Financing a Service Business
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The exact details and methods of raising financing and seed money for both new and existing businesses have changed over time, but the fundamentals have not changed. Most important is to have a product or service that people think they need or can be convinced that they need - the "create a need and then fill it" philosophy versus "find a need and then fill it." Today's entrepreneurs have the benefit of the Internet and its broad reach that makes just about anyone "discoverable" via angel investment groups, Kickstarter type individual investors, and access to countless numbers of establishment banks. Social networking with total strangers might provide the spark needed to set an effort on fire. Overnight successes no longer rely on a handful notable individuals and/or companies who dominate and control access to financiers. The same nouveau paradigm applies to almost all forms of latent talent looking to be discovered - musicians, artists, craftsmen, writers, website publishers ... Financing a Service Business
Sources of needed investment capital are available to shops that can show proof of good management. One of the toughest problems to whip in building a small business is that of getting the capital necessary to finance its growth. Many electronic service dealers now in business on a full-time basis started out as part-timers. By sacrificing their leisure time, they were able to learn the mechanics of the business, acquire the necessary test instruments and tools, and build a working stock of tubes and parts. When conditions appeared right to them, they cut loose from the ties of regular employment to become full-fledged entrepreneurs in the TV service business. For quite a few years, a dealer's ability as a technician kept him pretty well supplied with new business that came to him through recommendations by his satisfied customers. But, in this restless age, the public's attitude toward TV service has changed as increasing costs of living led the public into a "do-it-yourself" era. The average TV service dealer now has a file of former "happy customers" who seldom call him any more for their TV service and service referrals from satisfied customers have been dropping steadily. Quite naturally, this situation has caused the average dealer to be seriously concerned about the future of his business. For quite some time, seasoned observers of trends in consumer service have been urging dealers to add new products and/or services to the businesses to offset the loss of income from reduced service activities. This is excellent advice. The only problem a dealer has to solve is that of financing a new facet of his business. Very few small businesses have sufficient working capital at their immediate command to cover the initial investment to expand their operations with other products or services. Where can a dealer get the necessary capital? Local banks are the best source of funds for expanding the activities of a small business of the size of the average TV service shop. Banks must keep their money working. They are always interested in putting some of it to work in any business where there is reasonable assurance that the principal will be paid back on time. In addition to the regular short-term loans, most banks are prepared to handle "term loans." The latter are loans that mature over a period of more than one year. Before a banker will approve a business loan for a dealer, he needs to know a great deal about the dealer personally, the past record of the business, and how the dealer plans to use the loan. Of prime importance, of course, is the dealer's personal character and his record of reliability. How has he met his obligations in the past? If or when he was ever in financial straits, did he meet with his creditors and discuss the situation frankly? Or did he give them the run-around until he could corral enough money to square his debts? The answers are all of interest to the lender. Most men responsible for creating successful businesses have, at times, found themselves in rather tight spots, financially. By discussing the situation and circumstances frankly with their creditors, arranging payments they could meet, and promptly fulfilling their obligations, these men have established reputations for integrity and reliability that helped them get the financial assistance they needed to build their businesses into successful and prosperous ventures. If you apply for a loan, a banker will want tangible information that will enable him to judge your past record as a businessman. The best record you could give him would be copies of your operating statements covering the previous two- or three-year period. These will tell him how much money you handled in your business and how you spent it. They will also show whether your business operated at a profit or a loss. Of course, if you are in the habit of operating your business on the basis of the information you get from monthly, quarterly, or semi-annual operating statements, the chances are good that you have been making a profit. Dealers who really know their costs of operating set the charges for their services so they will make a profit. You will have to give the banker a complete personal financial statement. Most banks have standard forms for personal financial statements that detail the information they must have before they will consider a personal or business loan. Briefly, a financial statement tells what you own and how much you owe. The difference between the two figures is your "net worth." Your ability as a businessman will speak for itself if you are able to present a series of financial statements that show steady gains in your net worth. You are seeking money to invest in your business. A banker will want to know how you plan to use it. Suppose you want to add a sound and hi-fi department. You may want to use part of the proceeds of the loan to dress up your store front and modernize your display area to show off packaged hi-fi units to the best advantage. Your schedule for amortizing the cost of modernizing your display room should agree with the percentage you are permitted to write off on your Federal income tax. In order to justify your planned investment in a working stock of hi-fi products you should be able to make a projection of the volume of business you expect to do in this new department. In developing this information, along with the details of how you plan to do it, you will get a clearer picture yourself of what you must do to accomplish your objectives. These are the facts and figures you must be prepared to supply in applying for a term business loan from your bank. Such records are also essential if you apply for a loan from any of the several new concerns that have been organized under the new Small Business Investment Act. This legislation set up certain provisions for the Small Business Administration to work with small businesses in assisting them to get either operating loans or investment (equity) capital. In its publication, "Small Marketers Aids #22," the SBA cited the following as the basis on which a credit analysis is usually made when a businessman seeks a term loan: "Because a term loan covers a period longer than 1 year, your banker is more concerned with long-term financial qualifications than he would be on a loan of a few months' maturity. In this investigation he will examine earning capacity, quality of management, stability of the enterprise, and the extent of the competition facing you. "Among the factors to be analyzed, the banker will probably include the following: "(1) Market analysis of the merchandise or services sold by your company. "(2) Appraisal of the stock, if any, which you carry. "(3) Investigation of your accounting methods, depreciation schedules, reserve policy, and similar matters. "(4) Financial analysis of the business covering a period of several years to determine the soundness of the financial position, the trend of earning power, and the projected availability of cash for repayment of the loan. "(5) Investigation of your personal finances where they might influence the credit standing and earning capacity of your business. "(6) Estimate of the effect of a recession, war, or other contingency on your business." The SBA has published a number of special studies, some of which should be of interest to electronic service dealers. A copy of its publications catalogue may be obtained by writing the Small Business Administration, Washington 25, D. C., or from any of the SBA field offices located in principal cities.
Posted June 5, 2018 |
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By William Leonard