Overlooked Financing Option for Your Business

Overlooked Financing Option for Your Business:
If you need to cash to build your company but aren't keen on draining your personal savings or giving up equity to venture capitalists, there may be another possibility.
Looking to expand? There are the traditional sources: Digging into your own personal savings, loaning from a traditional bank, or finding an angel or VC investor who will fork over the cash for a share of equity.
But there are situations in which none of these is a good option--especially in tough financial times like these. Your personal savings may be skimpy or needed for, well, personal responsibilities. In the current environment banks aren't exactly rushing to help small businesses out and your company may not have the scale or size to attract a VC (or you may simply want to hold on to ownership). So are you out of luck?
No, says Lighter Capital, a Seattle-based company that offers a unique financing option to entrepreneurs: revenue-based financing. Founder and veteran entrepreneur Andy Sack explained how it works on the blog of New York VC Fred Wilson:

A revenue-based finance investment provides capital to a business by "selling" an ongoing percentage of a company's future revenues to the investor. For simplicity, you can think of it as a revenue share type of arrangement. Investor gives capital to company in exchange for a small percentage of gross revenues. RBF lives as a hybrid of bank debt and venture capital. This kind of financing has been around for a while in non-tech industries such as mining, film production and drug development, but it’s recently been gaining traction in the world of growth finance and early-stage technology funding….
Instead of a typical bank loan which requires a business to pay a fixed interest payment, a revenue-based loan receives a percentage of revenues over a specified amount of time, allowing "interest" payments to fluctuate when a growing company has inconsistent cash-flows or lumpy or seasonal revenues…. Another way of saying this is RBF turns loan repayment from a fixed expense to a variable expense.

Loans average $100,00-$250,000 and most are paid back within three years at a rate of 15% to 30% annual interest. Lighter Capital has lent around $2.5 million since opening its doors in November 2010, and stresses its model is particularly valuable to businesses with "lumpy" revenue, such as seasonal enterprises.
So what sort of business is a good fit for RBF, and what's the experience of financing your business this way really like? Inc.com called up an entrepreneur who has used the model to find out. Eric Estoos is the CEO of HarborCloud, a Bellevue, Washington, company that hosts small business applications in the cloud. He looked to Lighter Capital for funding when he wanted to grow his business but didn't want to give up any equity.
"This type of model is appropriate for a business that's getting some traction and is seeing some return on the resources that they've got and want to take the next step up before going to more traditional VC or angel funding," he says, adding that "for a business that has revenue, has their bases covered as far as their monthly net and is just looking to grow the business and needs some capital to do that, it'll make a lot of sense."
He has used the financing from Lighter Capital to hire for his growing company and pronounces himself satisfied, though as with every move in business, there are trade-offs.
"The money is a little more expensive than, say, traditional bank financing. However, for a business that's only been around two, three, or four years banks really just aren't lending, so it's really tough to try and get any leverage from a bank," he says.
And Fox News Small Business has reported another major downside to carefully consider: "if the borrower becomes delinquent on the loan after a set time period they stand to lose everything--their business, patents, domain names and trademarks-- to Lighter Capital."
Estoos, however, feels that getting funding from the team at Lighter Capital, all of whom are experienced entrepreneurs themselves, has other subtler advantages that counter-balance the risks for him.
"The payback is tied to my success, so I feel like they have more of a reason to stand behind me and help promote my business, as well as provide a vehicle for a second round, which we have done. They've also provided a lot of other resources from the standpoint of just [being a] great group of guys to bounce ideas off and help steer the ship. And I felt comfortable that I'm getting solid advice from them because they have everything to gain from giving me good advice."

The Only Three Reasons Entrepreneurs Need Accounting and Finance

The Only Three Reasons Entrepreneurs Need Accounting and Finance: Observing finance and accounting professionals? or the way academics at most business schools train them ? might lead you to believe that finance and accounting is a complex and arcane language understood only by an initiated few.  For an entrepreneur, the truth is that accounting and finance are only tools to accomplish three key tasks:

5 Tips for Forecasting & Maintaining Cash Flow

by Sara Hottman 

“It’s not necessarily the big hole that’ll sink a ship; that one you can plug. It’s the hundred little pin holes that are hard to find,” says Al Titone, the district director of the New Jersey Small Business Administration.
With the economy still in unstable territory, experts say you need to be extra vigilant about cash flow, carefully monitoring fixed and incidental expenses in order to reserve enough cash to survive uncertain times. Titone says you should question the necessity of all expenses — whether it’s a car or a brand-name printer cartridge.

The Small Business Administration recommends keeping the equivalent of six months to a year of operating costs in reserves. The key is relatively simple: Analyze your expenses as regularly as possible. Here, experts reveal a few basic tips to forecasting and maintaining cash flow in an uncertain economy.

1. Calculate your break-even analysis. Business owners should start the budget process with a break-even analysis, the equation that shows a business’ base cost to provide its product or service, says John Welch, a San Francisco-based CPA and attorney who specializes in small businesses. In his experience, most business owners, preoccupied with covering daily expenses and making payroll, don’t perform the analysis annually.
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“In an uncertain revenue world, the idea is to keep fixed cost to the minimum to run the business, and then really manage variable costs,” Welch says. “As a business owner, it becomes an administrative burden to do it. … But in an uncertain world you have to be more proactive about managing expenditures and matching the revenue levels you’re anticipating.”

2. Re-evaluate fixed expenses. Many business owners don’t second-guess fixed expenses like rent or insurance when setting their annual budget, even though those base expenses represent the largest bite out of cash flow, Welch says.
Switching carriers for employee health insurance or moving offices if location isn’t critical to a business could represent substantial savings. Or, Titone suggests, try to renegotiate rent; business owners have some leverage in a bad market.
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“Make sure fixed costs commiserate with revenue level,” Welch says. “Then variable costs, really beat them to death.”

From the owner’s perspective, he says, money left over from base costs either goes to variable costs or back to the business as profit; the more tightly it’s monitored, the more could potentially become profit.

4. Schedule a monthly check-up for tax purposes. Welch also suggests business owners perform a monthly analysis of income and expenses so they know through the year what their tax bill will look like.
Tax analysis requires keeping books on a cash basis as well as an accrual basis, he says. Most business owners keep books on an accrual basis — recognizing receivables and payables — and then for taxes adjust books to a cash basis — the difference between taxable income collected and cash expenditures made, which is taxable income.
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“That’s part of this whole cash flow planning process,” he says. “That way they’re not surprised by a big tax bill.”

5. Evaluate variable costs every six months. Businesses should regularly — on an annual or, preferably, semiannual basis — audit variable expenses such as office supplies for necessity, which most business owners neglect to do, experts say.
“You should always be second-guessing expenses, even in a good economy,” Titone says. “If you’re doing OK right now, it’s a good time to lock in cash flow.”

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