As a merchant banker, DSV Consulting LLC works with organizations embarking on growth phases – growth always includes expending financial capital (funding)! In order to be ready with the capital needed, WHEN it is needed, HOW it is needed, and in the AMOUNT it is needed, you need to have a PLAN and a STRUCTURE. This article is about the structure and timing.
Corporate Structure
Many people when they have an idea for a company create a business plan, at least in their head. They figure out how they are going to deliver services, figure out how they are going to purchase their supplies and products, and go about implementing those tasks. What very few do is take that plan and integrate that into a business structure. When considering a business structure, there are numerous considerations, including:
- Taxation,
- Regulation,
- Risk management, and
- Capital support.
When starting you organization in order to access capital (funding), both debt and equity, lenders and investors focus on the founders and majority equity holders to provide personal guarantees. The gold standard is being able to support your capital requirements by the operations and assets of the organization itself, but you need to structure for that – here’s how:
- Incorporate a limited liability corporation (‘LLC‘) to encompass your business operations, do so with at least $1,000 consideration from you personally.
- Open a bank account for the LLC.
- Get a business phone number that is not your personal number.
- Get a post office box at a United States Postal Service (‘USPS’) office for your business mailing address..
- Open a credit card in the name of the LLC.
- Secure a domain for your LLC, owned by your LLC (not you personally).
- Create a website.
- Create e-mail addresses for yourself and anyone associated with your organization on the domain for the LLC.
- Get business cards for yourself using your website, business phone, business e-mail, and business mailing address.
- Apply for a Dun & Bradstreet Number (‘DUNS Number‘).
- Setup and use an accounting cloud based software service like QuickBooks Online.
- Setup a merchant account to accept credit cards – Intuit Payments from the makers of QuickBooks Online is integrated, PayPal, or Square are the most pervasive.
Why do all of this? Seems like overkill if you’re just doing a small organization, but it will ensure that when you are ready for a growth phase your business will be ready. Here are some of the reasons:
- Banks and other financial (online) institutions required verification using domains, websites, and e-mails associated with a domain.
- Financial institutions, including banks and online lending organizations like Kabbage, require a 2 year operating history and $50,000 in annual revenue before lending based upon the business itself.
For more information on structure that are required for debt lending, take a look at the requirements for Kabbage on our funding page…
Capital Structure
After the corporate structure is in place, it’s important to set the stage for the future, especially taking into account that it takes two years of aging your corporate entity as well as ensuring that you can log $50,000 or more revenue into your entity as shown on your bank accounts and tax returns over those two years. Here are some rules to follow in your financial dealings:
- Keep a distinct boundary between your personal and business financial transactions – if it’s for business, ensure that either a business credit card in the name of your business is used or a check from your business account is used.
- Whenever an expense is done on the wrong side of the boundary, do an expense statement and reimburse either you personally or your business.
- Ensure that you are building business credit by using a business credit card from a bank like Capital One’s Spark or American Express (probably the easiest to secure for you business) – these can be put in the name of the business and tied to your DUNS Number to build your credit.
- Setup overdraft protection on your business bank account to protect against NSF charges (business lenders use number of NSF charges per month as a gauge for lending).
Here are the sources of capital available throughout the first 3 years of your business’ lifetime:
- Available day 1 – credit cards provide the easiest source of debt capital, but usually at the highest rate.
- Available after 90 days – merchant accounts almost all provide credit lines based upon you last 90 days of credit card processing volume.
- Available after 1 year – Intuit Financing, using access to your financial records, usually provides up 75% of your monthly revenue as a loan to be paid back weekly. This is usually a very good rate, usually less than credit cards.
- Available after 1 year – LoanBuilder by Pay Pal and other “payday” like lenders for business provide loans based upon you last 3 months’ bank statements, your last 2 years’ tax returns (both personally and business). Moderate price fees but all up front (not interest).
- Available after 1 year – American Express provides business loans based upon your personal credit and your payment history. There doesn’t seem to be any consistency here, but they do some amazing loans sometimes.
- Available after 2 years – Kabbage provides a line of credit based upon your last 3 months business transaction. Best rates that we can see and incredibly fast. We recommend this.