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It depends on risk and return. If there is cash flow in the business that can afford to repay principal and interest, debt does not change ownership in the business. If the use of capital is riskier or unproven, debt may not be available, and then equity will be an alternative at the cost of giving up some ownership |
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Is a simplified method that lenders use to determine whether to advance a loan. They are: Character – the applicant Capacity – the ability to repay the loan Capital – how much of your own money are you putting into the use of proceeds (e.g. a down payment for a house or a car) Collateral – the assets available to secure a loan – comfort if the cashflow dries up the lender may be able to recoup their money by selling these assets Conditions – the market (cost of debt to the lender) and structure of the loan (length of loan, covenants, interest rate) |
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Not always needed; however, it is best practice to have a business plan. Suppose the use of capital is either unique, unproven, or risky (in the lender's eyes). In that case, a well-articulated business plan helps you convey the message that you understand the risk and have mitigants in place. In other words, you demonstrate your confidence in making profits to repay a loan or provide returns to equity investors. |
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Financial statements are the best way to demonstrate the business's current ability to make profits and manage its liquidity (correcting cash and paying its obligations). When seeking capital, debt or equity, demonstrating the ability to manage money under your responsibility is table stakes. Particularly with lenders, the financial statements are used to generate ratios to test your ability to repay loans and interest. |
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Budgets and forecasts are excellent tools to complement a business plan if you have one. The ability to project how your business will generate cash (sales/revenue) and manage its expenses (costs of goods sold and fixed expenses – sales general and administration) helps investors (debt and equity) better understand how you will use the proceeds that you are asking for to improve your operations. |
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Related to the Character in the 5Cs of Credit. Lenders and equity investors look at the people first. A great idea without a strong team will not succeed. Yes, provide Bios on key people on your team. Include your characteristics both in business and personal achievements that demonstrate knowledge, innovations and flexibility (to roll with the punches) and tenacity (working through tough times to get things done). Remember, investors are investing in you. |
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Related to the Collateral in the 5Cs of Credit. What security is available to a lender or investor if things don't work well under plan A. |
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Quickest way to tell your story in punchy relevant points. A one-page summary (sometimes called a teaser if it intends to raise capital) is equivalent to the "elevator pitch." It would be best if you quickly got the potential lender's or investor's attention. They see many deals; you need to get through the first gate. |
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A Confidential Information Memorandum (CIM) is a marketing document used to tell the company's story, history, current status, and future potential. Used to raise capital, it is most often used when raising equity or selling a business. Depending on the size of the loan, many lenders do not require this. However, it summarizes the business plan, financial history, and forecast, so it doesn't hurt to have one. |
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It depends. For smaller loans, the lenders often have formulas; thus, financial statements, personal credit scores, and Collateral are more than enough. When raising larger amounts of debt or when raising equity or selling a business, financial consultants provide expertise in the presentation and knowledge of the market to provide advice to optimize the value or amount being raised. On the other hand, brokers tend not to take as active a role as a finance advisor (in structuring and negotiations); they do, however, have excellent relationships in the market and can help show you options. There is a difference between an advisor and a broker. Each has its place, depending on your needs.
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BE PREPARED: Here are some sample questions you may be asked by a Capital provider that you need to be able to answer:
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