Guide to Starting and Operating a Small Business | 2018 Guide to Starting and Operating a Small Business - Page 43

• • • A company’s line of credit is a commitment from a bank to its regular creditworthy business customers to provide a stated maximum amount of short-term financing for a specified time period. The credit line is often granted with a compensating balance requirement, and the floating or variable rate method of interest payment is used. Trade credit is credit extended by one firm to another in conjunction with the sale of goods or services that are used in the normal course of business. For example, goods are purchased but payment can be delayed to the extent of the specified credit terms. Accruals are services provided for a business on a continuing basis but are not paid for at the time the services are rendered. Once you have a complete business plan (which is generally required by commercial lenders), the first place to inquire about business financing is your local bank or credit union where you have banking history and possibly a personal relationship with bank staff. However, you are not limited to inquiring at a bank you use, nor only one bank. Sometimes it takes several lender presentations to find a loan relationship that works for you and the lender. Another option for commercial lending is on-line brokers/dealers that provide a website platform for submitting your loan request documents/application for financing consideration by conventional lenders or investors. • • • Equity Investment Equity investment is money invested that, unlike a loan, is not repaid to the investors in the normal course of business and represents an ownership stake in the business. Equity investment is often associated with high risk/high return opportunities for companies developing and marketing products or processes such as “game- changing” technologies or other high-demand items that are far superior to existing competition. These opportunities have huge potential returns but also often carry high cost to develop and market along with high risk of “failure to launch”. To compensate for the risk, equity investors expect a large equity share and a return on investment often in the 6 -10 times range. Equity in a privately held company is not a liquid asset so before investors buy in they expect to know the company’s strategy to provide them an exit to “cash out” their investment. For many investors, the only acceptable exit strategy is for the business to be acquired – meaning they are expecting the entrepreneur to sell the company. Major drawbacks to equity investment are the large ownership share (control) and acquisition exit strategies. There are various types of equity investors. It is important to properly prepare for and approach the right type for the company to make a strong first impression since they have many other deals from which to choose. Your local MI-SBDC office can help you prepare and identify appropriate investors. It is also very important to consult with an attorney throughout the investment process. Soliciting investment from someone who is not an accredited investor can get the entrepreneur and the company in serious trouble. Angel Investors An angel investor is anyone who wants to invest in your business. More typically, angel investors are defined as individuals with high net worth who invest their own money in emerging companies. They often come together in formal or informal groups to pool their funds and evaluate investment opportunities. An angel investor is usually focused on helping the business succeed, rather than merely gaining maximum profits. An angel investor can and should be a good partner by contributing exp W'F6RGW7G'6F7G2BgFVVG2FW"&VG2bf6rvVfW7F'2&RƖVǒF&WVW7B&v&W2FWFGVRFƖvV6R&6W72f"FP6W2v6FWfW7BBB27'V6'BbW7F&Ɨ6rFRWvǒf&VB&VF6WW2`vVfW7F"w&W3C