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Idaho Business Out Loud interview: Karen Appelgren, director of Zions Bank’s Business Resource Center

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Karen Appelgren

Starting a business can feel overwhelming with staff to hire, products to develop and customers to woo. Underpinning it all, of course, is money – keeping the books in the black.

It can be difficult to know where to start in the competition for funding, but luckily, Zions Bank’s Business Resource Center is here to help guide would-be entrepreneurs.

Karen Appelgren, the center’s director, recently sat down with the Idaho Business Out Loud podcast to share her advice on business financing.

This transcript has been edited for length and clarity.

What can a business owner do to bring more money from the business itself? Can you tell us about bootstrapping?

Bootstrapping is using your own funds as an owner and also customer revenues to grow your business. The advantages are that it’s the least expensive cost of capital. You’re not giving away equity in your company. And so when it’s possible, it’s a great way to start a business. For example, Sara Blakely, the founder of Spanx, started her business bootstrapping. What you want to try to do is increase the number of customers that you have, increase the average transaction size, increase the frequency of the transactions per customer or raise your prices.

All of those things will bring in more money to your business, but sometimes it’s not quite enough. Sometimes you end up turning down opportunities because you don’t have enough funds to maybe hire more staff and train more staff or you’re not able to do some of the marketing promotions you’d like to do because you’re constrained with just the amount of cash you have available. And sometimes even your product or service quality could go down because you’re just not able to do everything that you’d like to do to grow your business and be as successful as you can be.

In what situations would this be the recommended way to fund the business?

Well, that’s usually the best way to start out a business if you can as a startup.

If you are expanding your business, if you’re an established company, chances are you’re going to have to take stock of how much capital you have in the business itself. Let’s say you wanted to buy a building for your business. You want to look at whether you should tie up your capital in a big down payment in a building or is it better to lease. Or do you not have enough space at all to do either option without going out and seeking a loan or private investors?

How do you know when it’s right to make that decision to go out and seek capital elsewhere?

You do a financial forecast. You analyze your current situation and you might do financial projections, taking a look at what could we do if we had more funds, how much revenue could we bring in if we were able to use a certain amount of money to hire more people, do more promotions, those kinds of activities.

What can small businesses do to make their business attractive to angel and venture capitalist investors?

So not every business model is a fit for angel or venture capital funding. Angels and venture capitalists are looking for a business that has the ability to grow revenues rapidly – high growth companies, typically a company that has a technology component to it, maybe some intellectual property around that technology, because they are looking at the business being able to have a successful exit in three to five years. A successful exit could be another business purchasing this business that the angels are investing in or it could be an initial public offering where the business has grown to the point where they’re going on the stock exchange and offering shares.

There has to be a way for the angel investors and venture capitalists to receive a 10 times return on investment. And that may sound like a lot, but the angel capital association has polled their angel group members around the country and found that out of every 10 of the companies in a portfolio at an angel group or a venture capital group, only one will hit a home run. So in order to be sustainable, the investors need a 10 times return and not every company can deliver that. If you’re a mom and pop restaurant with one location or a dry cleaner, that’s not a fit typically for an angel investor.

So if you were to be one of those companies that did receive an offer from an investor, what criteria do you use to evaluate the opportunity?

Well, because most of us have not had experience with angel investors and venture capitalists it’s really important to get the advice of an attorney who has worked on mergers and acquisitions and investments. Also speaking with your accountant, getting familiar with term sheets so that you understand the equity you’re giving up in exchange for the investment in your company.

I think you have to be open to the fact that you’re no longer going to be completely in charge of your company. These investors are going to want a say in the management decisions, and they’re going to want a seat on your board. And they can also remove you as CEO if they feel that you’re an impediment to growing the company. You’d still retain your shares of ownership, but if they don’t believe you have the right focus or abilities to scale the company, you could be replaced by a CEO that they bring in.

When would a conventional bank loan or an SBA loan be a good option?

So often it’s a good option if you don’t want to give up equity in your company and control. If you are going the investor route, that isn’t an expectation. An SBA loan is a great way to start your business because typically banks or other funders are hesitant to invest in a business that’s less than two years in existence. It’s the riskiest time. So having that government guarantee for the bank encourages a financial institution to step out and take a little more risk, be willing to fund a startup.

Why is it important to choose the right SBA lender?

There are a lot of requirements and rules around SBA lending. It’s important that the bank that you work with understands whether this particular project is eligible for SBA funding and to be able to help you get to the finish line so that you’re not spinning your wheels, getting a loan package ready when in fact the deal can’t be done.

Look at this through the investor’s point of view. What do they want to see? What do they need to see in a business plan to do their due diligence? So whether you’re going for bank financing through a loan or angels and other investors or even your family and friends putting in money, you’ll want to have a complete business plan. Writing a business plan is so valuable because it forces you to look through all aspects of starting and growing a business.

We tend as entrepreneurs to be people drawn to certain aspects of work that we really enjoy or have a lot of expertise in. But running a business means more than just spending time with a customer or working on refining the product. It’s also handling the accounting, the bookkeeping. It’s the marketing, the sales funnel. And most of us are not great at everything. So by going through a business plan, we can start looking at where we have a weakness and where we might be able to bring on a team member or outsource a task like bookkeeping to a CPA.

For a funder to contribute, the business and financial projections are really important as part of the business plan because you need to have some sense of what your ongoing expenses are going to be and you need to be able to explain why you think you’ll have so much revenue. How many customers does that equate to? What is the average ticket sale? What is the growth rate that you’re predicting and why do you think that’s sustainable and what’s the competitive environment?

What resources are there to help businesses prepare that business model and that plan that they present to investors?

We are so fortunate in the Treasure Valley area and statewide to have so many resources for entrepreneurs. Many are low cost or no cost at all. For example, the SBA has programs like the Women’s Business Center, the Small Business Development Center, SCORE (Service Corps of Retired Executives) here in Boise. We have Trailhead, which is a coworking space and they also provide mentoring. Our Zions Bank Business Resource Center provides complimentary workshops and complimentary business counseling.

It’s important to walk through any of these doors and use as many resources as you can because we don’t often see some of the risks that may be out there that we need to prepare for or some of the weaknesses we have. And having that other perspective is really valuable.

What can you tell us about business grants?

So often there’s a perception that there’s piles of free money out there for people to start a business. There are some grants that are related to technology-based products. It’s not a fit for everyone.

Another option for funding is crowdfunding, but that’s also kind of a rare sort of model, isn’t it?

Well, there have been two businesses that I’m aware of in the Boise area that have been successful with crowdfunding, and there may be others out there that I just don’t know. Proof Eyewear and Boise Brewing have used the crowd funding platforms such as Kickstarter and Indiegogo.

You have to be willing to spend time on this type of funding because you have to be very good at marketing and do a lot of marketing to be able to attract potential donors to these platforms and then to attract them to your particular project, because there’s other projects that they could fund.

Then, once people decide to donate, typically you are promising to send them different items as a thank you. So you have to be good at shipping and fulfillment to send that coffee mug to someone who’s donated $100 or, you know, the t-shirt of the month.

And it’s important to understand the rules of the different platforms. With some platforms, if you don’t make your goal, you leave with nothing. With other platforms, you give up a percentage of the money you’ve taken in. So understanding the rules and the time involved and making sure that you have the skillsets to make this successful are important.

Do you feel like there might be an advantage there because when you launch, you launch with a pre-established customer base?

Absolutely. The companies that I know who’ve used crowdfunding have found it valuable to test market their product or service idea. They’re getting real-time feedback from people, suggestions and comments. That is a big benefit in addition to any funding you might be able to pull in from this method.

So what about using 401k money to start a franchise or buy a business?

That is an option if you have a what’s called a qualified retirement plan and that has rules around what is a qualified retirement plan. What happens is the business owner takes money from that 401k for example, and they create a new C corporation and fund that C corporation with those retirement proceeds. And so it’s now stock in that C corporation.

It’s a very complex process. If you don’t do it in the correct manner, you can get into tax trouble, legal trappings. So it’s really important that you work with a CPA and an attorney who have experience with the program. You probably want to talk to a financial advisor because you’re taking money that was probably in a diversified group of investments in your 401k and now putting all your eggs in one basket into your particular company.

It seems like there’s so many options here. Navigating through all of them must be very complicated. So to back up a little bit to something we touched on earlier, what are lenders looking for? What specifically do you want to present to them when you are trying to gain the interest of a lender or an investor?

Well, there’s something called a loan package and this is all of the documents that you need to prepare to submit a loan for a funding decision. And most banks and financial institutions will have a checklist of those items.

But I think even more importantly, you need to understand what’s called the five C’s of credit, how a lender is making a decision about funding your project.

The five C’s of credit include Character, and that C is about your credit score and the credit scores of the owners of the company. We’re also talking about the experience of the team because a lot of people have great ideas, but can everyone execute and be successful?

Another C is Capacity. You need to show that the business can afford to make the new loan payment and that is shown through either the existing financial statements and tax returns, if you’re an established company, or it’s shown through the financial projections, the forecast that you’re creating.

Another C is Conditions. What are the conditions in your particular industry, in the whole economy – the local economy and the general economic trends?

Another C is Capital. It’s really important that you have skin in the game. It is very rare to receive funding without the owner having injected some money into the business. Putting money into the business shows that you, as the owner, believe in your business and are sharing that risk with the other funders.

Collateral is another C of credit. Collateral refers to tangible assets that could be sold if there were trouble in the business. Things like vehicles, equipment and inventory are examples of collateral. A funder will look at what collateral you have available.

So all of those five C’s of credit are being analyzed as the lender is looking at strengths and weaknesses. You need to be as an owner prepared to explain how you’ll mitigate some of the weaknesses in your deal. The lenders are going to find it anyway or the funder is going to spot some concerns. So if you work with advisors, you’ll be more cognizant of some of those weaknesses, and hopefully you’re prepared with a strategy and some tactics so you can explain how you might overcome, for example, a new competition coming into the market or new regulations that are rolling out.

What is the key thing for our listeners and readers to know?

We don’t know what we don’t know, so it’s really important to get that outside perspective so that you’re more prepared, you understand your options and you understand what you need to do to make a good impression with that funding source.

I would highly advise that you have people on your team like a lawyer, a CPA. A business insurance agent and a good banker are important.

And then mentors as we talked about from places like SCORE, Trailhead, Small Business Development Center, Women’s Business Center. Venture is also a great place to go if you’re looking to pitch for investment because they have mentors who help you prepare for angel and venture capital funding.

So reach out. There are so many people in this community that want to support your small business and help you out. And that is awesome.

About Liz Patterson Harbauer