Finance Your Business
Borrowing money may be the best way for you to kickstart growth.
You have a home-run business idea. You have the drive and risk tolerance necessary to make the business succeed. What you’re missing, what’s holding you back, is capital—a way to finance your business. The number one way, and for most of us the only way, to create a profitable business, is with other people’s money (“OPM”). Burke & Schindler prides itself on helping clients like you finance your business by locating and utilizing OPM so they can step to the plate of entrepreneurship and confidently swing for the fences.
Where to Find OPM
The cheapest and most common source of OPM is your bank. Banks allow you to leverage your own money into much larger sums of money, resulting in a larger business bet. The bigger the bet, the better the opportunity for a bigger return. Think of these bets like a teeter totter—the further your financial weight (investment) is from the fulcrum, the higher the weight you can hoist on the other end. Therefore, the smaller percentage your money represents of the total business cost (your leverage), the higher potential return you will achieve on your investment. It is not unlike buying a personal asset, like your home or car, with a 20 percent down payment, except now you are financing a business asset that actually generates a return.
Since borrowing money costs money, you must achieve a higher return on the assets purchased with the borrowed funds than the cost of the debt. Otherwise, you get launched off the teeter totter directly into Debtor’s Prison. For example, let’s say you borrow money from the bank at 5 percent to buy an asset that generates a 10 percent return. This investment will enable you to pay back the bank and pocket a profit. Everybody is happy – leverage and OPM at its best. At Burke & Schindler, we help clients in determining what assets to purchase by creating a capital budget for fixed asset purchases and expected return on the investment in these assets.
What to Finance with OPM
There are essentially 6 business assets entrepreneurs must finance:
- Accounts receivable
- Goodwill/customer list
- Intellectual property
In addition to these assets, another cost that must be financed is initial operating losses, which are pretty much inevitable for the business owner.
At Burke & Schindler, we will analyze the following groups:
- Working Capital includes inventory and accounts receivable. Inventory is generally financed 50 percent by the bank with the balance financed either through your own retained earnings or by delaying the payment on your accounts payable. That’s why it is important to turn your inventory as quickly as possible, since the faster it turns the more you can finance with your own accounts payable. Accounts receivable are generally financed 80 percent by a bank and the other 20 percent through accounts payable or your cash.
- Fixed Operating Assets, include equipment and buildings. The bank usually finances 80 percent of the cost of these assets, and the rest needs to be your money. Alternatively, you can opt to lease assets. This can be done with little or no money down, however the business loses some of the tax advantages associated with owning the asset, like accelerated depreciation deductions.
- Intangible Assets serve as a catch-all and consist of assets such as goodwill and intellectual property. Goodwill includes customer lists and work force in place while Intellectual Property encompasses any proprietary know how, processes, or means of accomplishing a business activity. Goodwill, as well as the other intangible assets, generally arise from the acquisition of another business. Banks generally will not lend more than 2.5 times an acquired company’s cash flow, therefore the rest of the financing for this group of assets must either come from you or perhaps the seller financing a portion of the business you are buying. Seller financing is generally limited to about 25 percent of the purchase price.
The number one thing to remember about OPM is that, as the name implies, it is not yours. This must be at the top of your mind as you spend it. If you use their money judiciously and operate a successful business, not only will you prosper but you will be able to do it again with even larger sums at better rates from the same sources. At Burke & Schindler, we’ll help you create and implement a strategic plan to use OPM to generate great returns for your business and friendly and appropriate terms from your lenders or investors. Contact us today.