FINANCING YOUR INVENTION

by Chuck Umeda, 9902

Richard Shapiro, CFS, President of Condor International Financial Services, a board member of the IAA, provides a ”wealth” of information about finances.  Inventors tend to overlook this facet of their business or may be intimidated by it all.  But these fears are unnecessary, because we are “fortune”-ate to have Richard as a member of the IAA and who is willing to work with inventors’ financial needs.  He has invented an automatic ambient temperature beverage conditioner.  This ingenious device is cleverly disguised as a coffee mug decorated with the Condor logo and phone: 520-529-4960.  Any beverage – hot, cold, lukewarm, placed therein will automatically achieve ambient temperature without any external energy source!  This writer attest that the invention works perfectly.   Condor, located at 4725 E. Sunrise Drive, Suite 148, is a capital search and formation company.

If you have a patent, a viable product and orders, but limited means to produce the product for delivery, you need financing.  There are three “types” of money, besides your own: debt, equity and asset based.

Debt financing is a loan.  Loans from family and friends are the easiest to get and probably the hardest to pay back and are limited resources.  Family or close friends may not require a business plan, but it is a requisite for any other financial resource.  Have a repayment plan, Richard advises, to keep those friends.

Have a business plan.  The Small Business Development Center (SBDC) will help write a business plan for a nominal fee.

There are microloan programs available from civic organizations such as Chicanos por La Causa in Tucson, for example.  The limit is $100k to $150k.  Project PEPP has loans up to $10k.  There are also lending programs from banks and the Small Business Administration (SBA).  The SBA itself doesn’t make loans, but guarantees the loans made by the banks.  SBA has many new programs and makes an effort to provide an answer within 48 hours.  A SBA loan is similar to a FHA/VA mortgage, where the lender requires that the FHA insured transaction will have the government guarantee repayment.

Another example of debt financing is credit cards.  It is an easy source of money, but past history of bankruptcies will almost certainly exclude you.  The disadvantage is a high interest rate.

Equity financing is ownership.  This is done through IPOs, venture capital or small corporate offering.  Equity is selling a piece of the business.  IPO is a way of raising money by issuing stock, which has a value and gives ownership in the company.  However, costs are about $50k and requires 6 – 12 months per SEC rules.

There is the rare Angel capitol.  This is usually someone who has money and likes to dabble.  Downside is that these are hard to find.

Venture capitalists will carefully examine your business plan and check past performances.  They come in three tiers:  low is up to $250k and they deal with young companies; mid-tier is in the $3 - $5M range;  high-tier is over $5M.  These look for a solid company to back for expansion.  Venture capitalists typically want payback in three years + interest + part of the company.  They will want a majority position in the company while they have money in the company.  The inventor needs to be careful in those situations.

Another way to raise capitol is to look for a partner. 

Assets can be used to raise money.  Equipment, inventory, property, even key employees are considered assets.  There are paper assets also, such as invoices, purchase orders and contracts.

Financial terms for payment can be “2%  10, net 30.”  For the non-financial types, this means there is a 2% discount on the amount if you pay in ten days or the net amount is due in 30 days.  There is some stretch here, because people take the 2% discount even up to 15 – 20 days. 

Factoring.  Financially challenged inventors who have shipped a sizeable order and waiting for payment can sell their invoice at a discount to an investor.  If the invoice is for $1,000, the investor will give you an advance, typically 70% of the value of the invoice or $700.  The usual fee for the balance of $300 is 5 points (%) every 30 days.  Customers can be expected to pay in 35 - 50 days.  This works out to 7 ½% interest on the $300 balance of the invoice or $22.50.  This amount is deducted from the balance for the investor, and the rest is given to the inventor as a rebate.  The advantages are considerable, because the inventor gets the advance, doesn’t give up equity, maintains control, gets the rebate.  The investor is happy with the 7 ½% interest he gets.

There is also financing on P.O.s (purchase orders).  The inventor can take the customer’s P.O. to a bank or specialists for established business.  The inventor will be advanced up to about 66%.  Fees on the balance range from 4% to 10% for 30days.  Or, factoring can be used for P.O.s as well as with invoices.

The inventor can get into business in one of three ways: sole proprietor; partnership agreement; or form a corporation.  This also determines liability.  A sole proprietor is the one liable.  A partner shares liability.  If the corporation is found liable, you are not held liable.  There are protective advantages in a “corporate shell,” especially if there is risk of injury related to your product.

There is an emerging class of contract manufacturers who will also do fulfilment services.  This can be advantageous for inventors, who generally do not have large manufacturing facilities.  Many of these are international business.  They will accept a letter of credit from the inventor’s bank to make product.