Operation Franchise

Evaluating Your Money Matters

When it comes to applying for funds from traditional lending sources, it pays to do your due diligence just as carefully as you study the franchise system you join. According to Kate Lister, author of Finding Money – The Small Business Guide to Financing and owner of FindingMoneyAdvice.com, here’s how your options currently stack up:

Banks:

• The majority of lenders AMEX® surveyed in 2008 showed steady increase in credit standards each quarter.
• Capital spending plans are down 10 percent, inventories are down, prices are being cut, and profits are at record lows.
• The percent of companies reporting loans hard to find are the highest since the 1980-82 recession, and most owners think availability will continue to decline.
• We’re seeing the worst credit conditions in 20+ years.

Lister’s recommendations:

• Companies with weak balance sheets or income statements should work to increase income, reduce expenses, speed up the flow of incoming cash, and slow the flow of cash going out.
• If you already have a bank loan, your aim should be to preserve it. Requesting an increase in light of poor performance could alarm your lender.
• Don’t shop around for credit too aggressively (i.e. other banks, finance companies, credit cards) as this can set off alarms as well.

U.S. Small Business Administration (SBA) Loans:

Only 1 percent of small business funding comes from SBA loans.

Lister’s recommendations:

• This is a very good time to seek SBA financing (The American Recovery and Reinvestment Act called for a $15 billion increase in SBA lending).
• Choose a preferred (versus certified) lender, as they are can move more quickly.
• If you’re not financially savvy, have someone help you prepare your SBA loan request (The SBA’s Small Business Development Centers can do this free of charge).
• If you’re in a technology business, keep an eye on SBIR grant solicitations.

Venture Capital:

• Quarterly venture capital activity is down 47 percent in dollars and 37 percent in deals (Q1 2009 over Q4 2008). This is the lowest level in 12 years. Expansion-stage companies fared the worst.
• Average size of start-up/seed has actually grown in the last two years, including Q1 2009 venture capital fundraising is at a 5-year low, thanks to a lack of exit alternatives due to the stock market and other economic factors (because other companies aren’t in a position to buy).

Lister’s recommendations:

• Top funding categories Q1 2009: biotech (particularly green technologies), business products/services, computers/peripherals, and consumer products/services.
• Valuations are very low. If you can wait to raise money from this source, you should.

Angelsoft Investment:

Q4 2008 to Q1 2009:

• 18 percent growth in companies actively looking for angel money.
• 35 percent decline in total investments.
• 23 percent decline in valuations.
• Start-up funding declined 26 percent between 2007 and 2008 with the majority of the declines toward the end of 2008.
• Percentage pitched and funded: 10 percent in 2008 versus 23 percent in 2005.

Lister’s recommendations:

• Use one of the organized Angel networks to find this kind of investment.
• Be careful of treading on securities laws. Even an ad for “investors wanted” can get you in trouble with the securities police, so use a knowledgeable professional.
• Due to low valuations, wait to raise money from this source if you can.

(Statistics courtesy NFIB; Moneytree; Center for Venture Research, University of New Hampshire; and Angelsoft.)

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