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ProjectionHub

3 Ways Data is Disrupting Small Business Lending

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Believe it or not small businesses are getting funding these days.  The question is where are they getting funding?  The big banks are not lending to the average small business.  Unless you have a rock solid balance sheet, consistent cash flow from a diverse customer base, and a stellar personal financial statement with a high credit score, you are unlikely to secure a loan from a traditional bank.  But it is not all bad news.  There are many new alternative small business lenders that are exchanging the customer relationship manager for a computer engineer.  These lenders are utilizing new data sources to determine the creditworthiness of a small business.  Here are 3 types of data that lenders are using to help make credit decisions.

1.  PayPal and Bank Account Data – Your traditional banker may ask to look at your bank statements simply to verify that your balance and account activity is at the level you claim it is, but innovators like OnDeck Capital are carefully analyzing your PayPal and bank account data to determine your creditworthiness.  Your PayPal account can be rich with important data that a lender will want to know.  For example, your PayPal account can demonstrate if you have a diverse customer base or if you rely heavily on one customer.  It can show whether your business has consistent sales, or if sales fluctuate seasonally.  It can also show how often and which times of the month your balance tends to dip lower.  All of this data will help the lender understand if it makes sense to extend credit.

2.  Social Media Data – Similarly alternative lenders like Kabbage are digging into your social media data in order to get a feel for the creditworthiness of your company.  Kabbage will allow loan applicants to connect their Facebook and Twitter accounts to their loan app.  Based on data points like number of followers, engagement rates, etc a potential lender can determine whether you have a broad and loyal customer base.  Investors believe this method is worthwhile considering Kabbage has raised $56 million in equity financing since inception.

3.  Shipping Data – Finally, alternative lenders like Kabbage and OnDeck are using shipping data from UPS to quickly determine things like where are your customers, how many customers do you have, how often do your customers repurchase, are you expanding your geographic reach, etc. This is all data that the big banks probably are not collecting because they do not have the systems in place to analyze the data.  Alternative lenders are going to be able to determine which data points are important to focus on and quickly adapt their systems while the traditional banks are going to move like the big slow giants that they are.  

The good news for small businesses is that the credit score is not the only data point that matters anymore.  This doesn’t mean you can ignore your credit score, but it does mean that you can still grow a business even if your credit history isn’t stellar.  If you excel in any or all of these 3 data points, then it may be time to look into alternative financing for your small business.

How Much Collateral Does the Bank Need for a Business Loan

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If you are trying to get a business loan from a traditional bank you are going to need collateral.  If you are going to try to get an SBA loan you will need to pledge your home as collateral if you have a home.  It is simply SBA policy, they always require that the business owner pledge their home as part of the loan collateral.  There are really two questions related to collateral:

  1. Why does the bank need collateral?
  2. How much collateral will they require?

The idea of collateral is nothing new.  The bank wants to give you an incentive to pay back the loan.  If they did not hold your assets as collateral, you could simply fail to pay back the loan and really not lose anything other than your credit score.  Many borrowers already have tarnished credit scores, so that is rarely enough incentive to base a loan on.  SO the bank is going to require collateral that is worth more than the amount of the loan.  So you will actually lose more than you will gain by not paying back the loan.

The SBA (Small Business Administration) always requires that a business owner pledge their home (if they own a home) because they do not want to waste tax payer money on making bad loans.  The SBA wants to make sure that the business owner is fully committed to the success of the business, and is willing to risk even their home.  They figure that if the business owner is not willing to risk their home, then why should the American tax payer risk their hard earned money to fund their business?  Makes sense right?

Now the thing that really surprises and frustrates most entrepreneurs is how much collateral the bank is going to ask for.

Unfortunately, you are not going to get away with 100% collateral.  You can’t buy a piece of equipment for $50,000 and hope to get a $50,0o0 loan with only the equipment as collateral.  Depending on the type of asset banks will lend some percentage of the value of the asset.  This is called Loan to Value which is explained in more detail here.  Here are the 4 primary assets that you can secure a business loan for and the loan to value percentage that the bank will be willing to lend with.

  • Commercial Real Estate – 70% to 75%
  • Inventory with broad market potential – 50%
  • Inventory with specialized market – 0%
  • Equipment – 50% to 60%
  • Accounts Receivables – Depends on the credit worthiness of your customers, but can be up to 80%

This just gives you a place to start.  Obviously the details matter on any loan application, so these numbers just give you an idea of how much of a loan you might expect based on the value of various types of assets.

ProjectionHub Releases Version 3 of Financial Projection Web Application for Startups

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3/21/2013 Indianapolis, IN – ProjectionHub is excited to announce the newest version of our financial projection web application, which allows startups and existing businesses to create up to 3 years of financial projections.  Now entrepreneurs can avoid complex and time consuming Excel templates and instead quickly create a set of properly formatted financial projections through our web app and then download them as an Excel file to share with potential investors or lenders.

Version 3 of the tool includes a new design of the product, the addition of a sources and uses of funding section for startups, and a new lower level pricing option for startups. Over the last 6 months nearly 1,000 business owners have utilized ProjectionHub to create a financial forecast for their business.

The long term vision for the tool is to utilize the data that can be made available through tools like Quickbooks Online and TurboTax.  Based on aggregate data from thousands of businesses we hope to be able to help business owners create more accurate financial projections.  For example, you might be working on financial projections for a new restaurant and you project that your cost of goods sold will only be 7%.  If the tool accessed data from thousands of other restaurant financials and knew that the average COGS for a restaurant was actually 18%, it could warn the user, in real time, that their projections may be a bit unrealistic.  This is just one way that we hope to continue to innovate in the financial projection space for small businesses.

So check out the newest version of the tool today and get started with your financials.

ProjectionHub Sees Growth in 2013

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We are excited to see that February 2013 was the best month in terms of signups that we have had yet.  We have now had over 800 user signups since we launched the beta version of the tool back in the summer of 2012, and over 150 of those users came in February 2013 alone.

New Version of ProjectionHub

We recently released an updated version of ProjectionHub that allows both startups and existing businesses to create financial projections for their business.  The tool is a much simpler alternative to your average Excel template that most business owners use to develop projections.  You simply answer a series of questions, input data based on your financial assumptions and then download up to 3 years worth of financial projections as an Excel file.  The projections include:

  • 3 years Profit and Loss by the month
  • 3 years of Cash Flow by the month
  • 3 years of Balance Sheet by the month

Future Development of ProjectionHub

The tool is quite valuable now, but we are always looking for interesting ways to improve.  Here are a few of the ways we would like to improve the tool over the coming months and years:

  1. Live Chat – we would love to be able to offer a live chat feature where business owners can ask questions in real time as they are creating financial projections.  We think this will help improve the usefulness of the platform and completely set us apart from other financial projection tools. 
  2. Quickbooks Integration – Although this is a major undertaking, we would love to be able to integrate directly with Quickbooks.  We would be able to analyze your financial statements from the past, and use that data to help you project future financials.

We would love to hear your feedback and ideas on how to improve the financial projection tool as we move forward in 2013.  Feel free to email me directly at adam@projectionhub.com

3 Signs that You Shouldn’t Pledge Your House as Collateral on a Business Loan?

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One of the first places that entrepreneurs go to fund their business is their house.  They take out a second mortgage, they pledge the house as collateral, or they sell the house altogether in order to start a business.  For many people a house is their largest asset, and sometime their only asset.  If you are going to risk your house for your business, please make sure that your business is in a position to succeed.  So many people pledge their house as collateral for a loan, or take out a second mortgage before the business has a proven business model.  Here are 3 signs that you should NOT pledge your home as collateral for a business loan:

1.  No Sales Yet – Look if you have not made your first sale yet, you are crazy to risk your house.  I know that “crazy” is the definition of an entrepreneur, but I really encourage you not to risk your home until you have generated some sales.  What if you risk the house and then find out that no one really wants your product or service?  Or not enough people want your product or service?  Or what if it takes you a few months longer than expected for your sales to ramp up?  You learn a lot when you make your first sale, I encourage you to do that before you risk anything.

2.  No Proven, Profitable Business Model – Even if you make a few sales, that does not mean that those were profitable or repeatable sales.  Did you just get lucky with the sale?  Was it even profitable?  So many businesses are so hungry for sales that they decrease their price to the point that they are no longer profitable.  If you can’t compete, and generate sales without lowering your prices to an unprofitable level, then you might as well quit.  The last thing you should do is risk your house too.

3.  No Idea How Much Cash You Need – If you don’t know how much cash it will take to breakeven, then don’t do risk anything until you figure out that question.  You need to understand your business model, and your cost structure to the point that you can determine how much in sales it will take to breakeven, then you can work backwards and try to determine how much time it will take you to generate those sales.  If you know it will take you 3 months, and you know your monthly fixed expenses, then you can figure out exactly how much investment you need to make it to breakeven.

If any of these three scenarios describe you, then please don’t risk your home for your business yet.  You may need to inch along step by step for a few more months or even years before you are ready to make this level of commitment.  Once you have found a profitable and repeatable business model, and you know exactly how much cash you need to breakeven, then it is time to put the pedal to the metal and grow the business.  Until then, be careful…

3 Realistic Ways to Finance a Software as a Service Startup

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Software as a service startups are popping up everywhere these days, and for good reason.  The monthly recurring revenue business model is certainly desirable because it is predictable and profitable.  The problem with a successful software as a service company becomes financing growth.  Generally with software as a service there is no upfront, one time cost to get started.  Instead, many times a company will offer the first few months for free as an incentive to get a customer to try the service.  The problem is that in general most of the costs for the company are incurred when they sign up a new customer.  For example, it may cost you $100 to acquire a customer who then pays $20 a month for your service.  This is a great business if you can keep the average customer for longer than 5 months, but it causes some real cash flow issues.  Each time you sign up a new customer, you need to come up with $80 initially to fund the difference between the acquisition costs and the first month’s revenue.  So how do you finance a business like this?  At some point you will be able to raise investment, but probably not right away.  You need to show growth and sales first.  So here are 3 realistic ways to fund this type of startup:

1.  Microloans – Traditional banks are scared of software, they are scared of this type of recurring revenue business model in the early days of the business because every time you grow you need more cash.  That scares the traditional bank, but there is another option.  The SBA has a program called the Microloan Program.  There are SBA microlenders all around the country who work to fill a lending gap.  They lend where traditional banks do not.  You won’t be able to run forever on a microloan, but it may help you get closer to securing that large investment or line of credit from the bank.  Microloans are typically between $1,000 and $50,000.  Here is a listing of all the SBA Microlenders in the United States.

2.  Credit Cards – In a software as a service business you will always need additional funding if you want to grow.  There is no magic bullet.  Even if you raise some angel investment you will need to come back for more time and time again if you want to grow.  A majority of your costs are up front.  Over the long term each new customer will be profitable, but that breakeven point might not be for 6 months or longer. Sometimes this problem may drive you to fund your growth with credit cards.  This is not ideal, but it can work.  Just like a microloan, a credit card won’t solve all of your financing problems, but it can help you kick the can down the road.  The problem is, if you go to an investor and you have very little in sales, you are going to have to give up a huge percentage of ownership.  You need to find ways to increase your sales so that you can demand a higher valuation when it comes time to meet with investors.  Yes it is risky to get yourself too deep in debt growing the business and then find out you can’t secure an investor, but generally you will be able to find investment for a growing software as a service business, the only question is the valuation.  How much of the business will you give away.

3.  Alternative Financing – Lastly, there are some interesting new ways to finance businesses that charge their customers via PayPal or credit cards.  New alternative lenders are actually taking your PayPal data or your credit card/bank account data to determine how much they are willing to lend to you.  There are two examples of this type of financing.  Kabbage.com uses your PayPal data, social network data, and Amazon or eBay seller data to determine your credit-worthiness and how much you are able to borrow.  Similarly, OnDeck Capital uses your cash flow data from your bank account to determine if they are willing to lend and how much they are willing to lend.  Then they actually pull small payments back from you on a daily basis.  They realized that it could be hard to come up with a 1 time monthly payment for your loan, so they pull on a more regular basis.  This reduces their risk and a lender.  Now both Kabbage and OnDeck come at a price.  This is certainly not the cheapest way to fund your business, but it can help you grow without giving away the entire company to an investor.

All 3 options here are a bit more realistic than walking into your local bank and asking for a $100,000 line of credit to help grow the business.  That is very rare for a software company and even more rare for a startup.  So consider these financing options as stepping stones until you get to that $500,000 in annual recurring sales.  At that point you will be able to secure an investor without giving away all of your equity.  Good luck!

20 Universities Use ProjectionHub for Entrepreneurship Courses

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Business or educationA few weeks ago we released our updated version of ProjectionHub to the world to help make the task of creating financial projections easy.  Since our team is comprised of a recent college grad, and a current college student, we decided to make the tool free for all students with a valid .edu email address.

Over the past few weeks students from 20 colleges and universities have used ProjectionHub to create up to 3 years of financial projections including a Profit and Loss, Balance Sheet and Cash Flow Projection:

  • University of Pennsylvania – Wharton School of Business
  • University of California
  • Fresno State University
  • Liberty University
  • University of North Texas
  • University of the Rockies
  • University of Waterloo
  • Ivy Tech Community College
  • King Abdullah University of Science and Technology
  • Landmark College
  • Clemson University
  • Depauw University
  • Drexel University
  • Brandeis University
  • Quinnipiac University
  • Concordia University Texas
  • University of New Hampshire
  • Southern Methodist University
  • University of St. Thomas
  • Alaska University

Thank you everyone for giving our tool a try and for all of your great feedback as we look to improve the tool over the coming months.

Example Financial Projection for a Lawn Care Business and Other Seasonal Businesses

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Are you thinking of starting a lawn care business this spring?  As the manager of a microloan program, I have seen several loan applications from seasonal businesses including lawn care businesses.  The challenge for the average lawn care service is that it is a really simple business to start, but it is actually very difficult to manage cash flow to sustain the business.  So today, I wanted to use our Lawncare and Landscaping Financial Spreadsheet to create a set of 24 month financial projections for a lawn care business.  The resulting Excel template will be an excellent guide for other seasonal businesses to create a set of financial projections.  Let’s get started.

Sales Projections

First we need to start with your sales projections.  So I created Adam’s Lawn Care on ProjectionHub, and started by adding our first and only service… lawn care.

So here you can see that I am assuming we will charge $55 an hour for our service, it will take 40 days for the average customer to pay us, and finally I am assuming that all of our annual sales will occur in the 9 middle months of the year, from March to November.

Now let’s assume that you are in the commercial lawn mowing business, so you spend the winter months going from business to business signing contracts for the coming year.  Let’s assume you are able to get 50 business customers and the average customer will be charged for one hour of your service each time you mow.  Now I just need to enter in the number of hours I expect to provide each month.  To keep things simple I am going to assume that we provide service in increments of 50 hours, so in months where you only mow once, you will only provide 50 hours of service.

Before I show you how I projected sales for the first two years, I also want to assume that in year two I will be able to sign a total of 75 clients to a year long contract.

Now that we have our sales projections input, it is time to move on toward expenses.

Cost of Goods Sold for Lawn Care Business

Our next order of business is to project our cost of goods sold.  We are going to assume that you pay yourself $20 an hour and you have $3 an hour worth of fuel costs.

General Expenses

Now you need to enter your general monthly expenses which you can see vary by month just as your revenue varies by month.

Add Equipment

Next I am going to add equipment.  Let’s assume you purchase a lawnmower in month 1 for $4,000.

Cash Flow Statement

Now that we have added all of the needed info let’s check out our cash flow statement and see how the business is doing.  We are assuming that you started out with $3,000 in cash in the bank on month 1.  The only problem is that in your first month it was still winter so you did not generate any revenue.  You were able to start working in month 3, but then it takes 40 days on average to get paid by your customers, so you don’t actually receive any payment until month 4.  With the current situation you run out of cash in month 2 and have a negative cash balance for the first 6 months as seen  below:

Small Business Loan for Lawncare Company

So at this point your best option is to seek a small business loan for your company.  You may start with friends and family, and then seek out microlenders and other organizations that make small loans.  You will need about $6,000 to safely make it through your first year.  So let’s add a $6,000 loan to your projections that we assume is from your friends and family.

This solves your cash flow problem for a while, but the first year you were using your old truck and a fairly slow and limited lawnmower.  In year 2 you are going to need a used truck, a trailer, and another lawn mower.  Let’s say you are going to need to come up with another $35,000 in month 1 of your second year.  You were profitable in year 1 so you do have some cash, but is it enough. Take a look at month 1 of year 2:

As you can see you have about $30k in savings from last year’s profits in month 13, but after your purchases, you drop to a negative cash balance over $5,300.

If it was not for the seasonality of the business, your cash balance would have remained positive, but you must remember that you won’t generate any revenue during certain months of the year, and you must built that into your financial projections.

What Investors Are Looking for In Your Financial Projections

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If you are trying to raise angel or venture capital investment you have probably been asked for a detailed set of financial projections from your potential investors.  There are 3 areas that you really need to focus on as you build your forecast.

1.  Market Potential Narrative – Investors want to know that you are entering a large enough market that the investor has the potential to earn a large return.  If your market potential is only $10 million in annual sales, then you can’t expect to raise 5 million in investment.  The market is simply too small.  Here is an example of how I developed the market potential for ProjectionHub.

2.  Cash Flow Projections and Analysis – If you ask for $1ook in investment, but when reviewing your cash flow projections the investor realizes your cash balance never drops below $80k.  You are asking for too much.  You don’t need to keep such a high cash balance.  You might be able to ask for $25,000 instead, and retain significantly more equity in your business.  What if sales double, how does that impact your cash?  What if sales are cut in half, how is your cash flow changed?  Investors will want to see that you have looked at various scenarios like this.

3.  Do your Projections Seem Realistic –  No one can predict the future with perfect accuracy.  Investors don’t expect your projections to be correct, but they do want them to be within the realm of possibility.  Your projections should be based on data, and should be built from the bottom up.

Once you have built a set of realistic, data driven assumptions, creating your pro forma financial statements is easy.  There are a number of tools that will help you create the actual statements, including ProjectionHub.  You can get started here.

ProjectionHub Picks 5 Microlenders to Help Improve Loan Application Process

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In early June 2012 the ProjectionHub team announced an opportunity for 3 microlenders from around the country to apply and win the chance to create a custom financial projection tool for their loan applicants to create their financial projections.  There was such a great response that the team felt the need to choose 5 microlending organizations.  The following organizations have been selected as winners:

  1. alt.Consulting
  2. CDC Small Business Finance
  3. Iowa Microloan
  4. Southwest Initiative Foundation
  5. Community Development Resources

These organizations have literally made billions of dollars in loans to small businesses.

Co-Founder of ProjectionHub, Adam Hoeksema, said, “It is an incredible honor to work with such prestigious organizations.  He hope to learn from these experts and ultimately help their loan applicants create more accurate and realistic financial projections.”

Over the next several weeks the ProjectionHub team will work with these lenders to create a custom version of the pro forma financial tool specifically to meet the needs of each organization and their loan applicants.  The tool will be a more user friendly alternative to the complicated Excel spreadsheet templates that most business users utilize to generate a set of projections.

Some have described the tool as an up and coming TurboTax for financial projections.

About ProjectionHub:  ProjectionHub is a web based tool that help business owners create financial projections without a PhD in spreadsheet modeling.