Guest Column: For financing, planning is (almost) everything

You have that one “big idea” for a business that will allow you to be your own boss and quit that day job that just doesn’t do it for you any more. Or maybe it’s the next “big idea” that will allow you to expand your company. And of course, this idea will create profits beyond your wildest dreams.

Then, you wake up from your dream and realize you don’t know how to get your big idea off the ground.

Financing can determine if a dream just stays a dream or if it becomes reality.

To come up with the capital you need, you have to turn your dream into a plan. The planning process will help you determine if the timing is right to go forward with your idea or if you need to do some more work before you proceed.

Planning the future

Whether your goal is getting funds to start a new business, buy an existing one or expand what you already have, writing a plan helps you articulate your goals, which in turn makes it easier for lenders to understand and accommodate your needs.

Though key elements are spelled out in detail on the previous page, your plan also should include backup and emergency procedures according to guidelines suggested by the U.S. Small Business Administration. On the financial side, keep your assumptions reasonable. Make sure you’re not too optimistic. Take into account the seasonality of your business, or at the very least, plan for a slow day once in awhile.

There are several things a lender will look for in the financial section of a business plan:

• Operating budget. How much do you need to get going and keep going?

• Balance sheet. This is a hypothetical snapshot of the books on any given day, including assets, liabilities and cash on hand.

• Break-even analysis. How much will you need to sell before you start making a profit?

• Income statement. You’ve got a great idea, you believe it will sell. How well? Again, the key idea here is to keep it reasonable.

And it’s a good idea to show monthly projections for three years. Keep in mind that most businesses take at least a year to get established.

Finding the money

After you have completed a business plan, you can look at the two ways to finance your business: with equity (your own and other owners’ money) or with debt (borrowed money).

There are several types of debt financing, including:

• Conventional bank loans. The most common resource for funding – financial institutions – will provide a loan if you can show your business proposal is sound. To obtain a loan, you must be prepared and organized – know exactly how much money you need, why you need it and how you will pay it back.

• SBA loans. The SBA has several programs available to assist small businesses. The SBA guarantees a portion, generally between 50 percent and 75 percent of the loan amount made by local banks and other lenders to qualified small businesses.

• Venture capital firms. Venture capital and private equity firms are pools of capital that invest in companies representing the opportunity for a high rate of return, usually within five to seven years, typically through the sale of all or a portion of the company. Keep in mind that each round of financing will require you to surrender equity ownership.

• Angel investors. These are typically successful small-businesspeople, professionals and, occasionally, high-level executives of large companies who enjoy investing in startups. You can usually find these people by talking with accountants and lawyers in your area.

Clearly, the options for small businesses in the Springfield area to raise capital are diverse and numerous.

By taking the time to create a business plan, you create a stronger, healthier business when your idea takes off. You analyze the pros and cons more fully, as well as

the opportunities and threats within our market.

All of this makes you better prepared to adapt to what the economy or the competition throws at you.

Stoney Roberts is vice president of small-business banking at Commerce Bank in Springfield. He may be reached at stoney.roberts@commercebank.com.[[In-content Ad]]