Evaluating Your Market: A Basic Review
Market evaluation is the most critical element of successful business planning. It provides the basic data that will determine if and where you can successfully sell your product or service and how much to charge.
If you are thinking of starting a new business or expanding into new markets, proper market evaluation is critical to success. While it may sound deceptively simple to figure out if a market exists for your product or service, it's probably one of the most challenging requirements of business. The process involves scrutinizing your competition and your customer base and interviewing potential suppliers.
The information collected can help you adopt your product or service to better meet customer needs. In some rare cases, it might lead to a totally new, but financially rewarding venture. This Financial Guide covers some of the basic considerations of market evaluation. It is intended as only basic introduction to a complex determination to help focus the thinking for those businesspeople with limited experience in marketing. In many cases, a professional guidance can be extremely helpful.
There are a number of benefits to conducting market research including:
- Create primary and alternative sales approaches to a given market,
- Make profit projections from a more accurate base,
- Organize marketing activities,
- Develop critical short/mid-term sales goals, and
- Establish the market's profit boundaries.
So, how should you go about conducting your research? Two of the most important first steps are defining your goals and organizing the collection/analysis process. Maintain a set of well-documented and easily accessible files so you can store and retrieve data as needed.
Your research should ask these basic questions:
- Who are your customers?
- What are their needs and resources?
- Is the service or product essential in their operations or activities?
- Can the customer afford the service or product?
- Where can you create a demand for the service or product?
- Can you compete effectively in price, quality and delivery?
- Can you price the product or service to assure a profit?
- How many competitors provide the same service or product?
- What is the general economy of your service or product area?
- What areas within your market are declining or growing?
Knowing your market not only requires an understanding of your product, but also an understanding of your customers' social and economic characteristics. In conducting your research, you can access relevant market information from these sources:
The Small Business Administration (SBA) provides immediate, round-the-clock information on its services, publications and programs. Users can access a national calendar of events, such as training programs, small business seminars and international trade fairs. Most information is available at no cost.
The SBA's Business Information Centers offer the latest in high-technology hardware, software and telecommunications. Each BIC offers electronic bulletin boards, computer databases, on-line information exchange, periodicals and brochures, counseling, videotapes, reference materials, texts, start-up guides, application software, computer tutorials and interactive media. BICs are located around the country. One-on-one counseling with seasoned marketing veterans also is available through the Service Corps of Retired Executives, better known as SCORE.
Other sources include:
- Trade association studies and journal articles.
- Regional planning organization studies on growth trends.
- Banks, realtors and insurance companies.
- Customer surveys in your market area, which you can conduct on your own or search out existing material.
Finally, research on competitors is extremely important. Visit industry trade shows to find out what your competitors are selling and how they are marketing their products. Similarly, stay current on information in industry magazines and publications.
Research data will help you develop the basic assumptions in your financial projections - and tell you whether or not to go into business. Once you have obtained and analyzed this information, it becomes the foundation of your business plan. You should not view market research, however, as a one-time activity. Once you establish your business, you should continually be in touch with your customers. You may also have to adapt your product/service and/or marketing strategy to keep up with your customers' changing needs.
In general, you should be well-established in the U.S. market before committing resources and taking on additional risk to explore export markets. Some products, such as used equipment that is obsolete in the United States but new to other countries, may be particularly well-suited for exporting right from the start. Whatever your product or service, it is never too early to explore its export potential.
Researching international markets involves many of the same steps as domestic market evaluation. The first step is to identify the countries with the largest and fastest-growing markets for your product. The SBA's Office of International Trade can help. Information on this service can be found on the SBA's internet site. The National Trade Data Bank, maintained by the U.S. Department of Commerce, also contains valuable market information.
From your list of possible markets, you will want to determine which of these offer the best prospects. You should examine the markets in greater detail, looking at how your product quality and price compares with that of goods already available. You also should determine who your major customers are.
With this information, you can pick one or two export markets to explore initially. You can add more markets later, as your export skills develop. Now you are ready to conduct more in-depth market research on this target market(s), just as you did before establishing your business.
A small business owner must know and understand the market. Market research is simply an orderly, objective way of learning about people-the people who will buy from you and sustain your business venture.
Pricing Your Products and Services: A Basic Review
Pricing goods and services is one of the most difficult tasks in the business arena. Many small businesses fail to make a profit simply because they don't consider all the factors necessary to make prices competitive and yield that elusive profit.
Before setting prices, you must understand your market, distribution costs and competition. Remember, the marketplace responds rapidly to technological advances and international competition. You must keep abreast of the factors that affect pricing and be ready to adjust quickly.
This Financial Guide does not attempt to be an in-depth discussion of pricing analysis. Rather, it is intended only to provide a basic review of the several pricing strategies - and perhaps encourage you to take a fresh look at your present strategies. Professional financial guidance will be helpful in working up and evaluating the financial aspects of the analysis for your financial resources.
A common pricing practice among small businesses is to follow the manufacturer's suggested retail price. The suggested retail price is easy to use, but it does have one major shortcoming - it doesn't adequately account for the element of competition.
An alternative to the manufactures suggested retail price is to base your price on those of your competitors. A small retailer, for example, should compare prices with a store that's comparable in size and customer volume. It's very chancy to compete with a large store's prices, because they can buy in larger volume and their cost per unit may be less.
Instead, price products based on your local small-store analysis, and then highlight other competitive factors, like personalized customer service and convenient location. There are any number of factors that influence a consumer's decision to buy from a certain business, including price, convenience, and courteous and attentive service.
Some vendors have been very successful pricing their goods or services below the competition. Since this strategy reduces the profit margin per sale, it requires a company to reduce its costs and:
- Obtain the best prices possible for merchandise
- Locate the business in an inexpensive location or facility
- Closely control inventory
- Limit the line to fast-moving items
- Design advertising to concentrate on price specials
- Limit other services.
One word of caution: Pricing goods below the competition can be difficult to sustain. Why? Because every cost component must be constantly monitored and adjusted, it exposes a business to pricing wars. Competitors can match the lower price, leaving both parties out in the cold.
This strategy is possible when price is not the customer's greatest concern. Considerations important enough for customers to justify paying higher prices include:
- Service considerations, including delivery, speed of service, satisfaction in handling customer complaints, knowledge of product or service, and helpful, friendly employees
- A convenient or exclusive location
- Exclusive merchandise.
This approach involves selling a number of units for a single price-for example, two items for $1.98. This is useful for low-cost consumable product, such as shampoo or toothpaste. Many stores find this an attractive pricing strategy for sales and year-end clearances.
Every component of a service or product has a different, specific cost. Many small firms fail to analyze each component of their commodity's total cost, and therefore fail to price profitably. Once this analysis is done, prices can be set to maximize profits and eliminate any unprofitable service.
Cost components include material, labor, and overhead costs:
Material costs are costs of all materials found in the final product. For example, the wood used in the manufacturing of a chair is a direct material.
Labor costs are the costs of the work that goes into the manufacturing of a product. An example would be the wages of all production-line workers producing a certain commodity. The direct labor costs are derived by multiplying the cost of labor per hour by the number of personnel-hours needed to complete the job.
Remember; do not only use the hourly wage but, also the dollar value of fringe benefits. These include social security, workers' compensation, unemployment compensation, insurance, retirement benefits, etc.
Overhead Costs are any costs not readily identifiable with a particular product. These costs include indirect materials, (e.g. supplies) utilities, depreciation, taxes, rent, advertising, transportation and insurance. Overhead costs also cover indirect labor costs, such as clerical, legal and janitorial services. Be sure to include shipping, handling, and/or storage as well as other cost components. Part of the overhead costs must be allocated to each service performed or product produced. The overhead rate can be expressed as a percentage or an hourly rate. This is a complex task. It is best to consult with an expert in this area. It is important to review your overhead costs periodically. Charges must be revised to reflect inflation and higher benefit rates. It's best to project the costs quarterly, including increased executive salaries and other projected costs.
As a consultant, you will most likely price your service by the hour. Remember to charge for an adequate number of hours. Travel time is usually listed as an extra charge.
It's unlikely that all your time will be billed to clients. Therefore, hourly or contract fees must be set high enough to cover expenses during slow periods. That is why one-half of the total normal working hours for a given year are used in figuring overhead rates. Try to obtain long-term, monthly, or contract assignments when possible.
Your price structure and policy are major components of your public image and are crucial to securing and keeping your clientele.
Pricing for service businesses may be more complex that retail pricing. The equation, however, is the same: Cost + Operating Expenses + Desired Profit = Price
The key to success is to have a well-planned strategy. Establish your policies and constantly monitor prices and operating costs to insure profit. Accuracy increases profits!
Developing An Advertising Program: A Basic Review
By developing an effective advertising plan, you increase the likelihood of a positive return on your advertising investment, regardless of the amount you spend.
Advertising is an investment in your business, similar to other investments to improve and expand your business. The return you receive depends on the planning and thought that precede the actual commitment and expenditure of advertising dollars.
This Financial Guide is not intended to be an in-depth analysis of advertising principles and alternatives - that is beyond its scope. Rather, it is intended only to provide a basic review - to stimulate your thinking - of how to develop an effective advertising program. Unless you are very familiar with the opportunities in this area, you should seek the advice of an advertising professional.
The basic premise of an advertising plan requires you to thoroughly analyze the answers to key questions before you can make effective advertising decisions. There are four key questions to ask yourself:
- What do I want my advertising to accomplish?
- Whom should my advertising speak to?
- What should my advertising say?
- What advertising medium should I use?
In the specific business situation, each question has any number of potential answers. As you think about each question do not accept any answer until you have considered and explored the full range of possibilities.
The first step in developing your advertising plan is to specify your advertising goals. Be as precise as you can as to why you are advertising and what you want to achieve. Everyone wants advertising to increase business, but for your advertising plan to work it requires you to be more precise. Some possible goals for your advertising are:
- Increase awareness of your business.
- Attract competitors' customers.
- Increase the likelihood of keeping current customers and developing their loyalty.
- Generate immediate sales or sales leads.
It is possible you may want your advertising to achieve all of these goals plus some others. What is important is that you prioritize your goals. Advertising works best when it is developed to meet one specific goal at a time.
Once you determine your advertising goals you can then select the target audience for your message. Advertising that tries to reach "everyone" rarely succeeds. Successful advertising is written with a specific customer in mind. Try to picture the person you must reach in order to achieve your advertising goals. Try to describe your target consumers in each of the following:
- Demographics: Gender, age, income, location of residence or business, etc.
- Behaviors: Current awareness of your business; the products, services or vendors they currently use; loyalty to either you or your competitor's business, etc.
- Needs or desires: What benefits consumers look for, the basis on which they will decide whether to use your product or service, and how your business can fulfill those needs, etc.
Once you know who your target audience is and what they are looking for in terms of the product or service you offer, you can decide what your advertising will say.
Advertising should always be written to communicate a message that will be seen as important by your target customer. Your advertising should clearly and convincingly "speak" to your target audience, explaining the important benefits your product or service offers.
In deciding how to discuss the major benefits of your product or service in your advertising keep "AIDA" in mind: attract Attention, hold Interest, arouse Desire and motivate Action.
Every month new advertising options become available. Beyond "traditional" media you can place ads in airports, on ski lifts and on televisions monitors in the front of grocery carts. Where you place your advertising should be guided by a simple principle: go where your target audience will have the highest likelihood of seeing or hearing it. Many advertising media work well to reach a diverse range of target consumers. There is no single medium inherently good or bad. A good medium for one product or service may be a poor medium for another. As you consider media choices look for one that fits your advertising goals, reaches your target efficiently and cost-effectively and is within your advertising budget. Based on these considerations, the following summarizes the relative advantages and disadvantages of the advertising media most frequently used by small businesses:
Internet Marketing or Online Marketing
Internet marketing, online marketing or e-marketing are terms used for marketing your products or services over the Internet. Internet marketing is a great way to reach a wide, international audience at a relatively low cost. The nature of the medium allows consumers to find what they are looking for when they want, at their own convenience. It provides instant response and is very interactive. Internet marketing methods include search engine marketing, display advertising, email marketing, and interactive advertising, all completed through your website. Internet marketing can be very creative, cost effective and interactive.
Television provides a means for reaching a great number of people in a short period of time. Small businesses will typically use either spot television or cable television. A spot television ad is placed on one station in one market. The number of target audience who see your ad depends upon how many viewers are tuned into the television station at a specific time. Cable advertising is placed either on a local cable television channel or on a cable network. The number of people reached by cable advertising depends upon the cable penetration and cable/channel program viewer ship in a given market.
Beyond television's reach, an additional advantage is its ability to convey your message with sight, sound, and motion. The disadvantages of television advertising are: relatively higher cost - both the terms of airtime and production, limited length of exposure, short airtime (making it difficult to present a complex or detailed message) and the clutter of many other ads.
Television ads may require multiple exposures to achieve message retention and consumer action. Also, many commercials are considered intrusive, prompting viewers to switch channels to avoid them.
Radio, like television, has the ability to quickly reach a large number of consumers. The major advantage of radio lies in its ability to efficiently target narrowly defined segments of consumers. The vast array of radio program formats lets an advertiser gear ads to almost any target audience.
Beyond this advantage, radio is commonly used by small businesses because it is relatively inexpensive (both in terms of airtime and production costs) and because deadlines for placing radio advertising are relatively short, providing an advertiser with increased flexibility. The disadvantages of radio are: an advertiser is limited to an audio message so there is no visual product or service identification, ad clutter can be high and exposure to the message is short and fleeting. Finally, similar to television, multiple exposures may be required for message retention and consumer reaction. Also, listeners may change stations to avoid commercials.
Newspapers permit and advertiser to reach a large number of people within a specified geographic area. Newspaper advertising has several advantages for the small business. An advertiser has flexibility in terms of as size and placement within the newspaper. Exposure to the ad is not limited, so readers can take their time with your message. Short deadlines permit quick response to changing market conditions. Disadvantages of newspaper advertising include:
- Declining readership and market penetration
- Ad space can be expensive
- Clutter of competitive advertising and a relatively short lifespan (newspapers are typically read once, then discarded), thus requiring multiple insertions.
Magazines provide an advertiser with the means to reach highly targeted audiences. Specific groups can be reached by placing as ad in a magazine whose editorial content specializes in topics of interest to that target. This is true both of consumer and business publications. Audiences can be reached by placing ads in magazines which have well-defined geographic, demographic or lifestyle focus.
- Beyond the ability to reach specific audiences, the advantage of magazines include:
- Relatively long ad life and repeated ad exposure (magazines are typically looked through several times before discard);
- Excellent reproduction quality and pass-along value.
The disadvantages of magazines include:
- Long lead time
- Limited flexibility in terms of ad placement and format
- The potential for high costs in production and placement.
Outdoor advertising is typically used to reinforce or remind the consumer of the advertising messages communicated through other media. The advantages of outdoor advertising are:
- The ability to completely cover a market
- High levels of viewing frequency.
The disadvantages of outdoor advertising are related to viewing time. Because target consumers are typically moving, an outdoor advertisement must communicate with a minimum of words. Messages must be simple, direct, and easily understood.
Direct mail advertisers use targeted mailing lists to reach highly specialized audiences. In addition to low waste in ad exposure, direct mail provides an advertiser with great flexibility in the message presentation. The disadvantages of direct mail include:
- Relatively high cost per contact
- Obtaining updated, accurate mailing lists
- Difficulty in getting the audience's attention (direct mail is often considered "junk mail").
The Yellow Pages are an advertising medium that share many of the strengths of other advertising media while at the same time avoiding some of the limitations or disadvantages. As such, the Yellow Pages are best used to complement or extend the effects of advertising placed in other media. Like other media, the Yellow Pages permit an advertiser to select a well-defined geographic area, ranging from a neighborhood to an entire metropolitan area.
The advantages of the Yellow Pages are:
- Once the geography is defined, an ad has permanence, i.e., the Yellow Pages are kept as a regular reference.
- They support your other advertising by providing a convenient way for consumers to contact sources and obtain information on the products or services they desire at the time they are ready to "take action."
- The Yellow pages are relatively low in cost in terms of both ad production and placement.
The disadvantages of the Yellow Pages include:
- Lack of timeliness (ads can be changed only once per year and, as a result, there is no opportunity for "price advertising")
- Potential clutter in some classifications
- Not as much creative flexibility as other print media.
Referrals: The Secret to Building a Better Business Faster
Who are the very best new customers you get? Who is most likely to buy from you and continue being a good customer in the future? Isn't it a prospective customer who was referred to you by another customer who is an advocate for your business?
Referrals are the best prospective customers because they have already developed some trust for you and your company. Their defenses are down, and their minds and hearts are open. These are the ideal conditions for doing business.
The most expensive customers to get are those in the "cold market," through advertising or other promotional activities. Yet that's where most of the marketing effort for companies seems to go. You can market much more effectively by devoting more of your organization's time and resources to developing referrals.
You can encourage your customers to give you more referrals.
1. You must deserve referrals. You have to deliver the products and awesome service that people can't help talking about.
2. You must ask for referrals. At the end of every sales interview, whether you make a sale or not, you must ask for referrals. When you make a sale, you have only completed one-half of your mission. The other half is to get referrals. Don't leave the job half done. To encourage the customer to make referrals, help him isolate people in his or her mind: Is there a business associate, like him or her, who you can talk to? A customer? A supplier? Is there a golf buddy? Listen for names that come up during your conversation.
Script a brief profile or description of what you are looking for in a prospective customer. Trigger the customer's mental search with the question, "Who do you know who... (give profile)? If he or she was here, right now, you wouldn't hesitate to introduce us, would you? That's all I'm asking you to do."
If the customer hesitates to give a name, say... "That's all right, Mr. Wright. I think I understand how you feel. Give me the name of someone you know, under fifty, who is making money. I promise you I'll never mention your name." "Mr. Wright, my name is John Smith. I'm in the life insurance business. A mutual friend gave me your name with the understanding that I wouldn't mention his name. He told me that you have been very successful, and that you would be a good man for me to talk to. Could you spare five minutes now, or would you rather I stop by some other time?"
The prospective customers never asked who made the referral, and some of these people were John's best leads.
Part of our introductory procedure for new clients is to review a list of "Our Commitments To Each Other." The final client commitment is: "You will consider referring to us at least two other business persons whom you believe would benefit from an association from us." The expectation of providing referrals is planted at the beginning of our relationship.
3. Show appreciation. This is the real key to continuing receiving leads from a customer and cultivating him or her as a center of influence. Thank the customer for making the referral. Write a thank-you note. Call the customer with a report of the results of your interview. Make a big, appreciative fuss about the wonderful thing your customer has done. Give thank-you gifts in appreciation: send flowers, take him or her out to dinner, or give tickets to a show or athletic event.
What is appropriate considering the lifetime value of a customer for your business? Many people build their businesses with customer appreciation events. For example, marketing guru Dan Kennedy knows a chiropractor who has a monthly patient appreciation luncheon where he gives jeweled appreciation pins to patients who made referrals that month. There are different "levels" indicated by different jewels. Shades of Amway and Mary Kay! Patients are invited to bring family members to the luncheon to see them receive their award, which is given with an appreciative hug by the chiropractor. Photographs of the luncheons are posted in the reception room.
- If this were your chiropractor, would you want to make a referral?
- How can you use this extremely powerful idea to build your business?
- If you use salespeople in your business, do you train them in how to get referrals from customers?
- Do you maintain a file of all customers who buy your products for follow up promotions encouraging referrals?
- We can work with you to help build strong referrals for your business.
How To Get Your Customers To Trust You
An extremely powerful marketing tool that we get "too busy" or "too smart" to use is the testimonial.
According to marketing guru Dan Kennedy, "What others say about you and your product, service, or business is at least 1000% more convincing than what you say, even if you are 1000% more eloquent."
The reason is obvious. Customers doubt what we say about ourselves, but believe other customers. And the more customers who say good things about us, the more prospective customers will believe them. Is this a new idea?
Frank Bettger discussed the power of testimonials in Chapter 18 of How I Raised Myself From Failure To Success In Selling, published in 1949, and I'm sure there are earlier examples.
When Ira Hayes of National Cash Register made sales calls, his presentation principally consisted of showing binders of testimonial letters to his customers.
Time management consultant Larry Dolan told marketing guru Dan Kennedy he closes every inquiry he gets for a speaking engagement. He has no brochure, no demo tape, no video tape. When a prospective client calls, Larry simply sends a hand-addressed box of copies of testimonial letters.
Can you imagine the power of hundreds of letters praising his presentation? This is more compelling and believable than anything Larry could say about himself.
So when you send a sales letter, include as many testimonials as possible. The testimonials are more likely to make the sale than your letter. When you make a sales presentation, have a supply of testimonial letters. If possible, get audio tapes and video tapes with testimonials.
Include testimonials in your advertisements. In some cases, an entire advertising campaign can be built around a series of testimonials. Those who are not permitted to use testimonials about the results of their products or services may be able to use testimonials about how they deliver their products or services. If these limitations apply to you, get legal counsel to advise you about what you can do.
For example, "The team at the Dr. Roth's office are so nice I would like to visit there for my summer vacation. They made me very comfortable when I had always been stressed out going to a dentist. Their office is so fun and oriented to patients that when I go there I feel like I'm at Disneyland! They took care of all of the paperwork for my insurance claims and helped me arrange a payment plan for my co-payment."
How To Get Testimonials
First, you must provide an outstanding product and service. Then, ask your customers for help. Interview your customers about what they really like about your product and the service you provide. What do they especially like about working with you and your company? Ask if they would write what they told you in a letter or if you can write it for them for their approval. Ask if you can tape record or video record your interview. If you make a presentation, request that the audience complete evaluation forms. Some of the comments could be valuable testimonials.
Another source of testimonials is a client/customer advisory board. We had a client advisory board for our firm last year. As a warm up, we asked the participants to tell about how they were involved with our firm. They responded with at least a half hour of beautiful testimonials, many of which we incorporated in our firm brochure. (Facilitating client/customer advisory boards is one of the services we offer.) Ask for, collect, and use testimonials for your business and you will see an improvement in your results!
The Nicest Way To Build Your Business
"People don't care how much you know until they know how much you care."
It's interesting to see how many small businesses try as soon as possible to follow the example of some large corporations to build an impersonal "corporate image."
People actually prefer to do business with people, not institutions. The last time you called an organization with a problem, weren't you frustrated and didn't you experience emotional pain while "going through voice mail hell" or being transferred until you got connected with a person who could solve your problem? Corporate leaders with good marketing sense understood this.
When we think of Hewlett Packard, we think of Bill and Dave. Lee Iacocca rebuilt Chrysler largely by being the corporate spokesperson in commercials. No advertising has been more successful for Wendy's than Dave Thomas telling us about his latest fast food offering. According to John Sculley, former president of Apple Computer, it requires 16 times the investment for an existing customer to replace the profits of one who is lost.
Keeping existing customers is a key to running a successful business.
Why we lose customers?
According to a study conducted by the Technical Assistance Research Project in Washington D.C., 3% leave for convenience, 9% because of a relationship, 15% because of product, price or delivery problems, and 5% for other miscellaneous reasons.
That leaves 68% for the most significant reason: perceived indifference. Customers want to feel important and appreciated. A key to build customer loyalty is to build a relationship with customers/clients/patients where they feel important and appreciated!
In any business, but especially a business where there is contact with a customer and a representative of the company either in person or on the telephone, the best way I know to cement that relationship is through personal notes - thank you notes!
Personalize thank you notes by hand addressing the envelope and using a real postage stamp. A hand-written note is best. But if your handwriting is terrible, be sure to sign the letter in blue ink.
When should you write thank you notes?
When you are getting started in business or in sales, you should write a note after any contact, including meeting someone at a seminar or when you exchange business cards. Learn to be sincerely appreciative and express that appreciation. If you deal with a problem, apologize personally with a personal note and be sure the problem is resolved as quickly as possible; maybe even sending another note after it's done.
You certainly will want to acknowledge major purchases and referrals with thank you notes. You can sometimes exploit or manipulate people and make a sale. But when you become an "assistant buyer," a friend who helps the customer make transactions in his or her best interest, and express your interest in the customer as a person, you are building a business or a sales career that will provide for you and your family for years to come.
How To Ethically Blow Your Competitors Out of The Water
In developing your marketing message, it's very helpful to develop a Unique Selling Proposition, or USP.
What is a USP?
The USP very clearly answers the question, "Why should I do business with you instead of your competitors?"
The USP may be used repetitively in your marketing literature to build the customer's or client's identification of your company with your product or service.
The two major benefits in developing the USP
First, it clearly differentiates your business in the eyes of your current and potential customers or clients. Second, it focuses your team on delivering the promise of the USP, helping to improve your internal performance.
For example, whom do you think of when you hear the phrase, "Fresh, hot pizza delivered in 30 minutes or less, guaranteed"? Dominos virtually took over the delivered pizza market with that USP. Notice Dominos didn't even promise the pizza tasted good. How do you think a Dominos delivery person would behave compared to a delivery person who works for a competitor without this USP? Do you think the team at Dominos made a considerable effort to develop systems to assure the USP was met?
Beware of the "cutesy phrase"
The USP does not need to be expressed in 25 words or less. It could be a detailed set of performance standards. It should be tested to assure the USP addresses a need that is truly important to the buyer. Would you like some assistance in developing your USP?
We would be glad to act as a facilitator for you and your team in this process.
Uncover Your Business's Most Valuable Hidden Asset
Quick! What is your most valuable business asset?
If you are like most business people, your mind might quickly fly over your balance sheet. Is it your equipment? Is it your location? Is it your accounts receivable?
For most businesses, the most valuable business asset isn't on the balance sheet.
It's their customer list. And those businesses for which this isn't the most valuable business asset should change their orientation to make it so.
The hardest, most expensive sale we ever make to a customer is the first one.
In that first, critical, transaction we earn or lose the trust of the customer. Once we have the trust of the customer, we open the door to many more sales and to referrals, which most of us agree are the very best new customers to get.
Many businesses frantically work at bringing in new businesses while they neglect developing the "acre of diamonds" at their doorstep represented by their customer list.
Why would you want to know the lifetime value of a customer?
The lifetime value of a customer is a measure of the value of the customer to your business. It is the potential contribution of the customer to your business over a period of time. When you know the lifetime value of a customer, you have a benchmark for how much you would or should be willing to invest to acquire a customer.
When you evaluate the effectiveness of your marketing, instead of focusing on the response ratio (how many responded compared to messages delivered), you should focus on the return received (number of customers times lifetime value) for the investment made (campaign cost). Suddenly you find you can justify a much greater promotion investment when you look at your returns in this way, and this provides the engine for significant business growth.
Chances are your competitors are too cheap to make the necessary investment, and this can give you a competitive advantage.
How can you quantify the "lifetime value of a customer"?
Estimate the profit for the transactions you expect to have with the customer over the period you expect to do business with him or her. If this is an unknown long term, use five years. You should collect statistics of the transactions done with customers and how long you keep customers. Also, factor in the benefit for referrals from your customers.
Here's an example:
At a computer software store, customers make average purchases each year of $500. The average gross profit is 30%. Most customers do business with the store for five years. One out of three customers refer a new customer.
Average purchases $ 500
Years X 5
Total purchases $2,500
Gross profit % X .30
Total gross profit $750
Add 1/3 gross profit for referrals $250
Total lifetime value $1,000
If this business invested $1,000 to get a new customer, it would "break even."
Obviously the business wants to make a profit, but now it has a benchmark to work on based on its own situation. Also, advertising and promotion now represent an investment on which a return can be measured, instead of just an expense "thrown against the wall."
Try applying this lifetime value approach in your business as a growth strategy.
How to Profitably Grow Your Business With Less Stress
Do You Have A Business Or A Job?
Michael Gerber is a business consulting "guru" whose observations concerning small businesses have had a profound impact on how his students see their businesses and their role as a business owner.
Gerber observed that most people go into business for the wrong reason. They are skilled technicians. They do a good job of what the business provides to the customer. They believe they can earn more by doing it in their own business than for someone else. They leave and open their own shop. This is what Gerber calls an "entrepreneurial seizure."
These technicians believe they will find more freedom in their business but they discover it is the hardest job in the world. There is no escape. They are the ones who are doing the work! They are the "business!" But if they are the business, they haven't really created a business at all. They have only created a job for themselves!
According to Gerber, the role of the owner is quite different. The role of the business owner is to create a business that works independently of him or herself. There is an "end point" where the business functions independently of the owner. At this point, the business owner may choose to sell it or not. By then, he or she will have created a ready-to-sell "money making machine" and may choose whether to devote effort to it or not. The business can also be duplicated from place to place.
The model for this effort is the "turnkey franchise," such as McDonalds. The franchise creator, by establishing, documenting, and testing detailed systems, Ray Kroc made a uniform business with a certain look, providing a consistent experience to the customer. Ray controlled the design of the restaurant, sold uniformly made food and equipment, and provided the "scripts" for the service people. These scripts contained detailed procedures for preparing the food.
Likewise, the business owner should start with an idea of what this business should look like. This includes an organizational chart that could start with the business owner in each box. The chart documents the organization with responsibilities for chief executive, marketing, accounting, finance, and production employees. Gradually, the business owner tests, measures, and documents procedures for each position then replaces them with others until he or she isn't needed at all.
The shorthand phrase for the business systems could be "Here's how we do it here."
The business becomes a learning place where each person finds satisfaction in performing their parts to the best of their abilities.
Small business owners should be grateful to Michael Gerber for his profound observations and the challenge he has presented to us. Each morning, we should ask ourselves: "Am I going to a business, or am I going to a job?" If we are going to a job, we have Gerber's model for change.
Employees must think in order to provide outstanding service. Gerber's approach can sometimes be inflexible when dealing with changes we deal with today.
More important than "Here's how we do it here," we need to know "What's important here." We need to define the values of our business. People need to be more important than the systems that are supposed to serve them. Systems shouldn't override common sense.
Raising Capital: How To Get Money For a Small Business
In addition to drive, ambition and a great deal of planning, starting and expanding a small business generally requires capital. Capital may come from family, friends, lenders or others. This Financial Guide provides an overview of how to get the capital you need to start or grow your business.
One key to successful business start-up and expansion is your ability to obtain and secure appropriate financing. Raising capital is one of the most basic of all business activities. But as many new entrepreneurs quickly discover, raising capital may not be easy; in fact, it can be a complex and frustrating process.
However, if you are informed and have planned effectively, raising money for your business will not be a painful experience. Professional guidance should be considered in this quest, especially as to the financial information for the loan proposal.
This Financial Guide focuses on ways a small business can raise money and explains how to prepare a loan proposal.
There are several sources to consider when looking for financing. It is important to explore all of your options before making a decision. These include:
Personal Savings. The primary source of capital for most new businesses comes from savings and other forms of personal resources. While credit cards are often used to finance business needs, there may be better options available, even for very small loans.
Friends and Relatives. Many entrepreneurs look to private sources such as friends and family when starting out in a business venture. Often, money is loaned interest free or at a low interest rate, which can be beneficial when getting started.
Banks and Credit Unions. The most common source of funding, banks and credit unions, will provide a loan if you can show that your business proposal is sound.
Venture Capital Firms. These firms help expanding companies grow in exchange for equity or partial ownership.
It is often said that small business people have a difficult time borrowing money, but this is not necessarily true. Banks make money by lending money; however, the inexperience of many small business owners in financial matters often prompts banks to deny loan requests.
Requesting a loan when you are not properly prepared sends a signal to your lender. That message is: "High Risk!" To be successful in obtaining a loan, you must be prepared and organized. You must know exactly how much money you need, why you need it, and how you will pay it back. You must be able to convince your lender that you are a good credit risk.
Terms of loans may vary from lender to lender, but there are two basic types of loans: short-term and long-term.
A short-term loan generally has a maturity date of one year. These include working-capital loans, accounts-receivable loans and lines of credit.
Long-term loans generally mature between one and seven years. Real estate and equipment loans are also considered long-term loans, but may have a maturity date of up to 25 years. Long-term loans are used for major business expenses such as purchasing real estate and facilities, construction, durable equipment, furniture and fixtures, vehicles, etc.
Approval of your loan request depends on how well you present yourself, your business and your financial needs to a lender. Remember, lenders want to make loans, but they must make loans they know will be repaid. The best way to improve your chances of obtaining a loan is to prepare a written proposal.
A good loan proposal will contain the following key elements:
- Business name, names of principals, social security number for each principal, and the business address.
- Purpose of the loan: exactly what the loan will be used for and why it is needed.
- Amount required: the exact amount you need to achieve your purpose.
- History and nature of the business: details of what kind of business it is, its age, number of employees and current business assets.
- Ownership structure: details on your company's legal structure.
Develop a short statement on each principal in your business; provide background, education, experience, skills and accomplishments.
Clearly define your company's products as well as your markets. Identify your competition and explain how your business competes in the marketplace. Profile your customers and explain how your business can satisfy their needs.
- Financial statements: balance sheets and income statements for the past three years. If you are just starting out, provide projected balance sheets and income statements.
- Personal financial statements on yourself and other principal owners of the business.
- Collateral you would be willing to pledge as security for the loan.
When reviewing a loan request, the bank official is primarily concerned about repayment. To help determine this ability, many loan officers will order a copy of your business credit report from a credit-reporting agency. Therefore, you should work with these agencies to help them present an accurate picture of your business. Using the credit report and the information you have provided, the lending officer will consider the following issues:
- Have you invested savings or personal equity in your business totaling at least 25% to 50% of the loan you are requesting? (Remember, a lender or investor will not finance 100% of your business.)
- Do you have a sound record of credit-worthiness as indicated by your credit report, work history and letters of recommendation? This is very important.
- Do you have sufficient experience and training to operate a successful business?
- Have you prepared a loan proposal and business plan that demonstrate your understanding of and commitment to the success of the business?
- Does the business have sufficient cash flow to make the monthly payments on the amount of the loan request?
The SBA offers a variety of financing options for small businesses. The SBA's assistance usually is in the form of loan guaranties, - i.e., it guarantees loans made by banks and other private lenders to small business clients. Generally, the SBA can guarantee up to $750,000 or 75% of the total loan value, whichever is less. The average size of an SBA-guaranteed loan is $175,000, and the average maturity is about eight years.
Whether you are looking for a long-term loan for machinery and equipment, a general working capital loan, a revolving line of credit, or a "microloan," the SBA has a financing program to fit your needs.
Note: The SBA has a portfolio guaranteeing over $27 billion in loans to 185,000 small businesses that otherwise would not have had such access to capital. It guaranteed over 60,000 loans totaling $9.9 billion to America's small businesses in fiscal year 1995. It also gives management and technical assistance to nearly 1 million small businesses through its 950 Small Business Development Centers and 13,000 Service Corps of Retired Executives volunteers.
The 7(a) Loan Guaranty Program, financing that can satisfy the requirements of almost any new or growing small business. The SBA offers a number of specialized loan and lender delivery programs.
The 7(a) Loan Guaranty Program
The 7(a) Loan Guaranty Programis the SBA's primary loan program. The SBA reduces risk to lenders by guaranteeing major portions of loans made to small businesses. This enables the lenders to provide financing to small businesses when funding is otherwise unavailable on reasonable terms.
The eligibility requirements and credit criteria of the program are very broad in order to accommodate a wide range of financing needs.
When a small business applies to a lending institution for a loan, the lender reviews the application and decides if it merits a loan on its own or if it requires additional support in the form of an SBA guaranty. SBA backing on the loan is then requested by the lender. In guaranteeing the loan, the SBA assures the lender that, in the event the borrower does not repay the loan, the government will reimburse the lender for its loss. By providing this guaranty, the SBA helps tens of thousands of small businesses every year get financing they would not otherwise obtain.
To qualify for an SBA guaranty, a small business must meet the 7(a) criteria and the lender must certify that it could not provide funding on reasonable terms except with an SBA guaranty. The SBA can then guarantee as much as 80% on loans of up to $100,000 and 75% on loans of more than $100,000. In most cases, the maximum guaranty is $750,000 (75% of $1 million). Exceptions are the International Trade, DELTA and 504 loan programs, which have higher loan limits.
How The Procedure Works. You submit a loan application to a lender for initial review. If the lender approves the loan subject to an SBA guaranty, a copy of the application and a credit analysis are forwarded by the lender to the nearest SBA office. After SBA approval, the lending institution closes the loan and disburses the funds; you make monthly loan payments directly to the lender. As with any loan, you are responsible for repaying the full amount of the loan. There are no balloon payments, prepayment penalties, application fees or points permitted with 7(a) loans. Repayment plans may be tailored to each individual business.
Permissible Use of Proceeds. You can use a 7(a) loan to: expand or renovate facilities; purchase machinery, equipment, fixtures and leasehold improvements; finance receivables and augment working capital; refinance existing debt (with compelling reason); finance seasonal lines of credit; construct commercial buildings; and/or purchase land or buildings.
Terms. The length of time for repayment depends on the use of the proceeds and the ability of your business to repay:
- Usually up to 7 years for working capital
- Up to 25 years for fixed assets such as the purchase or major renovation of real estate or purchase of equipment (not to exceed the useful life of the equipment).
Interest Rates. Both fixed and variable interest rates are available. Rates are pegged at no more than 2.25% over the lowest prime rate (the lowest prime rate as published in The Wall Street Journal on the day the application is received by the SBA) for loans with maturates of less than seven years and up to 2.75% for seven years or longer. For loans under $50,000, rates may be slightly higher.
Fees. The SBA charges the lender a nominal fee to provide a guaranty, and the lender may pass this charge on to you. The fee is based on the maturity of the loan and the dollar amount that the SBA guarantees. On any loan with a maturity of one year or less, the fee is just 0.25% of the guaranteed portion of the loan. On loans with maturates of more than one year where the portion that the SBA guarantees is $80,000 or less, the guaranty fee is 2% of the guaranteed portion. On loans with maturates of more than one year where the SBA's portion exceeds $80,000, the guaranty fee is figured on an incremental scale, beginning at 3%.
Collateral. You must pledge sufficient assets, to the extent that they are reasonably available, to adequately secure the loan. Personal guaranties are required from all the principal owners of the business. Liens on personal assets of the principals also may be required. However, in most cases a loan will not be declined where insufficient collateral is the only unfavorable factor.
Eligibility. Your business generally must be operated for profit and fall within the size standards set by the SBA. The SBA determines if the business qualifies as a small business based on the average number of employees during the preceding 12 months or on sales averaged over the previous three years. Loans cannot be made to businesses engaged in speculation or investment.
Maximum Size Standards. The precise ceiling depends upon your company's Standard Industrial Classification (SIC) code.
- Manufacturing - from 500 to 1,500 employees;
- Wholesaling - 100 employees;
- Services - from $2.5 million to $21.5 million in annual receipts;
- Retailing - from $5 million to $21 million;
- General construction - from $13.5 million to $17 million;
- Special trade construction - average annual receipts not to exceed $7 million;
- Agriculture - from $0.5 million to $9 million;
Here are the ceilings at which businesses are ineligible to participate:
What You Need to Take to the Lender. Documentation requirements may vary; contact your lender for the information you must supply. Common requirements include the following:
- Purpose of the loan
- History of the business
- Financial statements for three years (existing businesses)
- Schedule of term debts (existing businesses)
- Aging of accounts receivable and payable (existing businesses)
- Projected opening day balance sheet (new businesses)
- Lease details
- Amount of investment in the business by the owner(s)
- Projections of income, expenses and cash flow
- Signed personal financial statements
- Personal resume(s)
What the SBA Looks For. Here are the qualifications the SBA is on the lookout for:
- Good character
- Management expertise and commitment necessary for success
- Sufficient funds, including the SBA-guaranteed loan, to operate the business on a sound financial basis (for new businesses, this includes the resources to withstand start-up expenses and the initial operating phase)
- Feasible business plan
- Adequate equity or investment in the business
- Sufficient collateral
- Ability to repay the loan on time from the projected operating cash flow
In addition to the standard loan guaranty, the SBA has targeted programs under 7(a) that are designed to meet specialized needs. Unless otherwise indicated, they are governed by the same rules, regulations, interest rates, fees, etc. as the regular 7(a) loan guaranty.
The CAPLines Program
The CAPLines Loan Program is the program under which the SBA helps small businesses meet their short-term and cyclical working-capital needs. A CAPLines loan can be for any dollar amount (except for the Small Asset-Based Line), and the SBA will guarantee 75% up to $750,000 (80% on loans of $100,000 or less).
There are five short-term working-capital loan programs for small businesses under CAPLines:
Seasonal Line. This line advances funds against anticipated inventory and accounts receivables for peak seasons and seasonal sales fluctuations. It can be revolving or non-revolving.
Contract Line. This line finances the direct labor and material costs associated with performing assignable contract(s). It can be revolving or non-revolving.
Builders Line. If you are a small general contractor or builder constructing or renovating commercial or residential buildings, this line can finance your direct labor and material costs. The building project serves as the collateral, and loans can be revolving or non-revolving.
Standard Asset-Based Line. This is an asset-based revolving line of credit that provides financing for cyclical, growth, recurring, and/or short-term needs. Repayment comes from converting short-term assets into cash, which is remitted to the lender. Businesses continually draw, based on existing assets, and repay as their cash cycle dictates. This line generally is used by businesses that provide credit to other businesses. Because these loans require continual servicing and monitoring of collateral, additional fees may be charged by the lender.
Small Asset-Based Line. This is an asset-based revolving line of credit of up to $200,000. It operates like a standard asset-based line except that some of the stricter servicing requirements are waived, providing the business can consistently show repayment ability from cash flow for the full amount.
Use of Proceeds. CAPLines may be used to:
- Finance seasonal working-capital needs
- Finance direct costs needed to perform construction, service and supply contracts
- Finance direct costs associated with commercial and residential building construction without a firm commitment for purchase
- Finance operating capital by obtaining advances against existing inventory and accounts receivable
- Consolidate short-term debt.
Terms. Each of the five lines of credit has a maturity of up to five years, but, because each is tailored to your individual needs, a shorter initial maturity may be established. You may use CAPLines funds as needed throughout the term of the loan to purchase assets, as long as sufficient time is allowed to convert the assets into cash by maturity.
Interest rates are negotiated with your lender, up to 2.25% over the prime rate. The guaranty fee is the same as for any standard 7(a) loan. The SBA places no servicing-fee restrictions on the lender for the Standard Asset-Based Line but requires full disclosure to ensure that fees are reasonable. On all other CAPLines, the servicing fee is restricted to 2% based on the average outstanding balance.
Collateral. The primary collateral will be the short-term assets financed by the loan.
The International Trade Program
The International Trade Program helps small businesses that are engaged in international trade, preparing to engage in international trade, or adversely affected by competition from imports.
The SBA can guarantee as much as $1.25 million in combined working-capital and fixed-asset loans. The working-capital portion of the loan may be made according to the provisions of the Export Working Capital Program (see below) or other SBA working-capital programs.
Use of Proceeds. Proceeds may be used for:
- Working capital; and/or
- Purchasing land and buildings, building new facilities; renovating, improving or expanding existing facilities; purchasing or reconditioning machinery, equipment and fixtures; and making other improvements that will be used within the United States to produce goods or services for export.
Proceeds may not be used to repay existing debt.
Terms, Interest Rates and Fees. Loans for facilities or equipment can have maturates of up to 25 years. The working capital portion of a loan under Export Working Capital Program provisions has a maximum maturity of three years. Rates and fees are the same as for the general 7(a) loan.
Collateral. The lender must take a first-lien position (or first mortgage) on items financed under an international trade loan. Only collateral located in the United States, its territories and possessions is acceptable as collateral under this program. Additional collateral may be required, including personal guaranties, subordinate liens or items that are not financed by the loan proceeds.
The Export Working Capital Program
The Export Working Capital Program was developed in response to the needs of exporters seeking short-term working capital. The SBA guarantees 90% of the principal and interest, up to $750,000.The EWCP uses a one-page application form and streamlined documentation, and turnaround is usually within 10 days. You may also apply for a letter of pre-qualification from the SBA.
You may have other current SBA guaranties, as long as the SBA's exposure does not exceed $750,000 for all of your loans. When an EWCP loan is combined with an international trade loan, the SBA's exposure can go up to $1.25 million.
Terms. Typically, EWCP loan maturates either match a single transaction cycle or support a line of credit, generally with a term of 12 months. Unlike other 7(a) programs, interest rates and fees are negotiated between you and your lender. The SBA charges the lender a nominal guaranty fee, which may be passed on to you.
DELTA (Defense Loan and Technical Assistance) Program
If you own a defense-dependent small firm adversely affected by defense cuts, DELTA can help you diversify into the commercial market. The DELTA (Defense Loan and Technical Assistance) Program provides both financial and technical assistance. A joint effort of the SBA and the Department of Defense, it offers about $1 billion in gross lending authority.
The SBA processes, guarantees and services DELTA loans through the regulations, forms and operating criteria of the 7(a) Program and the 504 Certified Development Company Program. Maximum Loan Amount. The maximum gross loan amount under 7(a) is $1.25 million for a DELTA loan. The maximum guaranty under 504 is $1 million. If both types of loans are used or if there is an existing SBA loan, the combined total may not exceed $1.25 million.
Collateral. DELTA loans may not be typical 7(a) or 504 loans and may require special handling because of complicated credit analyses. While you may have significant collateral, you may not be able to show the ability to repay based on past operations because of your firm's state of transition. New revisions to the law allow the SBA to resolve reasonable doubts in your favor.
Eligibility. If seeking a DELTA loan, you will be required to certify that your company meets DELTA eligibility standards as well as 7(a) criteria. To be eligible, your business must
- Meet SBA size standards
- Have derived at least 25% of total company revenues during the preceding fiscal year from Department of Defense contracts, defense-related contracts with the Department of Energy, or subcontracts in support of defense-related prime contracts.
In addition, your business must be adversely impacted by reductions in defense spending and use the loan to retain jobs of defense workers; or be located in an adversely impacted community and create new economic activity and jobs; or modernize or expand your plant so it can diversify operations while remaining in the national technical and industrial base.
Minority and Women's Pre-qualification Programs
If you are a woman or minority who owns or wants to start a business, The Minority and Women's Pre-qualification Programs can help. Intermediaries assist you in developing a viable loan application package and securing a loan. On approval the SBA provides a letter of pre-qualification you can take to a lender. The women's program uses only nonprofit organizations as intermediaries; the minority program uses for-profit intermediaries as well.
Once your loan package is assembled, the intermediary submits it to the SBA for expedited consideration; a decision usually is made within three days.
If your application is approved, the SBA issues a letter of pre-qualification stating the agency's intent to guarantee the loan. The intermediary will then help you locate a lender offering the most competitive rates.
Maximum Loan Amount
The maximum amount for loans under the women's program is $250,000; under the minority program, it is generally the same, although some district offices set other limits. With both programs, the SBA will guarantee up to 75% (80% on loans of $100,000 or less).
Intermediaries may charge a reasonable fee for loan packaging. These programs are available through a number of SBA district offices nationwide. To find out if these programs are available in your area, contact your nearest SBA district office.
Here are the eligibility rules for these programs.
- Businesses at least 51% owned, operated and managed by people of ethnic or racial minorities, or by women
- Businesses with average annual sales for the preceding three years that do not exceed $5 million
- Businesses that employ fewer than 100, including affiliates
- Businesses that are not engaged in speculation or investment.
SBA EXPRESS (FA$TRAK) Loan Program
The SBA Express (FA$TRAK) Loan Program makes capital available to businesses seeking loans of up to $350,000 without requiring the lender to use the SBA process. Lenders use their existing documentation and procedures to make and service loans. The SBA guarantees up to 50% of a FA$TRAK loan. Your local SBA office can provide you with a list of FA$TRAK lenders.
Like most 7(a) loans, maturates are usually five to seven years for working capital and up to 25 years for real estate or equipment. For revolving credits, you may take up to five years after the first disbursement to repay the loan.
Certified and Preferred Lenders Program
The most active and expert lenders qualify for SBA's Certified and Preferred Lenders Program. Participants are delegated partial or full authority to approve loans, which results in faster service.
Certified lenders are those that have been heavily involved in regular SBA loan-guaranty processing and have met certain other criteria. They receive a partial delegation of authority and are given a three-day turnaround on their applications (they may also use regular processing). Certified lenders account for 10% of all SBA business loan guaranties.
Preferred lenders are chosen from among the SBA's best lenders and enjoy full delegation of lending authority. This authority must be renewed at least every two years, and the lender's portfolio is examined by the SBA periodically. Preferred loans account for 18% of SBA loans. A list of participants in the Certified and Preferred Lenders Program may be obtained from your local SBA office.
The 7(m) MicroLoan Program
The 7(m) MicroLoan Program provides small loans ranging from under $100 to $25,000. Under this program, the SBA makes funds available to nonprofit intermediaries; these, in turn, make the loans. The average loan size is $10,000. Completed applications usually are processed by the intermediary in less than one week. This is a pilot program available at a limited number of locations.
Use of Proceeds. Microloans may be used to finance machinery, equipment, fixtures and leasehold improvements. They may also be used to finance receivables and for working capital. They may not be used to pay existing debts.
Terms Interest Rates and Fees. Depending on the earnings of your business, you may take up to six years to repay a microloan. Rates are pegged at no more than 4% over the prime rate. There is no guaranty fee.
Collateral. Each nonprofit lending organization will have its own requirements, but must take as collateral any assets purchased with the microloan. In most cases, the personal guaranties of the business owners are also required.
Eligibility. Virtually all types of for-profit businesses that meet SBA eligibility requirements qualify.
The Certified Development Company (504) Loan Program
The Certified Development Company (504) Loan Program enables growing businesses to secure long-term, fixed-rate financing for major fixed assets, such as land and buildings. A certified development company is a nonprofit corporation set up to contribute to the economic development of its community or region. CDCs work with the SBA and private-sector lenders to provide financing to small businesses. There are about 290 CDCs nationwide.
The program is designed to enable small businesses to create and retain jobs; the CDC's portfolio must create or retain one job for every $35,000 of debenture proceeds provided by the SBA. Typically, a 504 project includes:
- A loan secured with a senior lien from a private-sector lender covering up to 50% of the project cost,
- A second loan secured with a junior lien from the CDC (a 100% SBA-guaranteed debenture) covering up to 40% of the project cost
- A contribution of at least 10% equity by the borrower.
The maximum SBA debenture generally is $750,000 (up to $1 million in some cases).
Use of Proceeds. Proceeds from 504 loans must be used for fixed-asset projects such as:
- Purchasing land and improvements, including existing buildings, grading, street improvements, utilities, parking lots and landscaping
- Construction, modernizing, renovating or converting existing facilities
- Purchasing machinery and equipment.
The 504 Program cannot be used for working capital or inventory, consolidating or repaying debt, or most refinancing.
Terms, Interest Rates and Fees. Interest rates on 504 loans are based on the current market rate for five-year and 10-year U.S. Treasury issues plus an increment above the Treasury rate, based on market conditions. Only maturates of 10 and 20 years are available. Fees total approximately 3% of the debenture and may be financed with the loan.
Collateral. Generally the project assets being financed are used as collateral. Personal guaranties of the principal owners are also required.
Eligibility. To be eligible, the business generally must be operated for profit and fall within the size standards set by the SBA. Under the 504 Program, a business qualifies as small if it does not have a tangible net worth in excess of $6 million and does not have an average net income in excess of $2 million after taxes for the preceding two years, or if it meets standard 7(a) criteria. Loans cannot be made to businesses engaged in speculation or investment.
Small Business Investment Company Program
There are a variety of alternatives to bank financing for small businesses, especially business start-ups. The Small Business Investment Company Program fills the gap between the availability of venture capital and the needs of small businesses that are either starting or growing. Licensed and regulated by the SBA, SBICs are privately owned and managed investment firms that make capital available to small businesses through investments or loans. They use their own funds plus funds obtained at favorable rates with SBA guaranties and/or by selling their preferred stock to the SBA.
SBICs are for-profit firms whose incentive is to share in the success of a small business. In addition to equity capital and long-term loans, SBICs provide debt-equity investments and management assistance.
The SBIC Program provides funding to all types of manufacturing and service industries. Some investment companies specialize in certain fields, while others seek out small businesses with new products or services because of the strong growth potential. Most, however, consider a wide variety of investment opportunities.
Surety Bond Program
By law, prime contractors to the federal government must post surety bonds on federal construction projects valued at $100,000 or more. Many state, county, city and private-sector projects require bonding as well. The SBA can guarantee bid, performance and payment bonds for contracts up to $1.25 million for small businesses that cannot obtain bonds through regular commercial channels. Bonds may be obtained in two ways:
- Prior Approval. Contractors apply through a surety bonding agent. The guaranty goes to the surety.
- Preferred Sureties. Preferred sureties are authorized by the SBA to issue, monitor and service bonds without prior SBA approval.
Here is a handy guide to the various SBA loan programs. Click here To review synopses of SBA Loan Programs. If you are interested in obtaining further information for a specific Loan Program listed below, click on the Loan Program and you will be brought to the SBA Web site.
- Maximum Amount Guaranteed: $750,000 in most cases Percent of Guarantee (Max.): 75% (80% if total loan is $100,000 or less)
- Use of Proceeds: Expansion or renovation; construction of new facility; purchase land or buildings; purchase equipment, fixtures, leasehold improvements; working capital; refinance debt for compelling reasons; seasonal line of credit; inventory acquisition
- Maturity. Depends on ability to repay; generally working capital is up to 7 years; machinery/equipment, real estate, construction, up to 25 years (not to exceed life of equipment) Maximum Interest Rates: Negotiable with lender: loans under 7 years, max. prime + 2.25%; 7 years or more, max. 2.75% over prime; under $50,000, rates may be slightly higher Guaranty and Other Fees: Paid by lender (usually passed onto borrower).
- Amount of SBA exposure (based on maturity): 1 year or less - 0.25%
- Over 1 year and SBA share $80,000 or less - 2%;
- Over 1 year and SBA share more than $80,000 - figured on incremental scale
- Eligibility: Must be operated for profit; meet SBA size standards; show good character, management expertise and commitment, and always show ability to repay; may not be involved in speculation or investment
- Maximum Amount Guaranteed: $750,000 (except Small Asset-Based); Small Asset-Based $200,000 (total loan amount)
- Percent of Guarantee (maximum): 75%, see 7(a)
- Use of Proceeds: Finance seasonal working-capital needs; costs to perform; construction costs; advances against existing inventory and receivables; consolidation of short-term debts possible
- Maturity: Up to 5 years
- Maximum Interest Rates: 2.25%
- Guaranty and Other Fees: See 7(a); Under Standard Asset-Based, no restrictions on servicing fees
- Eligibility: Existing businesses, see 7(a)
- Maximum Amount Guaranteed: $1.25 million
- Percent of Guarantee (maximum): 75%, see 7(a)
- Use of Proceeds: Working capital; improvements in U.S. for producing goods or services; may not be used to repay existing debt
- Maturity: Up to 25 years
- Maximum Interest Rates: See 7(a)
- Guaranty and Other Fees: See 7(a)
- Eligibility: Small businesses engaged or preparing to engage in international trade or adversely affected by competition from imports; see 7(a) for other qualifications
- Features: 1-page application, fast turnaround; may apply for pre-qualification letter
- Maximum Amount Guaranteed: $750,000 (may be combined with International Trade Loan)
- Percent of Guarantee (maximum): 90%, see 7(a)
- Use of Proceeds: Short-term working-capital loans to finance export transactions
- Maturity: Matches single transaction cycle or generally 1 year for line of credit
- Maximum Interest Rates: No cap
- Guaranty and Other Fees: See 7(a); no restrictions on servicing fees
- Eligibility: Small business exporters who need short-term working capital; see 7(a) for other qualifications
- Features: Provides financial and technical assistance to help defense-dependent firms diversify into commercial market; joint effort of SBA and DoD
- Maximum Amount Guaranteed: 7(a) or combined with 504: $1.25 million (total loan amount). 504: $1 million SBA share (up to 40% of project)
- Percent of Guarantee (maximum): Depends on whether done under 7(a) or 504; see both
- Use of Proceeds: Defense conversion; see 7(a), 504
- Maturity: See 7(a), 504
- Maximum Interest Rates: See 7(a), 504
- Guaranty and Other Fees: See 7(a), 504
- Eligibility: Defense-dependent small firms adversely affected by defense cuts; see 7(a), 504 for qualifications (program authority will expire 9/30/98)
- Features: Help to prepare application and secure loan; SBA pre-qualification letter; pilot programs, limited sites
- Maximum Amount Guaranteed: Minority Pre-qualification Loan Program $250,000 generally (total loan amount); Women's Pre-qualification Loan Program $250,000 (total loan amount)
- Percent of Guarantee (maximum): 75%, see 7(a)
- Use of Proceeds: See 7(a)
- Maturity: See 7(a)
- Maximum Interest Rates: See 7(a)
- Guaranty and Other Fees: See 7(a); plus minority program may use for-profit intermediaries; women's program uses nonprofit only; both may charge fees
- Eligibility: Must be at least 51% owned and operated by racial/ethnic minority or women; $5 million or less annual sales for past 3 years; employ 100 or fewer, focus on credit history, ability to repay, probability of success
- Features: Lender approves loan, no additional paperwork for SBA; pilot program, limited sites
- Maximum Amount Guaranteed: $100,000 (total loan amount)
- Percent of Guarantee (maximum): 50%
- Use of Proceeds: Same as 7(a); limitations on real estate and construction; may be used for term loans or revolving credits
- Maturity: Term loan same as 7(a); no more than 5 years on revolving line of credit
- Maximum Interest Rates: See 7(a)
- Guaranty and Other Fees: See 7(a)
- Eligibility: See 7(a)
- Maximum Amount Guaranteed: $25,000 (total loan amount)
- Percent of Guarantee (maximum): NA
- Use of Proceeds: Purchase equipment, machinery, fixtures, leasehold improvements; finance increased receivables; working capital; may not be used to repay existing debt
- Maturity: Shortest term possible, not to exceed 6 years
- Maximum Interest Rates: Negotiable with intermediary
- Guaranty and Other Fees: No guaranty fee
- Eligibility: Same as 7(a)
- Features: Long-term, fixed-asset loans through nonprofit development companies; must create or retain 1 job per $35,000 of debenture proceeds
- Maximum Amount Guaranteed: Limit on SBA portion of project is $750,000 to $1 million
- Percent of Guarantee (maximum): 40% of project (100% SBA-backed debenture); private lender unlimited
- Use of Proceeds: Purchase of major fixed assets such as land, buildings, improvements, long-term equipment, construction, renovation
- Maturity: 10 or 20 years only
- Maximum Interest Rates: Based on current market rate for 5- and 10-year Treasury issues, plus an increment above Treasury rate
- Guaranty and Other Fees: Fees related to debenture, approx. 3%
- Eligibility: For-profit businesses that do not exceed $6 million in tangible net worth and did not have average net income over $2 million for past 2 years
- U.S. Small Business Administration
The SBA has offices located throughout the United States. For the one nearest you, look under "U.S. Government" in your telephone directory, or call the SBA Answer Desk at (800) 8-ASK-SBA. To send a fax to the SBA, dial (202) 205-7064. For the hearing impaired, the TDD number is (704) 344-6640.