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Repayment is tied directly to your success. In order to repay your Funding Source, you must clearly define how you are going to make money and how much money you are going to make.

R&D Requirements
How much research and development remains before you can enter the market? Does your product require regulatory approval? What is your time table? What delays are foreseeable that could affect your time table? Are there any alternative plans if tests, approvals, patents, licenses, etc., don't go as planned?

Break Even Analysis
Exactly where is it? Must you sell 10,000 widgets? How will price breaks effect you? Can your salespeople survive on your commission structure? What about material price increases? Here is where you are going to demonstrate that you understand your product, its market, its costs and your industry.

Current or Projected Debt Coverage Ratio
Remember 1.25 to 1. It's a figure that can affect your future. For lenders if your net income is below 1.25 to 1, it may mean no loan, a higher rate or more collateral. Simply put, it determines your ability to service debt. Your net income should be 1.25 times higher than the debt payment you are proposing to take on. Hopefully you have analyzed your debt coverage ratio and found it to be much higher. If it's not, this leaves a pretty slim margin for error.

With investors, because there is no debt, they are concerned with profit margins and retained earnings. The projections should support ratios of better than 2.0 to 1 to generate any serious investor interest.

Amortization or Dividend

  • Return on investment
  • Return of investment

These are terms that all funding sources want to know. If they give you the money, what do you project your time table to be for them to get their investment back? Then, when does the return on the investment start?

Always try to arrange for funding when you don't need it. Entrepreneurs are famous for seeking capital in a crisis. When your need is great (payroll, taxes, sales drop, etc.) rates always seem to go up or you can't find capital at all. Do your best to forecast your capital requirements at least six months in advance.

Workbook Main Menu I To Chapter 11

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