What is Revenue-Based Financing and How Can it Benefit You?

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Let’s say you have an idea for a brilliant new product, but you just don’t have the money to research, develop and market it, and you’ve been turned down by traditional lenders and the private equity markets for capital. What if your small business needs cash to cover a business emergency, but your bank’s lending process just takes too long? 

What do you do? 

The answer could lie in one of the fastest-rising – yet least known – funding solutions out there: revenue-based financing (RBF). RBF is a form of financing that could get you the assets you need quickly and without the need for personal collateral or an impeccable credit score.

What is Revenue-Based Financing?

RBF is a capital-raising method in which a lender, such as Kapitus, agrees to provide money to a business in exchange for a predetermined percentage of a company’s future gross revenues, plus a pre-agreed upon multiple of the original amount, over a predetermined time frame.

In essence, it allows a company to successfully raise money without giving away any ownership stake and without the business owner having to pledge personal assets, such as his or her home, as collateral. Furthermore, relative to debt and equity financing, revenue-based financing is a much easier process that requires less documentation when applying. 

In short, RBF is one of a few types of business financing methods that limits the personal exposure of the business owner and looks to the business itself when making underwriting decisions. 

In deciding who qualifies for RBF, lenders primarily look at a company’s sales history. In some cases, all you will need to submit is three months of business bank statements. Therefore, the underwriting process is relatively fast, and approval can come in mere hours. Once approved, many lenders can have funds in your bank within 24 hours.

Who Should Use RBF?

RBF can be used by virtually any small business with a strong sales history. If you own a plumbing or retail business and you need $20,000 because the roof starts leaking or your air conditioning machines break down, RBF may be your solution since you can get cash in your hands quickly with little paperwork relative to a business loan or other forms of financing. 

RBF can also be an ideal solution for larger small businesses, such as consumer software firms that have a strong sales history, which can borrow larger amounts to fund the research, development and marketing of a new product. According to a 2020 report issued by BootStrapp, the most popular users of RBF were software-as-a-service (Saas) companies, followed by food and beverage companies, consumer products companies, eCommerce and healthcare businesses.

How Does RBF Work?

Let’s say you own a larger business, such as a software-as-a-service (SaaS) company, and you believe that the future growth of your business can only be ensured by introducing a new software product that requires an additional $250,000 in capital to research, develop and market. However, you are not able to obtain a loan from traditional lenders because of your credit score, and the initial stakeholders in your company do not want to add any additional investors. 

Your company can arrange a deal with an RBF provider to get $250,000 in exchange for a portion of your company’s future revenues. Your company will be required to make agreed-upon installment payments equal to a percentage of your overall revenue plus a small multiple of the original amount to compensate for the risk.

What are the Advantages of RBF?

In revenue-based financing, investors are entitled to regular repayments of their initially invested capital, so it is like a loan in that regard. However, it differs from a loan in that interest is not charged. Instead, there is a fixed cost of capital, meaning that the repayments are calculated using a predetermined multiple that results in returns that are higher than the initial investment and that cost does not change as long as the terms of the agreement are met. 

Also, RBF offers unique advantages over receiving investments from venture capital or angel investors. With private equity, investors often require collateral, an ownership stake in your company and/or seats on your company’s board of directors, if you have such a board. RBF could also be an attractive financing model if your small business has no intention of going public any time soon – as most small businesses do not – as private equity investors often look for a big exit strategy such as an IPO. 

Who Needs Revenue-Based Financing? 

Really, any business large or small with strong, predictable monthly sales can qualify for RBF, if it is appropriate. In general, companies that have strong sales and are seeking to expand with a new product offering or need money for an emergency or may look to RBF as an alternative to traditional lending. 

What Are the Risks of RBF?

As a business, the biggest risk of RBF is that your sales go south, making the repayment of the loan longer. That said, investors take on much of the risk because the repayment of the investment is in direct proportion to the company’s revenues. For the company receiving the financing, if sales unexpectedly drop, the repayment of the investment will take longer, and the investor will still expect to receive the same multiple on the principal investment amount. 

Generally however, the lender and the borrower both benefit in an RBF deal because they both want the company to be successful and for repayment of the investment to be quick. The structure of the RBF deal prevents either party from getting completely burned, unless the borrowing company goes under and is forced to declare bankruptcy.

Finally, it is important to note that RBF is not for every company. The model works only with companies that historically generate strong revenues, be it a healthcare, consumer software or business services company. A company that wants to use revenue-based financing must also have strong gross sales margins to ensure their ability to repay the investment.

Why You Want to be an LLC and How to Create One

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If you are the sole proprietor of your small business, and – heaven forbid – your business gets sued or must file for bankruptcy, are your personal assets, such as your house or your car, at risk? If this question keeps you up at night, now may be the time to consider converting your business into a limited liability company (LLC). 

An LLC literally does what its name implies – limits your personal liability in the event that creditors or the IRS comes after your company, plus it simplifies taxes. It is a relatively new type of business entity that provides the legal protections of a corporation with fewer tax and financial hurdles. You can form an LLC for nearly any business. 

What is an LLC?

An LLC gives your business its own legal identity. It is a legal status granted to a business that relieves owners of personal responsibility for the company’s debts and liabilities and establishes the business as an official legal entity. In a sole proprietorship, you must file your business’ net income or losses on your personal balance sheet. This makes you personally liable if your company is sued or must file for bankruptcy. In such a case, creditors or the government can – and most likely will – come after your personal assets such as your home, car and personal bank accounts. 

Take note, however, that you can still be sued personally with an LLC, depending on the circumstances. For example, if you’re a masseuse and you accidentally hurt a customer’s back, that customer can still sue you personally. You should still consider taking out a business insurance policy for this reason. 

Unlike a sole proprietorship, you and your business would be separate under a LLC. Once you’ve established your business as a LLC, you can open a checking and savings account in the name of your business. Also, LLCs can be taxed as either a sole proprietorship or as an LLC, and can take on business partners or be a single member LLC.

What are the Benefits of an LLC?

There are distinct advantages and disadvantages to converting to a LLC as opposed to a sole proprietorship. The first advantage is that single member LLCs are typically taxed as sole proprietorships, and the tax liability passes through to the owner’s personal tax return (hence the term, “pass-through” business). 

Second, since a single member LLC is treated as a pass-through business, that means that the single member can still qualify for the 20% qualified business income tax deduction, created by the 2018 Tax Cuts and Jobs Act, and yet, as previously mentioned, enjoy limited personal liability from lawsuits filed against the business and bankruptcy. You can choose to be taxed either once or twice (both as a corporation and a sole proprietor) – whichever option minimizes taxes. 

While an LLC itself doesn’t pay taxes, co-owned LLCs (LLCs that have more than one owner) must file the U.S. Return of Partnership Income  Form 1065 with the IRS each year. Each partner in the LLC must file this form separately, which the IRS reviews to make sure each LLC partner correctly reports their income. Single members must fill out form 1040 Schedule C with the IRS that will report your operating results, including profits or losses. You also have the flexibility to be taxed as a corporation, which, in some cases, can mean even more tax savings. You should speak with your accountant to determine which is best for tax reasons. 

Third is that you don’t have to deal with the red tape and bureaucracy of an S or a C corporation. For example, in an LLC, you don’t have to form a board of directors or have attorneys make sure you are in compliance with federal securities regulations and keep track of board meetings. 

Potential Drawbacks

The biggest drawbacks of an LLC is that you cannot sell shares of your company or go public – the company is solely owned by you and/or your members. You also will not be recognized globally, which means that if you operate or gain sales in another country, you may be taxed as a corporation. 

Other potential disadvantages are that LLCs differ from corporations in that they do not have specific roles, such as directors, managers, etc., which could lead to confusion as to who among the members is in charge. Additionally, in some states, LLCs may legally cease to exist if a member drops out. 

Forming an LLC

There are distinctive steps to forming or converting your existing business into an LLC, but the first thing you may want to do before doing so is to hire an attorney that is familiar with the laws in your state, because each state has different rules and fees when it comes to creating an LLC. Regardless of the state you are in, the basic process is:

Choose a Name for Your LLC

This sounds very straightforward, but the advantage of choosing a name for your LLC is that it will be unique to your business, as no other business will be able to use your name. Most states require your business’ name to end in LLC, and in most states you can reserve your name for 6-12 months for a small fee. Some states, such as New York, will not allow you to use certain words in your LLC’s name, such as “bank,” “Academy” or “Assurance.”

File Articles of Organization

Articles of organization is a document that outlines the initial statements required to form an LLC. Some states, such as New Hampshire and New Jersey, call them “Certificate of Formation.” While creating such a document sounds complicated, most states do make it easy – a form is available on the websites of most states’ Secretary of State that is typically simple to fill out. These forms will require you to name the members of your LLC, the physical address of your company and how it will be managed. All states charge a small fee, usually around $100, to file this document. 

Choose a Registered Agent

Every state requires an LLC to have a registered agent – an individual or company that agrees to accept legal papers on behalf of the LLC in the event that it is sued. The registered agent must have a physical address in the state in which the LLC is registered, and most states, such as California, provide a list of commercial registered agents that will act as an agent for an annual fee. In most states, an LLC member can also act as a the registered agent. You may want to hire an attorney to advise in choosing an agent.

Create an LLC Operating Agreement

Some states – but not most – require that you file an operating agreement. This is an internal document establishing how your LLC will be managed. While most states do not require one, you should create one in the event that one of the LLC’s members takes legal action against the LLC. You should work with an attorney when creating an operating agreement. Additionally, if you do not have an operating agreement, your state may dictate how your LLC operates. 

Comply with Your States’ Tax and Regulatory Requirements

This will require several steps that you should do in consultation with your attorney and/or accountant. 

  • First, you must create an Employer Identification Number (EIN) with the IRS if your LLC has more than one member. If the only managing member is you, you can elect to have your business taxed as a corporation rather than a sole proprietorship. As previously mentioned, your business will be able to keep its pass-through status in the event that you do. 
  • Second, you will need a business license depending on what type of business you are running. Depending on the specific rules of your local and state governments, you may even need to obtain additional licenses in order to do business in your local community. 
  • Third, your LLC must register with the appropriate state taxing authority in order to collect sales taxes and withhold state and local taxes from your employees’ paychecks. 

Get Ready to File Annual Reports

Some states will require your LLC to file an annual report every year – a document stating the yearly, detailed financial results of your business. While the task may sound daunting, you should work with your accountant or attorney on creating one.

While creating an LLC may be an arduous process, it will go a long way in legitimizing your business and cutting down on legal liability. Your business will have its own identity and be more organized for future growth.

The Key Details of the Working Capital Cycle

What is a Working Capital Cycle

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In the sometimes-lengthy process of turning a product into capital, all businesses are subject to what is called the “working capital cycle” (WCC). The working capital cycle is the amount of time it takes for a business to pay off their liabilities, such as their suppliers, and then begin collecting all cash they receive from sales as profit within one operating cycle. A well-managed working capital cycle often reflects a well-managed business. Businesses with working capital cycles with too many operational stopgaps can lead to low liquidity and a less stable production line. Effectively managing your company’s working capital cycle can give massive insight into your own operations and can better inform your financial decision-making.

Elements of a Working Capital Cycle

A working capital cycle can be separated into three categories, often called Accounts Payable Days, Inventory Days, and Accounts Receivable Days:

Accounts Payable Days: A business purchases raw materials for manufacturing and has a certain number of days to pay suppliers. The number of days in which you must pay your suppliers are your “Accounts Payable Days.”

Inventory Days: A business sells that inventory made from those raw materials to customers over a certain number of days. However many days it takes to sell your inventory are your “Inventory Days.”

Accounts Receivable Days: A business receives payment from customers over a certain number of days via invoice or credit card. The number of days you must wait for invoices and credit charges to become capital are your “Accounts Receivable Days.”

The basis of a good working capital cycle is making sure accounts receivable and inventory days are few enough so you can still pay suppliers on time. A working capital cycle can also be written as the formula:

Inventory Days + Receivable Days – Payable Days = Working Capital Cycle

Positive Working Capital Cycle

In most working capital cycles there are more accounts payable days — the days where payments from clients come in — than inventory and receivable days. This can be due to invoices or credit card processing windows that can take up to several weeks to become capital. Working capital cycles where payable days outnumber the sum of inventory days and receivable days are called positive working capital cycles. 

Positive Working Capital Cycle Example: A CD manufacturing company takes 80 days to sell their available inventory during an operations cycle and then takes 45 days for credit card payments and invoices to become capital. The company also has 45 days to pay their suppliers for the raw materials, so their working capital cycle takes 80 days and is positive.

80 Inventory Days + 45 Accounts Receivable Days – 45 Accounts Payable Days = 80-Day Working Capital Cycle

Negative Working Capital Cycle

Despite its name, negative working capital cycles are often anything but a negative impact on a business’s operations. If your business has no gap between when inventory is sold in exchange for hard capital, they very likely would run a negative working capital cycle. The most traditional example of negative working capital cycle businesses are those that only accept cash. A business that deals solely in cash and has no invoices would have a zero Accounts Receivable Days meaning it is possible Accounts Payable Days may be greater than Inventory Days, leading to a negative working capital cycle.

Negative Working Capital Cycle Example: A local farmers market takes 30 days to sell all of their available inventory during one operations cycle. The farmers market only accepts cash and has no invoices. Since the farmers market has all capital on-hand at the point of sale, they have 0 Accounts Receivable Days. The farmers market takes 45 days to pay for raw materials and liabilities, meaning their working capital cycle takes -15 days.

30 Inventory Days + 0 Accounts Receivable Days – 45 Accounts Payable Days = -15-Day Working Capital Cycle

Improving Working Capital with Tactical Financing

One of the most frustrating parts of business operations is waiting for invoices to cash after making a sale. The 30, 60 or even 120 days necessary for invoices to become capital will take a massive toll on a company’s working capital cycle. That number of days is a business’s “Accounts Receivable Days” and by shortening the amount of time an invoice is in limbo, a business can massively improve their working capital cycle.

Invoice factoring is an agreement between a business and lender where the business sells unpaid invoices to a lender who then pays approximately 95% of the invoice’s value up front. In most invoice factoring agreements, it is then up to the lender to collect on the original invoice. When the client’s invoice eventually clears, the lender, or factor, will send a final percentage of the invoice to the business while usually keeping a 3% fee for the transaction.

By expediting the time an invoice takes to become capital, a business can massively increase their cash flow and in turn improve their working capital cycle. There are, however, counterexamples where an invoice factoring agreement may extend a working capital cycle. If an invoice factoring agreement allows for business recourse, then the business, not the lender, is responsible for invoices that go unpaid. This can also be the case if a factoring company is unable to collect, or has a difficult time collecting on an invoice.  In these cases, it could be a while until you get that last percent from your invoices. If you would like to learn more about invoice factoring and other working capital loan options, please see Kapitus’s comprehensive guide detailing the several working capital loans options for small businesses.

Shortening Your Working Capital Cycle

Without becoming a solely cash business there are several strategies to shortening a working capital cycle to increase cash flow.

Reevaluate Manufacturer Options: When was the last time your business checked your supplier’s competition? Depending on your business and operation cycles there are likely several optimizations to your business which could effectively reduce Inventory Days. Is it possible to buy your most frequently used materials in bulk? Have you considered working with emerging manufacturing hotspots like Malaysia or Indonesia? Sit down with your team and think creatively about how your business can take advantage of rising globalism and manufacturing options to keep inventory turnover and quality high. Keep an eye out for local manufacturing options alternatives as well.

Renegotiate Existing Deals: Most modern operation cycles require several cultivated relationships with manufacturers and liveries which should be regularly assessed to make sure your business is getting the best deal possible. When your business buys raw materials from a supplier, how long is your credit period? That credit period is the same as your business’s Accounts Payable Days and by expanding the number of days your business must pay back suppliers in, your working capital cycle will shorten as well.

Kick Up Accounts Receivables Collection: There are several other ways to speed up accounts receivables collection without invoice factoring or financing. By shortening the amount of time between a sale and when that sale becomes liquid your business’s cash flow and working capital cycle will both improve. Consider making an updated A/R Aging Report which consolidates all of company’s accounts receivables data into one place for easy consideration and optimization. Does your business offer payment plans for high-volume purchases? A great way to attract new clients and boost monthly receivables is to offer structured payment plans. Another strategy to maximize your business’s accounts receivables is to increase your client base.

Final Considerations and the Nature of the Working Capital Cycle

Barring very specific industries, having a positive working capital cycle is a good indicator that a business is financially sound. Regarding growth, however, it is often difficult for companies to expand when their operational cycles leave low liquidity and high asset value. This is why several businesses seek financing from banks or private lenders to cover working capital and in turn reinvest in their own operations.

There is no universally ‘good’ working capital cycle because every business’s operations cycle is different. If your business has several long-term invoices, invoice financing could be a great way to kick up your working capital cycle. If your slowdown is on the manufacturer’s side however, you will need to consider wholly different solutions.

If you would like to learn more about your business’s working capital cycle financing options, please get in touch with a Kapitus financing expert who can address your unique situation.

Tips on Starting, Funding a New Business

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Small businesses are being created now more than ever, thanks to people being laid off or furloughed during the COVID-19 pandemic and the advent of online tools aimed at helping budding entrepreneurs. In April 2021, roughly 500,000 people in the U.S. applied for new business applications, compared to just 300,000 in the same month of 2020, according to the Bureau of Labor Statistics.

While the current climate may make the decision to start your own business easier than ever before, it certainly doesn’t mean that starting a new business is easy. While creating your small business from scratch does start with a dream, a great idea and some funding, you’ll probably also need online training, business acumen and an understanding of some basic financial and marketing principles to get going. 

Mapping Out Your Business

Whether you are launching a construction business, retail store, business services firm or an eCommerce site, before you even think about funding, you’ll need to produce a business plan. 

A business plan is a specific outline of your business, what it will entail and how it will make money. If you plan to seek initial investors for your business, be it angel or venture cap investors or through crowdsourcing, you’re going to need one. 

Source: Growthink

There are cost-effective online tools out there that can provide you with a template for a presentable business plan, such as this one from Growthink, that can make it easy for you – all you have to do is plug in the text and the program will do the rest for you. The basic ingredients of a plan for a new business are:

  • Executive Summary

The executive summary should clearly tell the reader what you want to accomplish as a business, and why your business is special. This is often referred to as a mission statement and is extremely important to potential investors. All too often, this is buried in the middle of the business plan but needs to be stated upfront.

  • Business Description 

The business description should include a clear description of your industry, as well as the products or services you are seeking to sell within it. This is your chance to describe why your product or service stands out in the industry and why you think customers will choose it over your competitors. 

  • Marketing Strategy

This part of the business plan requires a meticulous analysis of the market you are trying to sell your product in, and who you want to sell your product or services to. As an entrepreneur, you need to be familiar with all aspects of the market you’re looking to sell in, as well as carefully define your target market so that your company can be positioned to garner its share of sales.

  • Competitive Analysis

Present a description of what your competitors offer, what their strengths and weaknesses are, and how big the market is in which you are trying to sell. Then, clearly explain what gives your business a competitive advantage. Put simply, why do you think consumers will choose your products or services over your competitors? 

  • Design and Development Plan

The purpose of a design and development plan is to provide a description of the design of your products or services, chart their development within the context of production, marketing and the company itself, and create a development budget that will enable your company to reach its goals.

  • Operations and Management Plan

This plan describes how your business will function on a continuing basis. Who, if anyone, is going to be in charge besides yourself? Where will your business function and what kind of equipment and inventory will you need? Who will you need to hire and for what functions? 

Put simply, the plan will clearly explain the various responsibilities of your management team (if you plan to have one), the tasks assigned to each person in your company, as well as the capital and expense requirements related to the operations of the business. 

If the only employee will be you, you need to clearly spell out what kind of compensation you will need for yourself, as well as the equipment, supplies and space you will need to make your business operate smoothly. 

Business Basics

In planning out a new business, you need to learn basic business terms and why they’re important. There are online courses (and many of them are free!) to teach you the basics of managing a business, such as what sales and profit margins are, customer retention and conversion, etc. 

In order to successfully launch your business, here are some basic business terms you should familiarize yourself with right off the bat:

  • Sales Margin 

Also known as contribution margin, this metric basically determines what you should be charging for your products or services in order to be profitable. It is the amount of money you charge for your product minus the cost associated with producing your product or service. Those costs include manufacturing costs, advertising/marketing and salaries. 

  • Customer Acquisition Cost

This metric helps determine what each sale costs. Simply add up the cost of marketing and sales — including salaries and overhead — and divide by the number of customers you land during a specific time frame.

  • Customer Retention Rate

Customer retention rate is a key metric that essentially tells you if your customers are happy, and will help you determine how quickly you can grow your business. It measures what percentage of your customers have kept coming back over a period of time, and can be calculated over a weekly, monthly or annual basis, depending on your preference.

  • Customer Conversion Rate

This metric basically tells you whether your marketing and sales efforts are paying off. It is simply the percentage of people who walk into your business or visit your website who end up becoming customers. If the conversion rate is low, you may want to change the way you are marketing or advertising your business. You may want to offer more discounts on your website if your conversion rate is low, for example. 

  • Revenue Percentages

If your small business is like most, you probably have more than one source of revenue. Where your revenue is coming from will tell you about shifting trends in your market and what consumers are spending money on. 

For example, if you run a small contracting business, you may get revenue from customers who want to build new homes and revenue from customers who want to renovate their homes. If you notice that, suddenly, many more customers are interested in home renovation rather than new home building, you may want to change your marketing efforts accordingly. 

Build a Website

Whether you’re a doctor or a plumber, it is virtually impossible today to run your business without having an online presence. When consumers search for your services, the first place they will search is the internet. 

Having an online presence means that potential customers can easily find you via a web search, know what products or services you offer, and what makes you unique. You can even set up your website to make direct sales.

Building your own website does not have to be costly, as there are plenty of do-it-yourself website builders such as Wix and SQUARESPACE that can make it easy. In a previous article, Kapitus offered a step-by-step guide to building your own site.

Potential Funding Sources

When you’re looking to start a business, traditional and alternative small business lending sources are probably not an option, since most require years in business. There are funding sources available to you, however, if your personal savings and help from friends and family members are not enough to start your own business:

  • Angel Investors

This option is pretty much what the hit show “Shark Tank” is about. Angel investors are individuals who are willing to invest in start-ups or early stage companies, typically between $25,000 to $100,000, in exchange for a piece of ownership. Their hope is that their investments will pay off big when your company either goes public or when your company becomes big enough so that you can comfortably buy out their pieces of ownership for a hefty sum more than the amount that they originally invested. 

Source: Angel List

Angel investors are often successful entrepreneurs themselves and can offer mentorship and business advice, and typically want to see a strong business plan as well as your plans for growth before they invest. You can find angel investors from other entrepreneurs, or search online through sites such as Angel List.

  • Crowdfunding 

Crowdfunding is becoming one of the most popular ways to garner funds for startup businesses. It is the practice of raising funds through popular crowdfunding websites. 

Setting up a crowdfunding campaign is relatively easy. In most cases, all it takes is setting up a profile on a crowdfunding site, describing your company and its business, and the amount of money you are seeking to raise. In order to attract investors, your business plan and products must seem compelling and differentiating. 

One of the best features of a typical crowdfunding plan is that you usually don’t have to give up pieces of ownership in your business, as people who are interested in investing typically do so in exchange for some kind of reward from your business, such as a discount based on the amount donated, or some form of profit sharing in your business.

Equity crowdfunding, however, is when you are selling stock or some other interest in your company in exchange for cash, and requires compliance with federal and state securities laws. In this form of crowdfunding, you should consult with an investment attorney.

Crowdfunding sites usually charge a fee to list your campaign, which will either be a processing fee or a percentage of the funds raised. Some of the most popular sites include Kickstarter, Indiegogo, Crowd Supply, Crowdfunder and SeedInvest.

  • Grants

There are several private grants available through application for startup and small businesses that could reward you with $10,000 to $150,000 in startup cash, especially if you are launching a woman- or minority-owned business.  Additionally, there are some grants offered through the U.S. Small Business Administration. Some of these grants usually require a business to be community-related or involve mentorship of some kind, so be sure to carefully examine the requirements before applying. 

  • Small Business Credit Cards

Since traditional and alternative business loans are not typically available for startup businesses, you may want to apply for a business credit card. These types of cards often require a strong personal credit score – not years in business – so they may be a good alternative funding source. Like with any credit card, interest is only charged on the amount borrowed, and these cards often come with perks such as cash back rewards, airline mileage points and discounts with selected retailers. 

In the past year, a number of credit card issuers have offered cards that specifically focus on the small business market and do not require personal guarantees, which means use of the card will not impact your personal credit score. One example is Brex, which offers a small business card for early-stage technology companies with professional funding. The credit limits may be substantially higher than traditional credit cards, and they often provide valuable rewards.

  • Venture Capital

Of course, VC funding is usually thought of first as a funding source for startup companies, but they often have the most stringent requirements. VC managers typically want to see strong business plans, and often require seats on company boards, right of first refusal, anti-dilution protection and high ownership stakes. It is often difficult to obtain VC funding as most fund managers are inundated with funding requests and often only accept pitches through referrals from trusted sources, such as other successful startups and successful entrepreneurs. 

Several rounds of funding are often involved, and most VC fund managers are seeking highly profitable exit strategies, such as an IPO or an acquisition, even though most startup businesses do not have any such plans on their horizons. If your startup business does have grand plans of becoming the next Amazon or Microsoft, then VC funding may be for you. 

Starting your own business may be a complex, exhausting task that will require hard work and long hours, but in the end, the thought of being your own boss, setting your own hours and not having limits on your compensation to support you and your family may be worth it if you have a dream and a great idea.

Ways Female Entrepreneurs Can Recover After the Pandemic

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Woman-owned businesses – especially those owned by women of color – bore the brunt of the recession caused by the COVID-19 pandemic, and need help to claw their way back.

The reason women-owned businesses in the U.S. were hit harder than most is because, according to a study by the U.S. Chamber of Commerce Foundation, many of the businesses are run by “mompreneurs” – in fact, 90% of them have no employees other than the business owner and involve selling merchandise over the internet. Additionally, many women started their own business during the pandemic because they got furloughed or laid off, and childcare centers closed.

Access to Funding Curtailed

This made getting loans from the Paycheck Protection Program or SBA impossible for them, as those loans require years in business and a certain number of employees. A number of grant programs exist for women-owned businesses, but according to a study of nearly 1,200 women-owned businesses by Gusto, the ones that are out there are not enough to help sustain the number of women-owned businesses. 

According to Gusto’s survey, the vast majority of women-owned businesses (68%) funded their business through their own personal savings.

“Women are disproportionately owners of foot-traffic-based companies,” said Sarah Gustafson, lead data scientist at Gusto. “What we saw is that female-owned businesses have had larger net losses in their headcounts [during the ongoing pandemic] than male-owned businesses.”

Shouldering the Burden

While women-owned businesses face the same challenges as any small business owner, they also face unique challenges such as childcare. In particular, minority women drove business creation during the pandemic, according to Gusto’s study. Nearly half (47%) of businesses started in the past year are minority-owned. 

Their reasons for starting a new business were overwhelmingly driven by financial imperatives. Minority women were more than twice as likely (35% vs. 17% for others) to start a new business because they were laid off or worried about their financial situation. Almost a third (29%) of these women are the sole providers of income for their family. 

The main reasons given listed by Gusto for women to start their own businesses are:

  • 58% of women want more control over their work schedule;
  • 24% wanted to start a business that they could pass on to their families;
  • 37% were looking to improve their financial opportunities;
  • 19% lost their jobs, and
  • 9% didn’t have any other job opportunities. 

Steps Towards Economic Recovery

Obviously, not all women-owned businesses are the same, but whether you own a retail store, catering service, an office-based company or beauty supply shop, there are still uniform steps you can take, as well as apply for grant programs that are available to you.

The first step you may want to take as a woman business owner is to certify yourself as such with the Small Business Administration so that you can compete for lucrative contracts:

  1. Officially certify yourself as a woman-owned business with the SBA. This will qualify your business for the SBA 8(a) Business Development Program – a program that allows women-owned businesses to:
  • Compete for set-aside and sole-source contracts in the program;
  • Get a Business Opportunity Specialist to help navigate federal contracting;
  • Form joint ventures with established businesses through the SBA’s Mentor-Protégé Program;
  • Receive management and technical assistance, including business training, counseling, marketing assistance, and high-level executive development;

You can compete for contract awards under multiple socio-economic programs, as they apply. To qualify for the program, you must have a personal net worth of $750,000 or less and a gross income of $350,000 or less. 

Grants for Women-Owned Buinesses

There are also several private grants, many of which are specific to women-owned businesses, that you can apply for as the economy slowly recovers from the pandemic:

The Eileen-Fisher Women-Owned Business Grant

The Eileen-Fisher Women-Owned Business Grant awards five grants up to $120,000 per year to woman-owned companies that promote social and environmental change. Your business must have existed for at least three years, and you cannot have earned more than $1 million in annual profits.

Visa’s She’s Next program

The Visa She’s Next grant is awarded to African-American women-owned businesses. In order to apply, you must have been in business for at least two years, be a B2C company, and have a minimum revenue of at least $24,000.

Amber Grants

The Amber Grant is one of the easiest grants to apply to. It is geared towards female entrepreneurs who are planning to launch small, local businesses and awards $10,000 every month. At the end of the year, one of the monthly winners is selected for a $25,000 grant. To apply, all you need to do is go to the website and explain the purpose of your business.

Cartier Women’s Initiative Award

The Cartier Women’s Initiative awards 21 female entrepreneurs every year with one-on-one expert coaching, business workshops, media coverage for the entrepreneur and their business, and prizes ranging from $30,000 to $100,000.

IFundWomen Universal Grant program

The IFundWomen Universal Grant Program  partners with several different organizations to bring grant opportunities to women-owned small businesses which has a grant pool of over $8M. Grants are available to many different types of women-owned businesses.

GrantsforWomen.org

GrantsForWomen.org  is a versatile program that is a database of grants specifically for women-owned businesses. Not all grants are specifically for women-owned business owners, but they offer funding options in a wide range of industries. 

37 Angels 

37 Angels is a great program for women entrepreneurs who are seeking start up capital for their respective businesses, as it is made up of female angel investors that invest only in women-owned small businesses. The organization is dedicated to assisting female entrepreneurs who do not qualify for traditional lending, and offers grants as large as $150,000. 

Belle Capital 

Belle Capital is a private equity firm focused solely on women-owned businesses, and is ideal for female entrepreneurs who plan to take their company public or have a big exit strategy planned over the next few years. Some of their criteria include the feasibility of the business reaching $20 million in revenues over the next five years, and high capital proficiency. 

Going Forward

While there are grants available to women-owned businesses, female entrepreneurs also need help from the government. According to Gusto’s survey, most women-owned businesses favor President Biden’s proposed infrastructure plan that aims to increase broadband access across the nation, as the number one concern for women-owned businesses is having greater access to the internet. 

Hiring concerns and the need for more training, particularly in the eCommerce space, also represent the greatest need for women-owned businesses, as well as expanded access to capital, both in the traditional lending space and the private equity market.  

You can find training courses online (and some of them are free!) on how to use eCommerce for your business and how to best navigate your way through social media.

What Independent Medical Practices Need to do to Survive

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Even before the COVID-19 pandemic hit, independent medical practices were in critical condition as large hospital systems implemented cost-effective, value-based care systems and hoarded patients’ medical histories – moves that forced many independent physicians who couldn’t compete to give up their practices and join them.

Contrary to popular opinion, independent medical practices were not immune to the effects of the coronavirus pandemic, as patient visits and needs for services plummeted. According to the American Medical Association, 2% of primary care practices closed and another 2% considered bankruptcy at the end of August 2020.

So how are independent physicians supposed to prevent themselves from becoming W-2 employees in the wake of competitive challenges posed by large hospital systems, as well as the task of finding new patients as the pandemic winds down? Here are some tips for survival, based on our conversation with Marni Jameson Carey, executive director of the Association of Independent Doctors, and data from the AMA. 

Merge Your Practice Due to the Threat of Value-Based Care

  • Perhaps the most important action an independent medical practice can take is to merge or form a strategic alliance with other independent practitioners in order to spread the risk posed by value-based care – a system designed to lower the cost of healthcare by charging patients for outcomes rather than service. 
  • In such a system, insurance companies as well as the Center for Medicare and Medicaid Services (CMS) set standards of payments to doctors to incentivize them to keep costs down by cutting redundancies in treatment, offering pre-paid bundled services packages to patients for cancer care and surgical procedures, and focusing on preventative care. If doctors go over the stated annual amount, then the cost of treatment must come out of their pockets. In short, doctors are rewarded and paid to keep patients healthy year-over-year, rather than paid for services rendered. 
  • The Healthcare Payment Learning & Action Network, which was established by the CMS in 2015, aims to have 100% of providers in the US participating in value-based contracts by 2025. While value-based care has become the wave of the future in medical care, it has become the biggest threat to the existence of independent doctors, who may not be able to afford to offer discounted services, said Carey.
  • Large hospital systems that own a network of salaried physicians are in a better position to offer value-based care because of their economies-of-scale, said Carey, and that makes it harder for independent practitioners to keep up.

Marni Jameson Carey, executive director of the Association of Independent Doctors, says that independent doctors should band together to offer value-based care.

“I have a problem with value-based care philosophically because smaller practices tend to have established patients, and as doctors get older, their patient bases tend to get older and sicker, not younger and better,” she said. “So, as a doctor, I’m now being measured against my prior year, even though my patients are getting older and sicker, and I’m doing my best. Value-based care goes against the grain of the idea that every year you have to do better than the year before, when natural evolution tells us that people get older and eventually die.” 

The answer, she said, is for independent practitioners, be it primary care physicians or specialists to “Ally with other independent doctors and share risk as a consortium, but still stay independent,” she said. 

According to a recent article from the Advisory Board, a physician advocacy group that promotes equity in healthcare practices, “As care delivery becomes more complex and value-based arrangements require more upfront resources, very small practices are more likely to struggle financially and be aggregated by larger entities. This may mean hospitals, yes, but it doesn’t only mean hospitals. In fact, many independent physicians are acting as aggregators themselves—buying up struggling practices and offering models that appeal to these fiercely independent shareholders.”

Independent doctors should know that acquiring another practice in order to scale up business may require financing. In such a case, physicians should consult with their accountants as well as seek financing from either traditional lenders or alternative lenders such as Kapitus, which offers Helix Healthcare Financing – lending specially tailored for independent healthcare practices. 

Make Healthcare Records Portable 

Electronically Updating the medical history of patients is the bane of most doctors’ existence, because it involves hours of tedious paperwork and filling out forms. To add to that frustration, independent doctors often have to deal with the fact that their expensive electronic health records (HER) systems are not compatible with those of the hospitals to which they refer their patients. As a result, hospitals don’t know their patients’ medical histories and order duplicate tests and perform redundant procedures. 

“This is one of the ways hospital systems try to encourage independent doctors to join them and become employed physicians, so that they don’t have to invest in electronic health record systems that may become obsolete,” said Carey. “Hospitals like to own patient data and freeze out other providers not within their system so that they capture patient share and make it hard to share the data with doctors who might take business from them.” 

The answer to this, she said, is for independent doctors to adopt an EHR policy that makes it easy for patients to have access to their own medical history – something many doctors are afraid of doing out of fear of violating the Health Information Portability and Accountability Act (HIPAA). 

“If you look up the HIPAA laws, it’s not about patient privacy, it’s about the patient’s access to information,” said Carey. “The law has been misconstrued to mean that patients can’t even have access to their own information, and that isn’t true. The patient should be able to have the data, so when the patient goes to the hospital or a specialist the patient has the information with him or her, whether it’s on a thumb drive or on a smart phone. So, the answer to this is to make sure patients have access to their own records and to sure information isn’t siloed by hospitals.”

AthenaOne Electronic Health Records Software

For independent doctors who are still using paper files to store patient records, adopting EHR software should not be a difficult task. Some of the most popular EHR software systems out there include AthenaOne and RXNT.

Make Telehealth a Featured Part of Your Business

Even before the nation went on lockdown due to the coronavirus, health insurance giant Kaiser Permanente revealed in 2018 that slightly more than 50% of doctor visits by its participants were through telehealth, and that the number of telehealth appointments shot up by 3700% from 2019 to 2020. The bottom line is that telehealth is here to stay, especially in rural parts of the country where a trip to the doctor’s office may require a long drive. 

“I’ve been told by our doctors that they are doing telehealth visits over their phones and over Zoom, and that they bill for the service and it isn’t complicated,” said Carey. “I know there are companies out there that want to make it complicated and want to sell expensive services, but this really isn’t a technology issue. I do know that you can’t just run around doing telehealth visits, that you need to be an established patient with a practice before that provider can do a telehealth visit with you and determine whether a telehealth visit would be appropriate.”

Make Prices Transparent

Several states have passed laws requiring medical practices to inform patients of the price of their services before they are rendered. This prevents patients from receiving billing surprises after undergoing surgery or another medical procedure. The patient may believe that the surgery is covered by insurance, only to find out afterwards that one of the specialists involved in the surgery, such as the anesthesiologist, for example, may not accept insurance and receive a bill for thousands of dollars for that service. 

States such as New Jersey, for example, have passed the Out-of-network Consumer Protection, Transparency, Cost Containment and Accountability Act in 2018, a law that independent New Jersey doctors claimed threatened their survival because it allows consumers to also seek an outside arbitrator to determine whether the cost of medical services are reasonable. 

Carey said that despite the initial objections to these laws, price transparency among independent physicians – even ones that do not accept insurance – is necessary to ensure their survival because it encourages competition among physicians as well as hospital systems, which inevitably will drive down prices of medical services. 

Automate Where you can 

Some independent physicians are still stuck in the dark ages when it comes to technology but should automate some of their systems with software to make their lives easier and give them more time to spend with patients. These systems include automated appointment reminders, patient intake forms and billing – systems that large hospital systems already automate themselves. 

In summary, survival may not be easy for independent medical practices going forward, as large healthcare systems continue to gobble up small practices. Following steps for survival such as partnering with other independent doctors and keeping up with technology can prevent an independent doctor from becoming a W-2 employee.

Small Business Acquisitions and How to Finance Them

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Acquiring another business can be a complicated task, but one that could very well be worth the effort to ensure the survival of your small or micro business. 

The time may also be right for considering an acquisition, as interest rates are low, making borrowing for an acquisition relatively cheap. Additionally, according to the most recent NFIB Small Business Optimism Index, the net percent of owners raising average selling prices increased 10 points to 36%, the highest reading since April 1981. 

While deal volume is not back at a pre-pandemic level, according to the NFIB, sectors such as liquor stores, home improvement businesses, e-commerce sites, medical businesses, manufacturers, and distributors are seeing high activity.

Reasons to Consider an Acquisition

One reason you may consider acquiring another business is that, now that we are (hopefully) in the waning days of the COVID-19 pandemic, your business may very well have taken a financial hit, and you may need to scale up by purchasing a similar business if you wish to survive going forward. 

Purchasing a similar business would give you an entirely new stream of revenue and a new pool of clients, as well as increase branding in your market – even if you’re a microbusiness such as an independent restaurant or retail store owner. If you’re an accounting or law firm or other type of business services firm or medical practice, it may even increase your client base to other regions of the country, depending on the location of the business you are seeking to purchase. 

Another potential reason to make an acquisition is that you may want to complement your business by offering additional services. For example, if you own and operate a construction firm that specializes in building houses, you may want to purchase a company that specializes in masonry and paving work so that you don’t have to subcontract that work whenever you build a new home.

Due Your Due Diligence

If you’re interested in making a strategic acquisition, your first task will be to work with an M&A advisor or even an accounting firm. While most banks are not interested in M&A advisory work for small businesses, there are several advisors that do specialize in handling acquisitions for small to medium-sized businesses (SMBs). 

Talk to your advisor about:

  1. Why you want to make an acquisition;
  2. What type of company you are seeking to purchase; 
  3. The location of the company in which you wish to purchase;
  4. The feasibility of merging your company’s balance sheet with the acquired company;
  5. The value of similar businesses in your industry and in your geographic location;
  6. A realistic amount you wish to spend on an acquisition;
  7. The logistics of merging your company with another, and
  8. How to fund the acquisition through debt.

A reputable M&A advisor should be able to do the due diligence for you and find you a list of companies in your area that may be a compatible target for an acquisition based on their business models, revenue, management structure and other factors. The advisor should also come up with a fair value of the acquisition target based on the financials of the target business. 

Create a Combined Business Plan 

Once you and your M&A advisor has found an acquisition target that meets your criteria and agrees to be acquired, you will have to produce new short- and long-term business plans for your new, combined entity in order to get financing to fund the acquisition. The basic ingredients of a business plan for a newly combined business typically include:

#1 Creating a New Management Team, Staff

Discuss with the head of the company that you are looking to acquire the logistics of combining your staff. Start with who will oversee the new company, and what functions each of you will have. If you are a microbusiness and the new company will only have 6 or 7 employees, then combining your respective workforces should not be too challenging. If your newly formed company will have 20 or more employees, you may wish to create new departments with new department heads, with each serving a different function.

Staffing redundancies, such as two people from each respective company essentially serving the same purpose, may be a red flag in the eyes of a prospective lender, so make sure your new staff structure is as efficient as possible. These factors will be crucial in the contingency –or 12-month plan– that you will need to present to a prospective lender to finance your acquisition.

#2 Creating a New Mission Statement in Line with Your New Capabilities

Your new company’s mission statement should detail the new array of products that you offer, how employees approach their work to reach goals and why your new company is improved in the way it provides products and services as a result of the acquisition. 

Next, ascertain the capabilities that your new entity has to offer in terms of sales. For example, the company that you are acquiring may offer eCommerce capabilities, while you have more retail locations. Post acquisition, your new company will offer both and your mission statement needs to reflect this. Your new company may now offer business-to-business, business-to-consumers capabilities or combinations thereof as a result of the acquisition. In addition to being a key component of your mission, these factors should be the benchmarks for your five-year business plan.

#3  Showing That You Can Absorb Debt

Typically, the company that you acquire will have some debt that you have to absorb. In order to get financing for your acquisition, you have to convince the lender that you can handle that debt, especially since you are using debt to finance the acquisition. 

Joshua Jones, Chief Revenue Officer at Kapitus, said the ability to take on new debt is key to acquisition financing.

“The [lending] bank is going to say, ‘does this asset (the acquired company) cover the new debt service on that business?’” said Joshua Jones, chief revenue officer at Kapitus. “Because now, you’ve just applied a whole new payment (through the financing of the acquisition) and the best way to show in your business plan that you can absorb that debt and increase your gross profit is either through efficiency gain or scale.” 

#4 Projecting Gross Income of the Newly Formed Company

Work closely with your accountant or M&A advisor to project a 12-month income. There are various ways to project income, and it is typically far more complicated than simply adding the gross income of your company to that of the company you are acquiring, so talk to a financial expert on this. 

“An effective planning tool is through the use of projections,” said Michael Kuru, a CPA specializing in family-owned businesses. “When a business is acquired, there is a strong indication of the gross income that should be generated. The experienced business owner should have an idea as to the underlying cost to generate that income.’

Obtaining Financing for an Acquisition 

Generally, the best type of financing for a small business acquisition would be an SBA loan, with the most common being the 7(a) loan. You may also want to consider a business loan, since the requirements for a SBA loan are typically stringent, require a high credit score, and are generally not easy to obtain. 

According to Jones, however, “An SBA loan will always be the most seamless with the acquisition strategy because it is going to provide the length of payback that’s more applicable to an owner buying a business and having the available profits to pay down the loan as a percentage of profits over time.”

SBA loans are typically offered by two different entities – a brick-and-mortar bank, or an accredited non-bank SBA lender (of which there are only 14). Many alternative lenders such as Kapitus do not directly provide the SBA loan, but have built a wide array of accredited lending partners and uses modern technology to underwrite, approve and manage the loan disbursement and repayment process, often in a timeframe that is much quicker than that of a traditional lender and often has fewer requirements.

Executing an acquisition could be an expensive and extremely complicated task. At the very least, however, buying another small business could help your business survive in the post-pandemic world. At most, an acquisition could help you thrive as it would allow your company to expand, scale up products and offerings, and ultimately pull in new business.

Preparing Your Small Business for Retirement

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Thinking about an exit strategy may be the last item on your priority list as you work hard to successfully run your small business. But no matter how young you are or how new your business is, life moves fast. It’s never too early to think about retirement, because being old and broke is the last place you want to be in a few decades (or a few years) from now. 

To prepare for retirement, the first item on your agenda should be to determine what you want to do with your business when it’s your turn to ride off into the sunset. Do you want to sell your business and use the proceeds to fund part of your retirement, or do you dream of passing along your business to your children or other close relatives? 

Planning For Retirement

No matter what you plan to do with your business once you’re ready to retire, saving money for retirement throughout your career is still your best bet. To do this, you’ll need to ask yourself some important retirement lifestyle questions, including:

  • What will your source of retirement income be?
  • How much money will you need to retire? 
  • What age do you want to retire, and how much will you need to save each month to make it happen?

Easily determine how much you need to save for retirement with the help of free online retirement calculators.

Online retirement calculators, such as this one from Bankrate, can be used for free online. If there is a place where you dream of spending your golden years, try to get an idea of what the cost of living is there. Also factor into the equation that as you get older, medical bills may pile up. If necessary, speak to a financial advisor about these factors. You can find a financial advisor online for free on various personal financial websites, such as SmartAsset.com. 

If You’re Starting Late

If you’re a bit late in the game when it comes to saving for retirement, not to worry. According to a great article from the American Association of Retired People (AARP), there are steps you can take, such as refining your personal budget to eliminate any excesses; setting up automatic savings deposits; maxing out contributions to any individual retirement account (IRA) you may have, and working as long as you can. The fact is, even if you’re starting to save in your 40s or 50s, you can still save enough to retire. 

Saving vs. Selling For Retirement

Selling your business to fund your retirement is an extremely risky proposition because small business owners tend to overestimate the value of their business and often mistakenly believe that selling it will bring in enough income to comfortably retire. Don’t count on it. A business is only worth what a buyer is willing to pay for it, and if you own a mom-and-pop shop with relatively low profit margins, chances are that selling your business will not pull in enough funds for you to retire.

The answer is to save early and often for retirement by setting up a retirement plan for yourself and your employees. Whether you have two or 20 employees, there is a retirement investment plan out there for your business. 

Retirement Investments

You can open a simple IRA which allows employees to contribute money to the plan. Another option is a SEP IRA, in which only the owners can make contributions. You can also fund a solo 401(k), which covers a business owner with no employees, or a 401(k) plan for small businesses.

You may want to seek help from a financial advisor to choose your investment options. The advisor can help you build a diversified investment portfolio that will automatically adjust the financial risk of your portfolio accordingly as you get older, and keep your retirement assets safe and allow them to grow.

Most retirement investment vehicles – be it a 401(k) plan or an IRA – allow you to contribute pre-tax dollars and will not charge you capital gains taxes until you retire or if you take an early withdrawal from it. Even saving just $100 pre-tax dollars per paycheck can add up over the years, so start saving early.

Always Know How Much Your Business is Worth

If you plan to sell your business to fund at least part of your retirement, you should always have a rough idea of what your business is worth. Finding out is a bit of a complicated process, so you may want to work with your accountant or an M&A advisor that specializes in small- to medium-size businesses (SMBs). 

  • The first step is to determine your cash flow by calculating your assets and deducting your liabilities from them. Your assets include current and outstanding invoices, equipment and inventory. If you own the land that your business resides on, that’s an asset as well. Then, subtract any outstanding debt and expenses you have from that figure. This is your cash flow and will at least give you a good starting point in determining the value of your business. 
  • Second, determine how much gross annual earnings your business makes through sales. This is often referred to by large corporations as earnings before interest, taxes, depreciation and amortization (EBIDTA). A company’s rough value is often calculated by a multiple of gross annual sales or cash flow. 
  • Third, consult with an M&A advisor or accountant on what multiples are used in your specific industry and location. For example, if you own a small tool manufacturing and supply shop in a wealthy location such as New York City, the average multiple of earnings that your business may sell for in the area could be five. Therefore, if your business’ gross annual sales are $500,000, it could sell for $2.5 million. 
  • Fourth, consider your client base. If you’re an accounting or law firm or an independent medical practice and have a base of long-time clients or patients, that should be a negotiating point when you go to sell your business. Typically, companies with long-time clients fetch higher multiples than smaller businesses such a retail store or restaurant. 

Now that you have a rough idea of the value of your business, you should factor that into the amount you are saving and investing for retirement, especially if you are planning to sell your business to fund your retirement.

Passing Your Business to Your Heirs

If you’ve saved enough for retirement and want your child or another close relative to inherit your business, there are several logistical and financial considerations you need to examine:

  • First, make sure your child is properly educated, trained and willing to run your business. It is probably best to introduce your child to the business as early as possible.
  • Second, if you have more than one child and they all want to inherit a piece of your business, make sure you speak with your accountant and your kids about how they will divvy up your business and what tax consequences, if any, each of them will face once you decide to retire.
  • Work with your accountant to avoid paying the gift tax. The gift tax taxes the transfer of property from one person to another. The property does include a business, and this tax applies while you are still alive (this is not to be confused with the inheritance tax, which is what your heirs will owe to the IRS on whatever property you leave to them after you are deceased). 
  • Keep in mind that there is a $15,000 annual exclusion from the gift tax in 2020 and 2021, and a $11.7  million lifetime exclusion. If the amount you are giving to your heirs stays below those amounts, you can avoid having to pay the gift tax altogether..

When it comes to planning your retirement, do not listen to the old Rolling Stones song, “Time is on my Side” (notice that Mick Jagger and Keith Richards haven’t retired yet!). Start saving early, because you do not want to be financially struggling in your golden years, and you certainly want your children to be fully prepared for the day when they take over your business. The earlier you start, the better off you will be.

What Kind of Website Do I Need, Are Websites Worth It

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Now that you’ve decided to build a website for your small business – congratulations. Your company will receive more visibility, better branding, and eventually more sales.

Before you build your site however, there are several questions you’ll need to answer in order to to determine if you should build a site through a low cost, do-it-yourself website platforms such as Wix, SQUARESPACE or GoDaddy, or make the significant investment in building your own robust website:

  • What products are you looking to sell on your site, and how do you plan on selling them?
  • Are you selling subscriptions? Will the purpose of your site be to make appointments for people to come into your brick and mortar business to buy products or services? 
  • Are you seeking to sell products directly through your websites via online payments?
  • Do you plan to feature industry content or a blog on your site?
  • How will your site stand Apart From Competitors?
  • What Actions Do You Want Site Visitors to Take?

What Should Your Site Accomplish?

Now that you’ve answered those questions, you essentially have two choices: You can use a DIY website platform, which does have its advantages – most of them charge a low monthly fee; provide an easy-to-use website template, and provide web security and basic analytics. This may be the best option to choose if you’re simply looking to expand your presence and just check off the “web presence” box for your business. 

For example, if you’re an independent restaurant owner who wants visitors to use your site to make reservations, or a car dealership owner who wants your site visitors to make appointments for test drives of your vehicles, then a DIY site may be the best choice for you.

DIY platforms do have their drawbacks, though. Almost all of them charge additional fees if you look to add features to your site, and many of them will ask for a large percentage of your revenue if you are seeking to use your site for direct sales. Additionally, the web template that you choose may be being used by other customers, so your website may not look unique.

If you want your website to do more, however, such as accommodate direct sales of your products, offer sales or discounts, or generate industry buzz through a blog page, then building your own website is probably the best bet for you. 

Be warned, however: while building your own site will be well worth the effort from a sales and marketing standpoint, it will be a long, arduous, and expensive process, and one that will require you to first analyze whether it will be worth the money to do so. 

Figuring Out if it’s Worth it

Now the question becomes: based on your wishlist for a website, is building a site worth the money? The answer to this question is paramount in deciding whether to invest capital into building your own site. The process of answering this question is also a bit complicated and may require you to hire an outside web consulting firm to assist you. 

The first thing to do is to figure out the cost of building a website. A basic laundry list of things you will likely need to spend money on in order to create your own site can include:

Do some research to find out the fees of website consulting firms and the market price for a web designer/programmer, if you choose to hire those. In order to house your website and make it available to the public via the world wide web, you can either purchase your own server – the machine that will house your site and may cost upwards of $1,000 – or hire a website hosting platform such as Bluehost or HostGator for a low monthly fee to house your website for you. 

There are many advantages to using a web hosting service – you won’t have to pony up the cash for your own server, and they provide web security for your site. Keep in mind, however, that a hosting platform will charge you the monthly fee for as long as your business’ website exists (which could be up to $60 per year), and there could be add-on charges if you look to make changes to your site.

In addition to hosting costs, leasing an original domain name through services such as GoDaddy, Domain.com or Name.com can cost anywhere between $20 to $50 per year, on average; and purchasing a domain name outright could cost you thousands of dollars.

Other costs to consider: If you do not have expertise in building a website, you may want to hire an experienced web designer/programmer to help you. Hiring an outside firm or an internal employee to do this may be expensive but making a mistake in building your site could be even costlier. Also, you will need a payment processing app to enable your customers to purchase items from your site. Apps such as Merchant One, Clover or ProMerchant will enable them to do that.

Estimating Your Site’s future Revenue

Now that you have an idea of the cost, the next thing you should do is have your website consulting firm assist you in creating a general, one-year projection of revenue for your site, since the process can be complicated. Some lenders may ask for this if you look for financing to build your site.

Of course, we all know that a general calculation of ROI is income minus cost divided by cost, but how do you calculate that if you don’t know what the actual revenue of your site will be? 

While it is impossible to calculate exactly what the revenue will be, you can make a rough estimation by examining the benchmark for similar-sized companies in your industry. The web consulting firm you hire should have data on this, or you can use an online tool called Similarweb, which tracks that. You can also use a web service called Unbounce, which can give you a benchmark conversion rate – the percentage of visitors of an ecommerce site who end up becoming customers. 

“This way, you’ll have an idea of what to expect in terms of revenue,” said Lucie Loubet, director of digital marketing at web design firm DesignWare. “Just remember to look at the paid vs. organic traffic breakdown in Similarweb to understand how much additional money you will have to invest in customer acquisition.”

Dawid Zimney, product manager at web consulting agency NerdCow, added “Your web agency needs to know your conversion rate, your market and your audience. They need to benchmark this against the historical improvements of the conversion rate on their clients’ websites.”

Another marketing term to know is customer lifetime value (CLV) – the estimated value of a return customer. For example, if you own a restaurant and you see certain customers coming back because they love your food, or a retail clothing store and you see customers returning for the service, you can calculate the average amount they spend per visit and multiply that by the number of times they visit your business. 

The website firm you hire can help you estimate the percentage of customers who will become repeat customers, as well calculate their CLV.

Final Calculation

Nikita Chen, founder and CEO of item authentication firm LegitRails, said the final step in calculating your website’s future ROI is to multiply the number of estimated customers with the CLV, and then determine whether that number is greater than the cost of building the website. The web marketing firm you hire should help you with that. 

“If the number is higher, you are in profit, and it is, therefore, a good idea to create the website,” she said. “If the number is lower (which could be the case if you’re running excessive ads) it might not be in your best interest. The figure you come up with at this stage will also determine your ROI,” said Chen.

Financing Options to Pay for Your Site

If you’ve realized that your needs require you to build a custom website but you don’t have the cash on hand to pay for it, that’s okay. There are several financing options you can choose from. 

A business line of credit may be a good option for you since building a website will not be a one-off expenditure. A business line of credit – much like a personal credit card – will give you the flexibility to spend as you go along in the process of building your site, and you will only be charged interest on what you borrow. You can also pay it down as you go along.

If you’ve predetermined a budget for building your site and plan to stick to it, then a business loan may be right for you. If you go to a traditional lender, they may ask you for a business plan or projected ROI on your website. Alternative lenders such as Kapitus will generally just ask to see your company’s revenue history and approve you for financing more quickly than a traditional lender.

Test Your Site First

Now that you’ve decided to go ahead with your site, you should have your web designer/programmer build a test site, typically referred to as a beta site. Pick the top functionality of your site, have your programmer design and build it, and release it online. The beta site should be a limited release of your website with the goal of gauging audience reaction a nd finding bugs before the final release of your site. 

The site is usually opened up to a limited number of users, such as employees of your company or friends or family. The idea of the beta site is to listen to their feedback and use that to make improvements or adjustments to your final website. 

Next Up

“If you build it, they will come…”

Now that you’ve done the calculations and figured out that building your own site is worth it, how do you build a site that is visually appealing, user friendly and will generate additional sales? In the next article, we will discuss what your site should look like to make that happen.

How Do Small Business Owners Build Their Websites?

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So you’ve decided to take your small business to the next level by building a website – you should congratulate yourself for taking the leap into the Internet. Whether you’re a small business with 200 employees and several different offices, or you’re an independent retail business or restaurant owner, you are about to expand your customer base and company brand to web browsers around the world. 

In our last article, What Kind of Website Do I Need, and is it Worth it?, we discussed the cost of the things you will need to build your site, such as a domain name, web hosting platform, etc. Here, we will discuss the steps you need to take to build your new site.

Starting from scratch can be confusing, as there are lots of choices to make. First, there are two ways you can go: if you are looking to simply promote your brand and check off the box for your business that says “online presence,” then low cost, do-it-yourself website builders such as Wix.com, SQUARESPACE or GoDaddy would be the best bet for you. 

If you’re seeking to build a robust site that can generate online sales and market yourself as an authority in your industry, then creating a site from scratch may be your best bet. This will, of course, require a commitment of time, patience and money, but it will be well worth the effort. 

DIY Website Pros and Cons

Using a DIY website builder is, of course, the cheapest route to building a new site, and there are plenty of advantages to using one of them: they’re relatively cheaper than building your own site, usually costing a low monthly fee; they’re easy to use, and they typically provide search engine optimization (SEO) and analytics features, as well as security. 

Some of the drawbacks are, however, that there can be hidden fees if you choose to expand your site, and other users may use the same website template that you’ve chosen, which would make your site look unoriginal. Here is a full list of pros and cons of using a DIY web builder that you should be aware of: 

Investing in Your Own Site – What you Need

If you are looking for a site that can process direct sales from customers, attract lifetime customers and build sales leads, then you most certainly should look to construct your own robust site from scratch. While this will entail a long, costly process, the effort will be worth it in the long term, as it will most likely yield the best results in terms of increased sales, brand recognition and customer base. The cost of a new website may be daunting at first, but remember the old adage, “you have to spend money to make money.”

Just consider – according to the US Census Bureau, e-commerce sales accounted for 13.8% of all retail sales in the first quarter of 2021, a steady rise from 5% in the first quarter of 2012. The pandemic only increased online purchases, as people had to make purchases from the comfort of their homes. Most economists believe, however, that the steady increase of online shopping, including food orders from restaurants, will only increase. 

Keep in mind that e-commerce sales are so prevalent now that they even contributed to the fall of brick and mortar giants such as Toys R Us, and economic experts believe e-commerce will only continue to rise. Given this, now is the time to offer your products and services online through your own site. 

A basic laundry list of things you will need to create your own site include:

  • High Speed Cable Internet;
  • A Domain name;
  • A Web hosting platform such as BlueHost, HostGator or GoDaddy, or your own server;
  • A Basic website layout;
  • A content management system;
  • A web designer/programmer, and
  • A Web-based Payment Module 

Designing & Building Your Site

Now that you’ve decided to build a website, know that designing a thorough and visually appealing site will be as important as the quality of the products or services you are selling. Examine the websites of your competitors to get ideas of what you believe works and doesn’t work.

The first thing you will need to do is ask yourself what you want your website to accomplish so that you can create subsets of your website’s welcome page. If you are seeking to expand the reach of your brand and ultimately increase sales, a basic list of items to highlight on your site could include:

  • A welcome page that will include your company’s logo, a basic explanation of who you are, your mission statement, and company reviews. 
  1. Remember, the welcome page is the first thing that web browsers will see, and it will be the initial reason they decide to stay on your site. Work with an experienced web designer to make it visually appealing, and without being too wordy, define your company and what it has to offer. 
  • A subset page that offers a catalogue of your company’s products.
  1. A subset page where browsers can actually purchase your products. This will also require your page to have a web-based payment module to process payments via credit or bank card.
  2. An “About Us” subset page informing browsers who you are, your history and perhaps any video presentation demonstrating your dedication to your products and services.
  3. A “Contact Us” subset page, and
  4. A blog subset page where you can write and post articles about trends in your industry to make you seem like an expert in your field. Content management systems such as WordPress, can make blogging easy.
  1. While it is time consuming, blogging SEO optimized articles about your industry is one way to keep potential customers coming back to your site and thinking about the industry in which you are selling products.

The second task you want to complete is to formulate a basic layout of your website. 

For our purposes, we used a fictitious company, “Joe Smith’s Construction Supplies,” to create an example of how you may want to outline your website:

Nuts and Bolts

As far as the nuts and bolts of building your own site goes, you can take courses to learn computer code and web design which, of course, will cost you time and money. Otherwise, you probably will need to hire a web designer/programmer to build your site. You can hire one on a freelance basis, but as you interview them, ask to see websites they have constructed in the past, as well as references. 

Once you do, work with both them and your website consulting firm to create a visually appealing, original and user friendly, responsive site that is optimized for computers, tablets and smartphones. You may even consider creating a limited test website, known as a beta site, to find any bugs in your site before you officially launch it. 

Next Up

“If a tree falls in the forest and no one is around to hear it, does it make a sound?”

What good will an awesome new website do you if no one is looking at it? Now that you’ve gone through the long and arduous process of building a great website, it won’t automatically mean more sales. 

In the next article, we will discuss general ways to draw viewers to your site. After all, web traffic turns into sales, and sales turns into potential lifetime customers. 

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