all income levels to invest in co-ops. Most states exempt co-op memberships from the securities registration requirements which means legal costs for raising capital for a co-op are relatively low.
- Crowd funding or peer to peer lending provides presales of goods or services to raise capital as opposed to selling shares of stocks.
- Crowd sourcing (Reg D 506c): Direct Public Offering (DPO) is a term that refers to a public offering of securities by a business or nonprofit to accredited investors in one or more states. Using a 506c, a business or nonprofit can market and advertise its offering at large.
- Equipment Leasing: Capital used to acquire commercial assets such as specialized equipment, motor vehicles and more.
- Grants typically are meant for government, educational institutions and nonprofit organizations. There are a few grants available for businesses include SBIR/STTR research grants, local community redevelopment grants from city and county facilities
- Hard Money Lenders: typically companies that manage private equity pooled funds that lend money at usually shorter terms with a higher rate of interest
- Hybrid Lending: Larger deals required a combination of financing including equity, debt, alternative, grants, bonds and partnerships
- Private Placement Offering (Reg D 506): if you offer the investment without public advertising, the offering may qualify for an exemption from the registration requirements to accredited and non-accredited investors. Also called Pooled Investment Funds, Hedge funds, Real estate asset backed funds
- Public-Private Partnerships: Businesses are partnering with nonprofits and governments to raise funds: Bonds, Grants, Sharing Assets, Social development and community development programs
- Non-Corresponding Lenders: provide working capital to help managing cash flow or expansion of your business.
- Real Estate Syndication or Sponsorship is a group of investors fund a particular joint venture or deal, usually coordinated by a lead investor allowing Angels to fund a larger deal.
- Venture Capital financing is used for high risk with high upside potential investments where traditional lending will not cover. These investments range from $500,000 to $5 million, expect a 20% to 50% return, focus on companies that generate $20 million in annual revenues, receives k-stock and expects to be bought out per agreement.
SO WHERE DO YOU START TO RAISE CAPITAL?
Many different loans have different levels of data detail. An SBA loan may not require extensive marketing data but an IPO will expect it along with an itemized sales per channel by part number. When writing your proposal, don’t assume the reader is familiar with your industry, its jargon or your individual business success. Always include industry-specific details so your reader can understand how your particular business is run and what industry trends affect it.
To start with, develop a description of your business, including the following information:
- Type of organization
- Date of information
- Keys to Success
- Product or service
- Brief history
Management Team Experience: Work and education for each owner and key management members needs to be included in the information. Focus on the aspects of their ability to function in the role, not on their technology knowledge. Good managers lead, so show the ability to convey vision, past accomplishments where they lead success stories.
Personal Financial Statements: Most lenders requires financial statements for all principal owners (10% or more) and guarantors. Financial statements should not be older than 90 days. Make certain that you attach a copy of last year’s federal income tax return to the financial statement.
Loan Repayment: Provide a brief written statement indicating how the loan will be repaid, including repayment sources and time requirements. Cash-flow, sales forecasts, budgets, and other appropriate information should support this statement.
Existing Business: Provide financial statements for at least the last three years, plus a current dated statement (no older than 90 days) including balance sheets, profit & loss statements, and a reconciliation of net worth. Aging of accounts payable and accounts receivables should be included, as well as a schedule of term debt. Other balance sheet items of significant value contained in the most recent statement should be explained.
Proposed Business: Provide a pro-forma balance sheet reflecting sources and uses of both equity and borrowed funds.
Projections: Provide a projection of future operations for at least one year or until positive cash flow can be shown. Include earnings, expenses, and reasoning for these estimates. The projections should be in profit & loss format. Explain assumptions used if different from trend or industry standards and support your projected figures with clear, document explanations.