Financing for For-Profits

Applies to for-profits unless otherwise noted.

For-profit entrepreneurs and managers often seek financing to start a new business, restructure operations or start a new product. Note that an entrepreneur will very likely need a business plan in order to secure financing. Developing a business plan holds many more advantages than just applying for funding.

Sections of This Topic Include

Financing Your Business

General Advice and Overviews of Sources
How Much Do You Need?
Your Own (or Your Family's or Friends') Money
Seller Financing
Angels
Banks and Finance Companies
State Agencies
SBA-Backed Loans
Venture Capitalists
Selling Stock -- Going Public
Resources for Assistance

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Related Library Topics

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Financing Your Business

© Copyright Tove Rasmussen

I just spoke with a bank manager yesterday about how his clients do not have well thought out plans for starting a business or expanding a business. So, I thought I’d help you out here.

Standard Questions a Bank Will Ask - a Business Plan

  1. Do you have experience in the industry?
  2. Does your plan make sense?
  3. Is there a market need?
  4. Can you make money?
  5. Does your pricing make sense?
  6. What are the risks?

You need to have your bases covered on these questions before talking with the bank.

Then, the bank will ask for a business plan.

For a new business, the bar is high. You are trying to prove a need without the sales to show you have a salable product or service.

For an expansion, you must have already demonstrated the value of your product. However, the bank will still require a well thought out plan that it believes you can and will implement.

Prepare for the Business Plan with Research

To prepare for the business plan research the government requirements, effect of the economic cycle (especially being in a downturn now), social and technological trends. Understand these issues thoroughly and how they will affect your business.

Then look at your possible competitors. This includes substitutes for your product, the ease of entering the market, the bargaining power of suppliers and of buyers. Take a look on the web and talk to industry participants.

Summarize the Business Plan with Opportunities and Threats, Strengths and Weaknesses

Spend some time understanding your market needs and buying behavior (Refer to What DOES Your Target Market Want? below). The results will provide you with the information you need to determine your competitive advantage and/or the reason your expansion will be successful.

Follow the research up by understanding the value of your product or service to your customers in dollars and cents, particularly versus your competition. Ensure you have your product or service, pricing, promotion and delivery of your service figured out.

Then thoroughly consider your company’s strengths and weaknesses. Try to get an outside view from customers. A simple but carefully considered survey can help here. The wording will be crucial to obtaining useful information. Take a look at the Net Promoter(R) Score literature to see if this is the approach you want to use (netpromoter.com).

Armed with this information, you will be ready to prepare your business plan. I will cover this in the next blog. Feel free to let me know any specific issues you have so I can be sure to address them.

Putting Your Business Plan Together

The bank wants a business plan. You have collected all the information on the external environment, company strengths and weaknesses. You thoroughly understand the market and financial rationale for starting or expanding your business.

Now it’s time to put the plan together. Typically the business plan will start with a one page executive summary. It will include the compelling reasons for the expansion, including the customers you have in place. For a start up, the executive summary will highlight the advantage of your business over the existing competitors out there.

Then you move into the details. A business plan typically starts with the marketing plan, the reason for the business’s existence. It will include your target market and how attractive it is to be in that market. Include market growth, trends, size, etc. Demonstrate a clear understanding of market needs, backed by objective data where possible.

Detailing your competitive advantage is key. Here it is critical to provide information on your competitors in order for readers to objectively evaluate the power of your business’s advantage.

Translate the competitive advantage into a value proposition. How valuable is your advantage to your customers? This information will feed into your business model ie, how you plan to make money.

Wind this all up with your promotional plan: how you plan to position your product or service in the market; product features; the pricing level, especially versus the competition; the promotional plan for getting your message to the market, including direct sales; and how you plan to deliver your product to the market.

Operations is the next key piece of the business plan. This is the opportunity to explain in detail how the product will be manufactured or the service delivered. It is important to outline the rationale for the key expenses and investments needed, as this will provide the information to support the numbers in the upcoming financial plan.

Ensure the competitive advantage is delivered by the operations, if that is your source of advantage. The more proof there is to demonstrate the advantage will be delivered to the market, the more credible the plan is to the bank — and verified for your own peace of mind.

The next sections of the business plan will include the other key functions of your business. This will vary according to the business. Possibilities include Regulatory, Research and Development, and Information Technology. Again, explain the expenses, investments and how these departments deliver on your competitive advantage.

Finally, crucial to your business plan are the financials. These will include your pro forma (projected) income statements with your revenues and expenses. It will also include your pro forma balance sheet, with the impact of the profit or loss on your assets, debt and equity. The assumptions need to be clear. It is a good idea to have an accountant review these numbers, if not help you put them together.

For the variables that present the most risk, it is a good idea to include a best case, worst case and most likely case. This will show the impact of shifts on the financials, which clarifies the variables to most closely monitor. An accountant can also assist with the sensitivities.

Following the above steps will yield a solid business plan for the bank, and for your own management of the company. Here’s wishing you the best of luck with your new business, or expansion.

General Advice and Overviews of Sources

7 Sources of Financing
How to Raise Money for Starting a Business

A Hitchhiker's Guide to Capital Resources
Free venture capital, commercial finance, equipment leasing, ...
Debt overload: 5 red flags
danger signs of debt
Business startup costs - the types of startup costs businesses face and need to account for when developing their business plans.
Raising Capital for Small Business
Unsecured Business Loans: The Facts
So, How Do I Get Started on My Venture Capital Presentation?
From Bootstrap to Venture: The Money Behind Startups
How to Raise Start-up Capital in 2011
How to Win Over Investors in Three Minutes or Less
Types of Equity Financing for Small Businesses
The Five Things You Must Do Before Approaching Any Investor
Five Common Startup Money Mistakes
Where Not to Look for Money -- And Where You're More Likely to Find It
Congress Gets Crowdfunding (finally)

How Much Do You Need?

Evaluating Start-Up Costs
Determining Your Financial Requirements
5 tips for estimating your startup costs
The Three Primary Types of Financial Capital
Two Weeks to Startup: Day 3 Calculating Startup Costs

Your Own (or Your Family's and Friends') Money

Accepting Money From Friends & Family
10 Tips in Loaning Money to Friends and Family
Borrowing Money from Friends and Family
Send Money from Crowdsourcing
Should You Use Personal Savings to Fund Your Business?

Seller Financing

Seller Financing Basics
What Is Seller Financing?
Seller Financing
Seller Financing: It Makes Dollars and Sense

"Angels"

Raising Startup Capital
How "Super Angel" Investors Are Reinventing the Startup Economy
Business Startup Angel Financing
Business Angel Financing
Case Study: An Angel Investor with an Agenda
Who are Angel Investors and What is Angel Investor Funding?
How to Find an Angel Investor
Financing Fantasy #1: Angel Investors

Banks and Finance Companies

(includes reference to getting loans)
(NOTE: Asset-based loans are backed by the buyer's assets , for example, buildings, accounts receivable, inventory, etc. Lines of Credit are amounts of money the bank sets aside for the buyer to borrow from.)
Loans -- Getting (covers most aspects of getting a loan from a bank)
Types of Business Loans
5 Tips for Using Collateral to Secure a Small Business Loan
What to Do When Your Small Business Loan Application Gets Stalled at the Bank
How to Approach Lenders Now

State Agencies

(include reference to getting loans)
Offices of economic development
Small Business Guide to Government Grants and Loans
Common Types of Government Loans for Small Business from SBA

SBA-Backed Loans

SBA -- brief intro
Refer to State Agencies above

Venture Capitalists

How Do I Get Money from a Venture Capitalist?
National Capital Venture Association
Wikipedia on venture capital Capital Venture Institute
Raising Capital - a Roadmap
8 Cool Companies Who Just Raised Venture Capital
How to Find the Right Investor for Your Business
Financing Fantasy #2: Venture Capital

Selling Stock -- "Going Public"

(This scenario is almost impossible in a small business that is just starting out.)

Resources for Assistance

List of venture capital companies
businessfinance.com
Equity Funding
also see "Megalist for Resources"
Peerbackers


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