Making Financing, Ownership, and Organizational Decisions
21 important questions on Making Financing, Ownership, and Organizational Decisions
What are the start-up costs to be made?
- One-time start-up costs - include such one-time expenses as legal fees, licenses and permits, utility and lease deposits, furniture and fixtures, inventory, leasehold improvements, signage, and everything you need to initiallyopen for business.
- Working capital - the cash you need to stay open for business.
- Reserve - the amount of capital you need to overcome forecasting mistakes and/or make up for variances from your budget.
What are the two basic methods to finance your start-up?
- Bootstrapping - the internal generation of initial financing, using primarily your own personal resources, and sometimes complemented by various forms of equity investments or loans from family and friends.
- Outsourcing - the external generation of financing for both start-up expenses and ongoing business needs, using outside resources, such as banks, angel investors, and venture capitalists.
For most start-ups, bootstrapping is a much more likely source of funds than outsourcing. Besides, providers of outsourced funds aren't likely to give you the money you need unless they see that you've done your bootstrapping first.
How large should the reserve probably be?
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How can you locate the funds you need to finance your start-up?
- Take stock of your personal assets and liabilities.
- Assuming that your parents and other family members are financially able to help, gingerly approach them. (! Potentially dangerous !)
- Ask friends, especially those friends who can bring expertise along with money to the table, to contribute to your business's start-up.
- If Steps 1, 2 and 3 still aren't enough, start looking for a, gulp, partner (or partners).
- When all else fails, look to outside resources, even though they're historically unlikely to fund start-ups. Look for angel investors before heading for the banks.
What is the golden rule of bootstrapping?
What are some of the most common places to find bootstrapping capital?
- Savings, investments, and salable assets
- The family and friends network
- Life insurance
- Credit cards
- Home equity
What are the financing possibilities at banks?
- Asset-based financing
- Line of credit - establish your credit line when things are going well. Sooner or later, if you're like most small businesses, you'll need the cash.
- Letter of credit - a guarantee from the bank that a specific obligation of the the business will be honored.
What is a SBA (small business administration) loan?
What are the primary criteria the SBA looks for when considering guaranteeing a loan?
- The owner must have invested at least 30 percent of the required capital and be willing to guarantee the balance of the loan.
- The owner must be active in the management of the business.
- All principals must have a clean credit history.
- The business must project adequate cash flow to pay off the loan, and the debt/net-worth ratio must fall within the SBA's approved guidelines.
What are Small Business Investment Companies (SBIC's)?
What are the Certified Development Companies (CDC's)?
This program focuses on financing fixed assets, such as real estate (land and buildings). CDC's work with a local lender; typical financing may include 50 percent from the local lender, 40 percent from the CDC, and 10 percent down from the small business being helped. The asset being purchased serves as the collateral.
What are the 4 basic rules for any angel investor that Brodsky gives?
- Invest in peole who want your help, not your money.
- When possible, go it alone.
- Take a majority stake (become a partner) until your investment has been paid.
- Retain the right to force a payout (pay-back including interest) of the loan or investment.
What are the three ownership options for businesses?
- Privately held, with the founder being the only shareholder.
- Privately held, with the founder sharing ownership with partners or other shareholders.
- Publicly held, with the founder sharing ownership with the general public via one of the public stock markets.
What is a business incubator?
They're businesses in the early stages of development. Each of the businesses has problems and needs that are similar, and each is in need of a variety of help, ranging from technical assistance to shared business opportunities to a simple pat on the back.
What are the advantages of being the only owner?
- It's generally easier, quicker, and less expensive.
- The profits belong solely to you.
- You have no need for consensus.
- You don't waste time catering to the often-aggravating demands of shareholders, minority or otherwise.
What are the disadvantages of being the only owner?
- You have no one to share the risk with.
- Your limited skills have to carry your business until you can hire someone with complementary skills.
- Single ownership can be lonely.
Which questions can help to decide between sole and shared ownership?
- Do you believe that you need a partner? (cash & knowledge)
- Are you capable of working with partners or shareholders?
- Does your business fit the multiple-ownership profile?
- What are the legal requirements of multiple ownership?
- What do you have in common with other business owners who have opted for multiple ownership? Where do you see conflicts?
- What's the likelihood of finding a partner with complementary skills and a personality compatible with yours?
What does a good Partnership Agreement include?
- The duration of the partnership.
- The time or money each partner will contribute.
- The methods for making business decisions.
- The sharing of profits and losses.
- The determination of when to distribute profits.
- The dissolution or restructuring of the partnership in the event of death or disability of a partner.
What is a corporation?
What are the desired benefits of making the incorporation decision?
- Shielding the company's principals from personal liability.
- Providing an opportunity to raise capital by selling stock.
- Enabling the business owners to more quickly and easily transfer ownership from one shareholder to another.
- Allowing for the adoption of a variety of employee benefits (such as the corporation's ability to fully deduct employee health and disability insurance premiums paid) not available to other types of unincorporated entities.
What are the primary disadvantages of incorporating?
- The cost and hassle of going through the incorporation procedure and complying with the public agencies (federal and state) that oversee corporations.
- The hassle and potential liability from shareholder lawsuits involved in dealing with shareholders.
- The "double" taxation that occurs in a C Corporation when dividends are paid (profits taxed at the corporate level, dividend and income tax).
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