THE FINANCING PROPOSAL


The purpose of this section is to help you turn your business plan into a financing proposal that fits your business needs and capital constraints. The financing proposal is slanted toward a banker's needs. In a very few situations, other capital sources should be approached-venture capital firms or investment bankers, for example. If your deal is large enough and the anticipated payoff is sufficiently high (financing needs of over $1 Million, with an anticipated payout rate greater than 40% annually are two rough measures), your banker and other advisors will steer you to the right people. Otherwise, don't waste your time or theirs. Most deals never get beyond the first screening (5% or so make it through) and only a handful of those get venture capital or go public. If your deal is attractive enough to warrant attention, you will want to tailor your proposal to the needs of your intended audience, a process beyondjhe scope of this handbook and one that requires detailed knowledge of the players involved. For the rest of you with more modest deals, turn to your banker first. Your banker may refer you to a local venture capital club or other source of equity-but start with your banker. If you need more equity than you have available. check with our accountant and lawyer. who may be in tough with individuals who invest in local or startup deals. lfyou don't have a banker and an accountant, you surely will have no need for specialized financing. The business plan you have developed throughout the preceding pages needs little alteration to become a. first-rate financing proposal. Some areas of the plan will be of little use to your banker (personal histories can be replaced by resumes, deviation analysis won't be needed). The difference between a business plan and a financing proposal is one of emphasis rather than design : The main function of your plan-is to enable you to understand and master the complexities of your. business while the function of the financing proposal is to show your prospective backers that you not only know what you are doing but will also make their. investment as risk-free as possible. Most bankers deal with small business owners who is on't understand the dillerences between types of inancing, the importance of those distinctions to a business, and the banker's point of view. Bymhowing, } same familiarity With how a business unancmg package looks from the banker's viewpoint. you will be on guard against two severe problems : 1 The banker who can't say no but who can't or won't provide adequate Enancingi and / or The banker who gives the wrong loan for the wrong z'easons . YOu will also better understand the role of a bank 113' the financing process : Banks are not venture caPitalists, not risk takers, not gamblers. 1'th shOuldn't be. Their business in investing other people's and they have to be cautious. Although the greatest dollar amounts of credit for businesses of all sizes is trade credit (money owed to suppliers), you single most important financing source is your local bank. Such esoteric financing tools as factoring, warehouse loans and the many forms of stocks, bonds and debt instruments just don't apply to most businesses. If you need them, your banker will help you find the right professionals. Debt 173. Equity : s when you go to your bank for a loan, you are seeking debt money, which you will repay oyer a period of time at an additional cost (interest). The money you invest in your business is ordinarily equity, that is} money that will not be repaid to you unless you sell 6* portion of your ownership. Debt iinancing doesn't lead to sharing ownership of your business with the Enancier. Equity iinancing does. Control is another matter. Your banker may exert substantial control over your business through a legal loan document or through suggestions~but he or she doesn't own your business. Debt pays interest,usua11y for a finite time. Equity pays profits forever. The distinction between debt and equity is important to your banker because the more debt then: is in relation to equity, the higher the risk. A high debt~ to-worth ratio (worth being roughly equivalent to equity but may include some kinds of subordinated debt) indicates high riskand high risk costs high interest if you can find new debt money at all. Why '9 Because debt money is rented money, and the rent must be paid no matter what the business' is doing. If you can t meet your debt payments, you go out of business Not only. that, but a highly leveraged business (higher than normal debt-to-worth ratio for that kind of business) must earn money