Finding Funding Sources for Client Start-Ups and

Expansions2008 Community Food Security Coalition/FoodBin Conference

Diane Holtaway

Capital…A fundamental need for establishing a new business ….

• Personal Cash shortfalls• Credit card limits• No available cushion • Late receivables• Cash on delivery• Large upfront security deposits• Start-up operating costs• Long sales cycle• Large working capital needs

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. . . Or For A New Business, Expansion or Venture?

• A client has a strong business idea with great financial potential?

• There’s a ready market that needs this product or service?

• Client is ready to expand their business – facilities, production, open up new markets, etc.

• Client desires to launch a new product

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The Reality of Small Business Financing Today

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Over 2/3 of small businesses feel that they are being affected by the credit crunch.

National SBA 9/2008

The Reality of Small Business Financing Today

• Nearly 1/3 of small businesses feel bank loan interest rates and fees are higher than 6 months ago.

5National SBA 9/2008

The Reality of Small Business Financing Today

• According to a Federal Reserve Survey, nearly 2/3 of banks have tightened lending standards to small businesses.

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Federal Reserve Survey 2008

Funding A Business Today

• Who Can Help ?

• Spectrum of Funding Sources

• Presenting Your Company To The Financial Community

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The Good News: Funding is still available

You just have to harder…..and prepare better than the

competition

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First Ask: Why Might Investors/Bankers Say “No”

• Team

• Concept and Market Potential

• Competition

• Sustainability

• “Big Picture”

• Willingness to Share Control

• Underestimation of Startup Costs

• Pumped-up Revenue Projections

• Communication Skills

• Trust

• Risk

• “Fit” within Investment Criteria

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First Ask: Why Might Investors/Bankers Say “No”

• Businesses want money for nothing. They want money without any strings attached. “Give me a check but don’t tell me how to run my business”

• Business owners overvalue their company. Many entrepreneurs look at how much control they are willing to relinquish and base their valuation on owning at least 51% of the company after they take in outside capital (pre-capital value + cash = post-capital value)

• Companies need more money than they actually think they do. Need to partner with an investor whose deep pockets can write a check at a crucial moment.

Adam Borden, Managing Partner, Bradmer Foods LLC, VC firm10

Funding Your Business

• Who Can Help?

• Spectrum of Funding Sources

• Presenting Your Company To The Financial Community

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The Funding Spectrum

12State economic development programs include low interest loans, loan guarantees, tax incentives, bridge financing, temporary real estate locations, entrepreneurial training, and other support.

• Grants:― Federal USDA― Foundations

• Small Loans― Family & friends― Personal loan - banks― Federal SBA & USDA― State & community

economic develop.

• Credit Cards/ Vendors― Major cards― Vendor cards/terms (Caution – keep current)

•Commercial/Asset Loans―Commercial, S&L banks―Assets based lenders

•Government Loans―Federal SBA―State economic develop.

•Angel Capital (<$1 M)―High net worth investors―Designated funds

•Venture Capital (>$1 M)―Small to medium funds (Usually industry focus)―Corporate funds

•Strategic Partners

•Venture Capital―Large funds; torestructure capital

•Strategic Partners

•Initial Public Offering―Commercial banks―Investment banks

•Commercial/Asset Loans―Commercial banks―Asset based lenders

•Public Bond―Commercial banks―Investment banks―State economic authority

Startup/Early Stage Growth Stage Later Stage

The Funding Spectrum

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Startup/Early Stage• Grants:― Federal USDA― Foundations

• Small Loans― Family & friends― Personal loan -

banks― Federal SBA― State & community

economic develop.

• Credit Cards/ Vendors

― Major cards― Vendor cards/terms (Caution – keep

current)

Just thinking of an idea? Have a Just thinking of an idea? Have a management team? business plan?management team? business plan?

Talk to friends and familyTalk to friends and family Visit SBA, SBDC or Business Incubator Visit SBA, SBDC or Business Incubator and consider services and programsand consider services and programs Network with industry trade associationsNetwork with industry trade associations Perform risk assessment: personal,Perform risk assessment: personal, market and financialmarket and financial Meet service providers (lawyers,Meet service providers (lawyers, accountants, business advisors)accountants, business advisors) Maybe meet financial providers (banks,Maybe meet financial providers (banks, SBA, economic development groups,SBA, economic development groups, angel investors )angel investors ) Fine tune business planFine tune business plan

Financial Risk Assessment:Can the Money be Paid Back?

Debt Financing

• Character / Credentials – trustworthy, industry knowledge, business experience

• Credit History – good credit history

• Cash Flow – profit levels high, low working capital, low capital requirements

• Capital – equity resources available

• Collateral – real estate, equipment, account receivables

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The Funding Spectrum

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Later Stage

•Venture Capital

•Strategic Partners

•Initial Public Offering

•Commercial/Asset Loans

•Public Bond

Ready to enter a large new market? Major Ready to enter a large new market? Major plant expansion? Acquisitions?plant expansion? Acquisitions?

Network with service providers andNetwork with service providers and trade associationstrade associations

Meet with large venture capitalist,Meet with large venture capitalist, commercial and investment banks,commercial and investment banks, economic development groupseconomic development groups

Prepare comprehensive offeringPrepare comprehensive offering document, private placement document, private placement memorandum – i.e. fancy business planmemorandum – i.e. fancy business plan

Identify and consider strategic partnersIdentify and consider strategic partners

Which Type Of Funding Is Best?

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Advantages• No interest• No required repayment• Equity provides security

for banks and customers

Disadvantages• Ownership dilution• Possible transfer of

control• Possible dividends would

affect cash flow; non-deductible

• Usually investor has board representation

EQUITYHigh Business Risk

Advantages• No interest• No repayment• Helps raise matching

funds

Disadvantages• Limited dollar amount• May be difficult to

obtain because of qualifications

• Often not available if don’t get match

• Reports required• Reimburse expenses

GRANTSVery Early Stage

DEBT Low Business Risk

Advantages• No ownership dilution• Interest cost known• Interest tax deductible• No board representationDisadvantages• Must be repaid• Must pay interest• Covenants may be

restrictive• Rarely available at early

stage without collateral• May require warrants• Reports required

Government Funding Programs

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Economic Development Serves All Stages of Growth. . .

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Focus: Focus: Business development, job creation, community revitalization; small business core focusBusiness development, job creation, community revitalization; small business core focus

Types of Funds:Types of Funds: Bonds, loans, loan guarantees, incentives Bonds, loans, loan guarantees, incentives

AmountsAmounts:: Purchase or Renovation of a Building; machinery or equipment for business growth: Loans up to Purchase or Renovation of a Building; machinery or equipment for business growth: Loans up to $1.25 million; loan guarantees up to $1.5 million for a total EDA exposure of $2.75 million $1.25 million; loan guarantees up to $1.5 million for a total EDA exposure of $2.75 million

AdditionalAdditional: : Loan opportunities for business growth in urban municipality (see njeda.com)Loan opportunities for business growth in urban municipality (see njeda.com)

Incentive GrantsIncentive Grants: : to Businesses creating at least 25 new jobs in NJ; 10 in the tech or biotech sectors to Businesses creating at least 25 new jobs in NJ; 10 in the tech or biotech sectors

Rates:Rates: variable or fixed, longer repayment schedules than traditional lendersvariable or fixed, longer repayment schedules than traditional lenders

EligibilityEligibility: : 5 to 100 employees, 1-5 years in business, partial to women and minority owned businesses, 5 to 100 employees, 1-5 years in business, partial to women and minority owned businesses, technology and life sciences, manufacturing, logistics, financial services, arts, tourism and retail technology and life sciences, manufacturing, logistics, financial services, arts, tourism and retail

Collateral:Collateral: Assets-financed and personal guarantees Assets-financed and personal guarantees

Example, NJ Economic Development Authority (NJ EDA):

SBA Programs

• The Small Business Administration provides loan guaranties, through private lenders and non-profit institutions, for viable small businesses that have real potential, but cannot qualify for loans from traditional sources.

• 7(a) program: – Business plan required– Guarantee : up to 150K 85%; 75% of loans over $150,000 to $2.0MM– Use of funds: expand or renovate facilities, construction of new facilities, land

and buildings, machinery, equipment, lease improvements, working capital– Terms: 7 years or less, 2.25% above prime (max), 7-25 years 2.75% above

prime (max), usually 10 year maximum – Individual negotiates best rate– Eligibility: Operating for profit, Qualifies as small business– Collateral: Must pledge sufficient assets

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SBA Programs

• Micro loans:– $1,000 to $35,000 – Avg. $13,000– Available through SBA intermediaries – for ex. in NJ, the

Cooperative Business Assistance Corp., Regional Business Assistance Corp, Greater Newark Business Development Consortiums

– Business Plan required– Collateral required– Rates – between 8-13%

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SBA Programs

• 504 Program:– Focus: Business expansion and job creation– Long term, fixed rate mortgage financing for acquisition and or renovation of

capital assets, including land, buildings and equipment– Characteristics:

• Business plan required• Lower down payment – 10%• Rate usually below market rate – (Sept. rate 6.5%)• Use of Funds: Construction/renovation, purchase of facility or capital

equipment• >$50,000 to $4.0MM• Eligibility: Small business, for profit, retail, service, wholesale or

manufacturing• Collateral: assets-financed

– www.sba.gov21

SBA Has Strong Lending Track Record

• Business & Industry Guaranteed Loan Program– Barrel O’ Fun Snack Food Company, Perham, MN received $11.5

million to construct 95,000 sq. ft. building and buy equipment, to expand production and warehouse capacity

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• SBA – Ben & Jerry’s– Initial expansion loan was awarded to assist this rapidly growing

ice cream manufacturer.

• Hampshire Pet Products, Joplin, MO, a manufacturer of dog biscuits and treats, received $9.5 million to add equipment and expand production and employment.

Why SBA May Not Guarantee a Loan

• Applicant has poor credit• At least 20% equity required (not

borrowed)• Business plan must demonstrate pay

back according to loan terms• Initial lack of collateral

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USDA Business & Industry Guarantee Loan Program

• Goal: to create jobs and stimulate rural economies by providing financial backing for rural businesses

• Guarantees 80% ($5MM or less) of loan made by commercial lender• Amount: up to $10MM to any one borrower

– Exceptions: $25 MM under certain circumstances, and up to $40MM for rural cooperatives that process value-added agricultural commodities

• Geographic limitation: Only designated rural areas

• Use of funds: working capital, machinery and equipment, buildings and real estate and certain types of debt refinancing

• Eligibility: Any legally organized entity, including a cooperative, corporation, partnership, trust or other profit or non-profit entity

• Terms: Maximum 30 years, real estate; machinery and equipment, 15 years or useful life; working capital 7 years or less

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USDA Focuses On Rural Areas

• Bed & Breakfast Inn, Lambertville, NJ$335,000 USDA B & I 80% Guaranteed Loan to purchase this business

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• The Catering Company, Retail Food Sales & Catering, Blawenburg, NJ $350,000 USDA B&I 80% Guaranteed Loan to Purchase & Renovate

Take Advantage of State Agency Services & Networking

– General/Small Business Financing - Loans and Guarantees, bond financing export financing

– Environmental Issues, such as site selection services, from “prime sites to brownfields”

– Geographic & Urban Redevelopment programs– Clean Energy Programs – financing and assistance – Work force training and funding – job creation & retention incentives– Energy tax credits (firms > 500 fulltime employees)

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Funding Your Business

• Who Can Help

• Spectrum of Funding Sources

• Presenting Your Company To Funding Sources

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A Business Plan Is A Good Place To Start

1. Business overview and focus

2. Industry and competitive assessment

3. Marketing plan – who is the customer?

4. Operations detailed growth plan

5. Management and employees

6. Financial projections and analysis

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• Clearly describe your firm and goals Be focused, Be realistic, Know yourself, Know where you want to go and how you plan to get there.

• Understand the Features and Benefits of your Product – “Features Tell, Benefits Sell”

• Demonstrate your business’ competitive advantages

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1.1. Business overview and focusBusiness overview and focus

• Describe the industry size, growth and environment

• Describe competitive and substitute products

• Demonstrate your business’ competitive advantages

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2.2. Industry and competitive assessmentIndustry and competitive assessment

• Who is the customer? Be Clear!• What is the customer’s need?• What is your product’s value proposition?• Detail marketing plan to reach customer

– Direct marketing, collateral, ads, website, public relations, word-of-mouth, etc.

• Sales and distribution strategy• Competitive and value pricing

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3. Marketing plan – who is the customer?3. Marketing plan – who is the customer?

• Detailed operating plan includes goals, milestones, and resources needed

• Identifies regulatory issues, facility and technology requirements, key vendors, strategic partnerships and service providers

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4.4. Operations detailed growth planOperations detailed growth plan

• Competent and passionate management team; and employee growth plan

• Detailed staffing requirements, including seasonal and temporary staffing issues

• Identify regulatory issues and trade related issues

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5. Management and employees5. Management and employees

Financial Forecast Must Mirror

Operating Plan

• How much does your business need?

• How will you spend the money?

• How will you pay it back?

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Forecast Must Answer :

6. Financial projections and analysis6. Financial projections and analysis

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EQUITYHigh Business Risk

GRANTSStage

DEBT Low Business Risk

Return on Investment

Financials

Management

Operations

Marketing/Sales

Industry/Competition

Critical to hit target ranges that vary with type of business

Critical to show enough detail and reasonable estimates

Strong emphasis on 5 C’s and impressive in-person meeting

Details thought out

Reasonable strategy

Large market; clear competitive advantage

Clear/differentiated; patent preferred

Product

Becoming more important

Becoming more important

Management credentials key

Of interest to grantor

Clear/differentiated

Focused on ability to repay debt and adhere to covenants

Necessary to show credibility with enough detail and reasonable estimates

Emphasis on 5 C’s and recommend in-person meeting;

Market size to match profit potential

Clear/differentiated

Target Presentation to Audience

Rutgers Food Innovation CenterContact Information

• Lou Cooperhouse, Directorcooperhouse@aesop.rutgers.edu

• Diane Holtaway, Associate Director, Client Servicesholtaway@aesop.rutgers.edu

– Phone 856-459-1900 – Fax – 856-459-3043– 450 East Broad Street

Bridgeton, NJ 08302

Website: www.foodinnovation.rutgers.edu36