Borrowing Growth Capital

Lenders expect working capital loans to be repaid through cash generated in the short-term operations of the business, such as, selling goods or services and collecting receivables. Liquidity rather than overall profitability supports such borrowing programs. Growth capital loans are usually scheduled to be repaid over longer periods with profits from business activities extending several years into the future. Growth capital loans are, therefore, secured by collateral such as machinery and equipment, fixed assets which guarantee that lenders will recover their money should the business be unable to make repayment.

For a growth capital loan you will need to demonstrate that the growth capital will be used to increase your cash flow through increased sales, cost savings, and/or more efficient production. Although your building, equipment, or machinery will probably be your collateral for growth capital funds, you will also be able to use them for general business purposes, so long as the activity you use them for promises success. Even if you borrow only to acquire a single piece of new equipment, the lender is likely to insist that all your machinery and equipment be pledged.

Instead of bank financing a particular piece of new equipment, it may be possible to arrange a lease. You will not actually own the equipment, but you will have exclusive use of it over a specified period. Such an arrangement usually has tax advantages. It lets you use funds that would be tied up in the equipment, if you had purchased it. It also affords the opportunity to make sure the equipment meets your needs before you purchase it.

Major equipment may also be purchased on a time payment plan, sometimes called a Conditional Sales Purchase. Ownership of the property is retained by the seller until the buyer has made all the payments required by the contract. (Remember, however, that time payment purchases usually require substantial down payments and even leases require cash advances for several months of lease payments.)

Long-term growth capital loans for more than five but less than fifteen years are also obtainable. Real estate financing with repayment over many years on an established schedule is the best example. The loan is secured by the land and/or buildings the money was used to buy. Most businesses are best financed by a combination of these various credit arrangements.

When you go to a bank to request a loan, you must be prepared to present your company's case persuasively. You should bring your financial plan consisting of a Cash Budget for the next twelve months, Pro Forma Balance Sheets, and Income Statements for the next three to five years. You should be able to explain and amplify these statements and the underlying assumptions on which the figures are based. Obviously, your assumptions must be convincing and your projections supportable. Finally, many banks prefer statements audited by an outside accountant with the accountant's signed opinion that the statements were prepared in accordance with generally accepted accounting principles and that they fairly present the financial condition of your business.

Borrowing Permanent Equity Capital

Permanent capital sometimes comes from sources other than the business owner/manager.

Venture capital, another source of equity capital, is extremely difficult to define; however, it is high risk capital offered with the principal objective of earning capital gains for the investor. While venture capitalists are usually prepared to wait longer than the average investor for a profitable return, they usually expect in excess of 15 percent return on their investment Often they expect to take an active part in determining the objectives of the business. These investors may also assist the small business owner/manager by providing experienced guidance in marketing, product ideas, and additional financing alternatives as the business develops. Even though turning to venture capital may create more bosses, their advice could be as valuable as the money they lend. Be aware, however, that venture capitalists are looking for businesses with real potential for growth and for future sales in the millions of dollars.

Applying for Capital

Below is the minimum information you must make available to lenders and investors:

1. Discussion of the Business

Name, address, and telephone number.

Type of business you are in now or want to expand or start.

2. Amount of Money You Need to Borrow

Ask for all you will need. Don't ask for a part of the total and think you can come back for more later. This could indicate to the lender that you are a poor planner.

3. How You Will Use the Money

List each way the borrowed money will be used.

Itemize the amount of money required for each purpose.

4. Proposed Terms of the Loan

Include a payback schedule. Even though the lender has the final say in setting the terms of the loan, if you suggest terms, you will retain a negotiating position.

5. Financial Support Documents

Show where the money will come from to repay the loan through the following projected statements:

Profit and Loss Statements (one year for working capital loan requests and three to five years for growth capital requests)

Cash Flow Statements (one year for working capital loan requests and three to five years for growth capital requests)

6. Financial History of the Business

Include the following financial statements for the last three years:

Balance Sheet

Profit and Loss Statement

Accounts Receivable and Accounts Payable Listings and Agings

7.Personal Financial Statement of the Owner(s)

Personal Assets and Liabilities

Resume(s)

8. Other Useful Information Includes

Letters of Intent from Prospective Customers

Leases or Buy/Sell Agreements Affecting Your Business

Reference Letters

Although it is not required, it is useful to calculate the ratios described earlier in this section for your business over the past three years. Use this information to prove the strong financial health and good trends in your business's development and to demonstrate that you use such management tools to plan and control your business's growth.

Whether you Operate a factory, wholesale outlet, retail store, Service store, or are a contractor, you will need to sell. No
matter how good your product is, regardless of what consumers think of this, you must sell to survive.

Direct selling approaches are through private sales efforts, Advertising and, for many companies, exhibit - including the
packaging and styling of this item - in kitchens, at the institution, or even both. Establishing a good reputation with the
general public through courtesy and distinctive services is a direct process of selling. While the latter shouldn't be neglected,
this brief discussion will be confined to direct selling methods.

To establish Your Company on a business footing requires a great deal Of competitive personal selling. You might have established
competition to conquer. Or, if your thought is fresh with minimal or no competition, you've got the extra problem of convincing
people of the value of the new idea. Private selling work is almost always necessary to accomplish this. If you aren't a fantastic
salesperson, seek an employee or asociate who is.

Another way to create sales is by advertising. This may be done Through papers, shopping papers, the yellow pages section of the
phone directory, along with other published periodicals; radio and tv; handbills, and direct email. The media you choose, in
addition to the message and style of presentation, will depend upon the particular customers you would like to attain. Plan and
prepare advertisements with care or it'll be ineffective. Most media will have the ability to describe the characteristics of
their viewers (readers, listeners, etc.). Since your first planning described the qualities of your potential clients, you need to
match these characteristics with the media audience. If you are selling expensive jewelry, then do not market in high school
newspapers. If you fix bicycles, you probably need to.

Advertising can be very costly. It Is a Good Idea to place a limitation upon An amount to spend, then remain within that
limitation. To assist you in deciding how much to invest, study the working ratios of similar businesses. Media advertising
salespeople will allow you to plan and also prepare ads for you. Make sure you tell them your budget limits.

A third Way of stimulating sales is successful displays both in Your place of business and outside it. If you've had no previous
expertise in display work, you are going to want to examine the topic or turn the task over to someone else. Observe displays of
other businesses and read books, trade magazines, and the literature provided by equipment manufacturers. It may be wise to hire a
screen expert for your opening display and unique events, or you may get the services of one on a part time foundation. Much
depends on your kind of business and what it takes.

The proper amount and types of marketing campaign to utilize vary from business to business and from owner to owner. Some
companies prosper with low-key sales attempts. Others, such as the used-car lots, flourish on aggressive, hoop-la promotions. In
any case, the importance of effective selling can't be over-emphasized.

On the other hand, don't lose sight of your major objective - to Earn a profit. Everyone can produce a large sales volume selling
dollar bills for ninety bucks. But that will not last long. So keep control of your costs, and cost your product carefully.

Record Keeping. 1 essential element of company management is the keeping of adequate records. Study after study shows that many
supervisor failures can be attributed to inadequate records or the owner's failure to make use of what information was available .
Without records, the businessperson cannot see in advance that way the business is going. Up-to-date records may forecast
impending tragedy, forewarning one to take action to avoid it. While extra work must maintain a decent set of records, you'll be
more than repaid for the effort and cost.

If You Aren't prepared to keep adequate records - or have someone Keep them for you - you shouldn't try and operate a small
business. At a minimum, records are Required to substantiate:

1. Your yields under taxation laws, such as income tax and social Security legislation;

2. Your request for credit from equipment makers or even a loan From a bank;

3. Your claims about the business, should you wish to sell it.

However, most important, you want them to run your business successfully And to raise your profits. With a decent. Yet easy,
bookkeeping system you may answer these questions as:

How much company I doing? What are my expenses? Which seem to be too high? What is my gross Profit margin? My net gain? How much
am I piling in my charge business? What is the state of my working capital? How much money do I have on hand? How much in your
bank? How much do I owe my Suppliers? What is my net worth? That is, What's the worth of my possession of The business? What are
the tendencies in my Receipts, costs, gains, and net value? Is my financial position improving Or growing worse? How can my assets
compare with what I owe? What is the Percentage of return on my investment? How many cents from every dollar of Sales are net
gain? Answer these and other questions by preparing and studying balance sheets and profit-and-loss statements. To do this, it is
Important to record information about trades as they occur. Keep This information in a comprehensive and orderly manner and you
will have the ability to answer the above questions. You'll Also have the answers to these other vital questions About your
company as: What products or services do my clients enjoy best? Next best? Not at all? Can I carry the merchandise most frequently
requested? Am I Qualified to render the services that they need most? How many of my charge Clients are slow payers? Shall I
change to cash only, or use a charge card Bill plan?

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