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Selling Franchises

Selling Franchises

Definition

While franchising is often thought of as a means of building your brand with limited capital outlay, franchising can also provide an additional revenue stream for your business through franchising fees and royalties. Typically, entrepreneurs charge an initial fee for the purchase of the franchise as well as continuing fees on total revenue. Ongoing management fees are charged as a percentage of total turn-over in exchange for sales, marketing and additional support. In some cases, the entrepreneur also acts as a vendor to the franchisee providing supplies, in which case additional revenue is generated based on the mark up of these items.

Franchising typically is done by companies with a well established business and the ability to provide significant marketing support or well-established systems for franchisees to get started. Franchisees pay money in return for using the brand name and relying on the proven business structure already in place. Returns from franchising your business may take longer to realize, so it is not as advisable a funding option for short-term cash flow needs, but can provide consistent, longer term revenue streams for companies in need of cash.

Selling Assets

Selling Assets

Definition

When in need of some quick cash to help fund early projects, it could be as easy as selling some of your current assets; these assets are things like accounts receivables and inventory. Tangible items are usually the easiest to sell for the quick up-front cash so weigh the pros and cons of selling certain items in your vicinity. Sometimes you can even sell and lease back your assets, such as your office equipment, when you sell to a leasing company.

Tap into online markets like Ebay and other auction sites to attempt making the most bang for your buck. If auctioning isn’t your thing, post on Craigslist, local classified ads, join a flea market, or even host a garage sale.

Seller Financing

Seller Financing

Definition

Seller Financing refers to buying a business that has already been established. With the elimination of early startup costs, you would already tap into an enterprise that has a recognized customer base, employees, overhead, and inventory. Specifically, seller financing is the means of financing in which you do not purchase the entire business up front; rather, this type of financing means paying small monthly payments to the seller of the business, similar to the way you would make loan payments to a bank.

Traditional Bank Loan

Traditional Bank Loan

Definition

Traditional Bank Loans, as the name implies, are loans given directly from a bank. Unlike Lines of Credit (LOC), they are given in lump-sum amounts which means the borrower is required to pay interest on the entire amount, regardless of whether the funds are used for purchases.

Bank loans typically fund larger amounts than those offered through SBA loans. They are most often used by mature companies because they are document intensive, requiring good credit and an operating history of at least 3 years; additionally, the loan must be secured with collateral such as property or equipment which is why typically only more mature companies qualify. Traditional bank loans also often have restrictions on how the funds can be used.

The advantage of traditional bank loans, if one can qualify, is how the low interest rate is when bank risks are mitigated by collateral and thorough credit history requirements. However, rates can be more variable than government back loans as they vary based on personal credit history, financial analysis of the company, and the current economic climate.

SBA Loans

SBA Loans

Definition

The US Small Business Administration (SBA) is an important resource for small businesses. SBA provides a number of financial assistance programs for small businesses that have been specifically designed to meet key financing needs, including debt financing, surety bonds, and equity financing. In this post we will talk about the different financial assistance programs that the SBA offers. If your startup needs a business plan, our Level 2 Business Plans are written specifically to meet the SBA’s requirements for funding.

1. 7(a) Loan Program: The 7(a) Loan Program is SBA’s primary program to help start-up and existing small businesses obtain financing when they might not be eligible for business loans through normal lending channels. The 7a loans were created to help businesses with special requirements. The programs encompass express loans, loans for exporters, loans for small and rural communities, seasonal funding loans, and loans for borrowing cost fees.

For the 7a loans, SBA itself does not make loans, but rather guarantees a portion of loans made and administered by commercial lending institutions. 7(a) loans are the most basic and most commonly used type of loans and they are also the most flexible, since financing can be guaranteed for a variety of general business purposes. Most American banks participate in the program, as do some non-bank lenders, which expands the availability of loans. Participating lenders agree to structure loans according to SBA’s requirements, and apply and receive a guaranty from SBA on a portion of this loan.

2. CDC/504 Loan Program: The CDC/504 loan program is a long-term financing tool for economic development within a community. The 504 Program provides small businesses requiring “brick and mortar” financing with long-term, fixed-rate financing to acquire major fixed assets for expansion or modernization. For the 504 loans, 50% of funding is contributed by the bank or private sector lender, 40% is provided by a CDC, and the business owner a 10% equity share.

A Certified Development Company (CDC) is a private, nonprofit corporation set up to contribute to the economic development of its community. CDCs work with SBA and private sector lenders to provide financing to small businesses.

3. Microloan Program: The Microloan Program from the SBA provides short-term funding to businesses by making funds available to non-profit community-based lenders who then make loans to eligible borrowers. The maximum loan amount is $50,000 with the average loan around $13,000.

4. Disaster Loans: Disaster loans are available to businesses and individuals to repair damage to physical property (including real estate, personal property, equipment, inventory and business assets) damaged or destroyed by a declared disaster. Loans are also available to assist business, located in a declared disaster area, who incurred economic injury, regardless of physical damage. SBA Disaster loans also cover personal home and property, and funds for businesses unable to meet operating expenses because an essential member was called-up for duty.

SBA Loans – Disaster

SBA Loans – Disaster

Definition

Disaster Program loans are made available through the SBA for business owners as well as homeowners and renters who have been harmed in a declared disaster. For businesses, loans are available for physical damage to property suffered in a disaster. This includes actual property as well as machinery and equipment, fixtures, and inventory. Additional funds, up to an additional 20% of the loan value, are available to protect property from potentially similar future disasters. These loans are available regardless of whether or not the property was insured.

The SBA also provides loans based on economic injury related to a declared disaster. This loan is available regardless of whether or not any physical damage occurred. The SBA considers economic injury and inability to pay operating costs or meet its financial obligations.

The maximum amount available from these loans is $2 million. The length of term of these loans can be up to 30 years for repayment and interest rates are variable depending availability of alternative sources of funding. The SBA rates specify in cases where alternative funding sources are not available; loan interest rates reach a maximum of 4%. In cases where alternative funding is available, the interest rate ceiling increases to 8%.

SBA Loans – 7a

SBA Loans – 7a

Definition

The 7(a) Loan Program is SBA’s primary program to help start-up and existing small businesses obtain financing when they might not be eligible for business loans through normal lending channels. SBA itself does not make loans, but rather guarantees a portion of loans made and administered by commercial lending institutions. 7a loans are designed to help business with special requirements.
Types of 7a Loans
• Express Programs: SBA’s Express programs offer streamlined and expedited loan procedures for particular groups of borrowers. The express programs are made up of the SBA Express, the Patriot Express, and the Export Express Loan Programs (listed as part of the Export Loan Programs).

• Export Loan Programs: SBA has placed a priority on helping small business exporters—some 70 percent of all U.S. exporters have 20 or fewer employees—with a number of loan programs specifically designed to help them develop or expand their export activities. These loan programs include the Export Working Capital Loan, the Export Express Loan, and the International Trade Loan

• Advantage and Rural Loan Programs: The Small/Rural Lender Advantage (S/RLA) initiative is designed to accommodate the unique loan processing needs of small community/rural-based lenders by simplifying and streamlining loan application process and procedures. These include the Small Loan Advantage, Community Advantage loans, Rural Lender Advantage, and the B&I Guaranteed Loan.

• Special Purpose Loan Programs: Specialty purpose Loans are designed to assist those businesses affected by NAFTA, developing Employee Stock Ownership Plans, and implementing pollution control measures. The Specialty purpose loans include the CAIP loan for borrowing costs and the CAPlines for seasonal funding needs as well as Pollution Control and Employee Trusts Loans.

What Banks Are Looking For
To be considered for a 7(a) loan, applicants must meet certain eligibility requirements. These requirements are designed to be as broad as possible so the program can accommodate the most diverse variety of small business financing needs. First, your startup must operate as a for profit company and do business in the United States or its possessions. Your entrepreneurial venture must also meet SBA size standards and not have any funds available from other sources. You, the entrepreneur, must have what the SBA determines as “good character”, management expertise, and the ability to pay the loan on time. A strong business plan is recommended as well.

SBA Loans – 7a – Express

SBA Loans – 7a – Express

Definition

The express loan programs were designed streamline the lending process for quick turn-around loans for particular groups of borrowers. The SBA also makes lower interest rates available to Express loan borrowers.

Loan Types

1. SBA Express Loans are designed for small business owners. The estimated response time to the application process is within 36 hours.

2. Patriot Express Loans are made available to veterans and active-duty service members to start or expand a small business. These loans secure the lowest interest rates available ranging from 2.25 – 4.75 percent over prime depending on amount and duration.

3. Export Express – see SBA Loans – 7a – Export

SBA Loans – 7a – Export

SBA Loans – 7a – Export

Definition

The export loan programs were designed to assist small business exporters. There are 3 specific types of loans available to help exporters, depending on their need and type of operation.

1. The Export Express Loan Program gets its namesake from its streamlined process which allows lenders to use their own forms and its promise of a response within 36 hours. Funding is available up to $500,000 for any business in operation for at least 12 months and can prove the funds will go toward supporting export development, even if prior year operations did not include exporting revenues. Funds are restricted to only those activities that enhance company exporting capability.

2. Export Working Capital Loans(EWCP) fill the hole left by U.S. banks failing to provide working capital advances on export orders, export receivables, or letters of credit. A 90% guaranty on export loans is available from the SBA with a maximum of $5 million. This program was designed specifically to encourage lenders to make capital available for these companies.

3. The International Trade Loan Program was developed for business that have experienced difficulty because of import competition and are looking for additional funds to make adjustments to remain competitive. Like the EWCP program, a 90% guaranty from the SBA is available on loans up to $5 million.

Sample Term Sheet

Sample Term Sheet

The information contained in this sample is provided for informational purposes only, and should not be construed as legal advice on any subject matter. You should not act or refrain from acting on the basis of any content included in this site without seeking legal or other professional advice. The contents of this post contain general information and may not reflect current legal developments or address your situation. We disclaim all liability for actions you take or fail to take based on any content on this site.

This sample has been provided in conjunction with Meyerdirk Consulting. MeyerdirkConsulting.com
elow you can find a Sample Term Sheet

Contents

TERM SHEET FOR THE PURCHASE AND SALE OF SECURED CONVERTIBLE PROMISSORY NOTE OF XYZ CORPORATION

<DATE>

THIS TERM SHEET (the “Term Sheet”) sets forth the principal terms proposed by _________________________ (the “Investor”) for the purchase of a Convertible Promissory Note from XYZ Corporation, an <State> corporation (the “Company”). These terms when finalized will be memorialized in a binding Convertible Note Purchase Agreement executed between the Company and the Investor along with other documents as described herein.

GENERAL:

Type of Security:
Convertible Note, bearing interest at a simple interest rate of _____ (__%) percent calculated on the basis of a 360-day year consisting of twelve, 30-day months (the “Notes”).

Investors:
The Investor named at the beginning of this Term Sheet, as well as other investors designated by and reasonably acceptable to the Company (collectively, the “Investors”).

Total Amount Invested:
U.S. $____________________.

Closing:
As soon as practicable following the Company¡¦s acceptance of this Term Sheet and execution of all other required documentation designated by the Company but no later than <Date> (the ¡§Initial Closing¡¨). Additional closings may occur at any time following the Initial Closing in the Company¡¦s discretion.

TERMS OF THE NOTES:

Term of Payment:
The day that is one year following the date of the Initial Closing shall be the end of the term of the Note (the “Maturity Date”). All principal and accrued interest under the Note is due and payable on the Maturity Date. The Note may be prepaid at any time by the Company without penalty upon five days prior written notice to the Holder.

Terms of Conversion:
The Note would be convertible on the following terms. In the event the Company consummates, prior to the Maturity Date (as defined below) an equity financing pursuant to which it sells shares of its Series A Preferred Stock (the “Series A Preferred Stock”) with an aggregate sales price of not less than $_____________, including any and all convertible notes which are converted into preferred stock (including the Notes issued under this Note Purchase Agreement), and with the principal purpose of raising capital (a “Qualified Financing”), then the Note shall automatically convert all principal and accrued interest under the Note into the Series A Preferred Stock at __% of the price paid by investors in the Qualified Financing. The Note shall convert into shares of Series A Preferred Stock on the same other terms as the other investors purchasing Series A Preferred Stock in the Qualified Financing.

Liquidity Event:
If a Liquidity Event occurs before repayment or conversion of the Note into equity, the Company will pay the holder of the Note an amount equal to ___% of the outstanding principal amount of the Note plus any accrued interest due under the Note upon the closing of such Liquidity Event. (For example the Holder of a $_________ note earning __% interest, upon a Liquidity Event would be paid $_________ plus accrued interest of __% on $_______.) For purposes of this provision, a “Liquidity Event” shall mean (a) a merger of the Company with or into another entity (if after such merger the holders of a majority of the Company’s voting securities immediately prior to the transaction do not hold a majority of the voting securities of the successor entity), (b) a sale by the Company of all or substantially all of its assets or (c) the closing of the Company’s first firm commitment underwritten public offering of the Company’s common stock registered under the Securities Act of 1933, as amended.

Security and Subordination:
Repayment of the Note would be secured by a first priority security interest in collateral consisting of all of the assets of the Company. The Note shall be subordinated to all indebtedness of the Company to banks, commercial finance lenders, insurance companies, leasing or equipment financing institutions or other lending institutions regularly engaged in the business of lending money (excluding venture capital, investment banking or similar institutions which sometimes engage in lending activities but which are primarily engaged in investments in equity securities), which is for money borrowed, or for the purchase or leasing of equipment in the case of lease or other equipment financing, whether or not secured.

OTHER:

Documentation:
The transaction would be documented by counsel of the

Company with the documents containing the provisions described above and consisting of the following:

  • Note Purchase Agreement;
  • Risk Factor Statement;
  • Convertible Promissory Note; and
  • Security Agreement.

Representations & Warranties:
The Convertible Note Purchase Agreement would contain customary representations from the Company including, without limitation: organization and qualification, execution and delivery, validity and enforceability of agreements, issuance of the Note, no litigation and compliance with laws. Customary representations from the Investor would include without limitation: suitability to invest, restrictions on the securities that will be issued in the event of conversion, “lock-up” provisions related to a potential public offering.

Non-Binding Terms:
Except for the provisions set forth in the captions below entitled ¡§Exclusivity¡¨ and “Expenses,” this Term Sheet is not an offer subject to acceptance or a legally binding commitment by Investor, and no obligation will be created by execution of this Term Sheet unless and until definitive documents have been executed and delivered.

Confidentiality:
The Company shall not disclose the terms of this Term Sheet to any person or entity except for the Company’s accountants and attorneys and other potential Investors acceptable to Investor, without the written consent of Investor.

Expiration:
This Term Sheet expires on _____________, 20__ if not accepted by the Company by that date.

Amendment:
Holders of a majority in interest of the principal amount of the Notes may amend or waive any provision of the Notes and such amendment or waiver shall be binding on all holders of the Notes.

Expenses:
The Company and the Investors will each bear their own legal and other expenses with respect to the transactions contemplated herein.

The undersigned hereby agree to the foregoing terms. This instrument may be executed in one or more counterparts and by facsimile, each of which will constitute an original, and all of which will constitute one and the same instrument.

INVESTOR: ______________________

By:_________________________

ACCEPTED AND AGREED TO AS OF THE DATE SET FORTH BELOW:

THE COMPANY: XYZ CORPORATION, an <State> corporation
By: _____
Name:______
Title:_______

This sample has been provided in conjunction with Meyerdirk Consulting. MeyerdirkConsulting.com