On The Spot
This story appears in the October 1998 issue of Startups. Subscribe »
What do lenders and investors look at before signing a check over to a business? Banks want to know if you'll be able to repay the loan, private investors want to know if they're going to profit, and venture capitalists want to know if your concept will solve a recognized, widespread problem.
Not that many start-ups have to answer questions from venture capital firms. "Most [venture capitalists] focus only on two kinds of deals: medical and high-tech," says Richard Quis, director of marketing and communications for PricewaterhouseCoopers LLP.
That leaves banks and investors. While banks are usually conservative when it comes to business loans--particularly to start-ups--more and more are lending to small businesses. "[Some banks] will make 60 percent to 80 percent loans if the entrepreneur contributes the other 40 percent to 20 percent of the equity," says Quis. "However, they discount your assets knowing that if ownership of the business reverts to them, they'll probably have to discount the value by 40 percent, and they don't want to suffer a loss." Such funding from banks, though, is almost exclusively limited to businesses with tangible assets or substantial receivables.
What about private investors? "They want to know you have enough working capital to see you through a potentially long, dry start-up period, and a business plan showing how and why you'll produce sufficient working capital and profits thereafter," Quis says.
"Be prepared with market studies supporting your concept," he adds. "But such studies should be conducted by an outside firm. And if you're going into a retail location, don't touch the deal without input from a site-selection expert. Then get the report in writing and present it to potential investors."
In your search for funds, Quis suggests, "Keep in mind, investors' interests are the same as yours: You both want a profitable operation. So provide a marketing survey, location study, demographic analysis--whatever it takes--and stress your expertise in the business. That's a major consideration among investors and lenders alike."
Paul DeCeglie is a former staff reporter for Journal of Commerce and American Banker. He can be reached at MrWritePDC@aol.com
Count On It
"General Ledger" was not a Civil War hero, "Trial Balance" has nothing to do with the scales of justice, and "Unearned Income" is not what you pay your lazy brother-in-law.
If you aren't familiar with these and other accounting terms, you're not alone. But understanding and maintaining an accounting system are crucial to running a successful business. Accurate books allow you to make decisions about direction, expansion, marketing programs, hiring and other business activities; ease the preparation of income tax returns and operating budgets; and may be required by lenders and investors judging you not only by the numbers, but by the professionalism of your operating methods.
As a start-up, you probably can't afford a staff accountant, and you want to spend your time building your business, not learning and practicing bookkeeping. The Overnight Bookkeeper (Eagle Business Center, $139, 800-943-2392) can help: This tutorial package introduces you to bookkeeping and helps you create a complete bookkeeping and tax-filing system.
The package of four audiotapes, a computer diskette for PCs, and printed support materials and worksheets also "helps business owners test the bookkeeping and accounting skills of job applicants," says Mary Jo Heiden, owner of Eagle Business Center, a Wildomar, California, company that develops materials for tax preparers, tax practitioners and bookkeepers.
Expense Account
Think you've got what it takes to start a business--not in terms of experience but in terms of finances? Remembering that underfinancing is the primary reason most new businesses don't become old businesses, take a look at some typical expenses you can expect to face:
Advertising
Computer, software
Furniture, supplies, equipment
Incorporation fees
Insurance
Inventory
Licenses/permits
Printing
Professional fees
Rent
Repairs/maintenance
Taxes
Telephone, utilities
Contact Source
PricewaterhouseCoopers LLP, 350 S. Grand Ave., 50th Fl., Los Angeles, CA 90071, (213) 356-6466
