Balancing Business and Law Blog

Creative debt financing

February 28, 2007

It's critical to think about the pros and cons of various types of capital infusion into your business. Lots of small business owners are afraid of debt financing because it drains cash. Many immediately look to equity financing which does not drain cash in repayment requirements but may severely cut into your ownership and profit percentage as well as diminish your power to drive the business. Debt financing isn't always a direct cash drain because debt financing is not necessarily a bank loan. Businesses can finance their operations through lines of credit which function similarly to a loan but can also use vendor payment terms as a way to finance the business operations. Consider a restaurant where products are delivered by the vendor and sold promptly but payment is not due for 30 days. The business is able to float the revenues from those sales for 30 days before having to pay the vendor. Similarly, sometimes the simple decision to lease equipment rather than buy it outright provides tax and cash flow benefits to the business. When considering a bridge loan or cash infusion, don't only think about bank loans and equity financing... be creative!

Capital infusion through debt

It's critical to think about the pros and cons of various types of capital infusion into your business. Lots of small business owners are afraid of debt financing because it drains cash. Many immediately look to equity financing which does not drain cash in repayment requirements but may severely cut into your ownership and profit percentage as well as diminish your power to drive the business. Debt financing isn't always a direct cash drain because debt financing is not necessarily a bank loan. Businesses can finance their operations through lines of credit which function similarly to a loan but can also use vendor payment terms as a way to finance the business operations. Consider a restaurant where products are delivered by the vendor and sold promptly but payment is not due for 30 days. The business is able to float the revenues from those sales for 30 days before having to pay the vendor. Similarly, sometimes the simple decision to lease equipment rather than buy it outright provides tax and cash flow benefits to the business. When considering a bridge loan or cash infusion, don't only think about bank loans and equity financing... be creative!

Market Segmentation

February 21, 2007

When developing your business plan or marketing plan, a key component is your target market. Who are you targeting and how do you reach them? When I was developing the business plan for the Twisted Cork Wine Bar, I encountered a fabulous market segementation tool. The book is entitled "The Lifestyle Market Analyst" by SRDS and Equifax. The book correlates lifestyle activities against one another and by demographics. For example, not only did I learn that women between the ages of 35 and 50 are wine drinkers but also that wine drinkers also enjoy skiing, gourmet food, and travel. This information helps me more specifically reach this target. The Lifestyle Market Analyst can be found at most larger public libraries and university libraries.

Entrepreneurship Training

February 14, 2007

I am currently teaching a number of seminars through Renton Technical College on small business planning. The classes are very small (typically under 10 attendees) with a hands-on focus. This winter quarter I offered courses on Business Plan development, Trademarking, Legal Planning, Contracts, Financing a Business and Leases. Next quarter classes will include Business Structures (or Choice of Entity in legal terms), Managing Risk, and Trademarks. Summer quarter will repeat the Business Plan development, Legal Planning and Financing your business. Most of the classes are offered from 9-11am at IKEA in Renton. For more information, visit http://www.rtc.edu/StudentServices/ClassSchedule/ and click on the PDF next to "Community Education" for the course booklet. These programs are listed under Business Legal Breakfast Briefing.

Peer to Peer Lending

February 07, 2007

I heard a really interesting piece on NPR yesterday about websites that link up small business owners and individuals who need money with people who have money to lend. One site is www.prosper.com where individuals and businesses post profiles and credit ratings. Those with the money review these profiles and give loans of all sizes, although smaller loans are typical. Over the past year, prosper.com has generated $35 million in loans. You probably wonder about the risk associated with lending to people you don't know, many of which wouldn't qualify for a traditional bank loan. Of the outstanding loans, only 3% are currently more than 3 months late in payments. So if you're looking to finance your small business startup or growth plan, this may provide an opportunity for funds! Check out the text of the radio broadcast at NPR's Marketplace website.

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