Raising money to start a business is one of the greatest challenges an entrepreneur faces. A business cannot begin operating until it has sufficient funding, and banks and investors typically subject start-ups to more scrutiny than established companies. Starting a bakery presents a unique set of challenges because of the investment in equipment and raw materials that is required.
Items you will need
- Business plan
- Sources-and-uses analysis
- Account with Capital IQ
- Account with LexisNexis
Draft a comprehensive business plan for your bakery. The business plan should include a detailed description of your bakery, what market segments the bakery is targeting, and why you believe the bakery is different from the numerous other bakeries in the market.
Create financial projections. The projections should be realistic and should clearly spell out the assumptions you have made regarding market share, sales growth and anticipated expenses. Pay particular attention to the cost of raw materials, such as flour and sugar, which can be very volatile. Your business plan should describe any hedging strategies you intend to use to protect yourself against swings in commodity prices.
Develop a sources-and-uses schedule for your bakery. The uses should include all of the upfront costs associated with starting the bakery as well as any operating losses you will need to cover before the bakery is profitable. For a bakery, the main upfront costs will be the purchase of baking equipment and working capital (dough, flour, etc.). The sources of funds should highlight any contribution you are planning to make from your own wealth.
Use Capital IQ to research banks and investment funds that have recently invested money in bakeries. You will need to establish an account with Capital IQ (a yearlong subscription cost $500 in June 2009). You can also search for news articles using LexisNexis ($300 for a yearlong subscription as of June 2009). LexisNexis will help you find articles in business publications about individual or institutional investors that have put money into bakeries.
Generate a list of investors who are familiar with the bakery industry based on your research. This list will be your target list of investors. Divide the list into two sections: commercial banks and equity investors.
Approach the commercial banks on your list. A business lawyer will likely have a list of contacts at the banks you have identified, or your research may have identified a specific loan officer who has worked with bakeries. If all else fails, you can simply visit the banks on your list and ask to speak with a commercial-loan officer. You should ask the banks for an asset-based loan since bakeries are asset-heavy businesses. The baking equipment and raw-materials inventory of your bakery will serve as secure collateral for any bank loan, which should lower your interest rate.
Seek a loan or a grant from the U.S. Small Business Administration (SBA). The SBA makes loans and grants to thousands of small businesses each year, though getting money from the SBA is a very competitive process.
Approach the equity investors, such as angel investors or venture capitalists, on your list. When dealing with equity investors, it is critical to identify people who have successfully worked with and invested in bakeries in the past. Equity investors will ask for an ownership percentage in your bakery; in exchange, you should expect these investors to assist you in developing the overall strategy of your bakery. Additionally, they should be able to give you advice on the day-to-day operations of a bakery.
Some banks or investors may ask you to pledge personal assets, such as your house or personal savings, as collateral for loans. Be very careful in pledging personal assets; if you pledge your house as collateral and your bakery is unable to repay the loan, you will likely lose your house to the bank.
Be sure to review any financing documents with your lawyer before signing anything.