A Hitchhiker's Guide to Capital Resources
Whether it's on the Web, in bookstores, or free for the asking, you'll find it in our street-smart guide to the latest and greatest information about raising money
We know what you want: money. No doubt you'd like to get your company as quickly as possible from its current cash-strapped condition to one in which it is flush with cash--preferably cash that comes with as few strings attached as possible. But before you venture into the capital markets, it pays to evaluate your options realistically. With that in mind, we've searched for the best resources to help you assess the wide range of financing methods used by growing companies. Whether you're approaching a high-powered venture-capital firm or Mom and Dad, the odds are that there's a resource here that can help you prepare. To further ease your search, we've arranged this information alphabetically, by topic.
Fantasizing about divine intervention from an angel investor? For a dose of reality (as well as plenty of practical suggestions about how to make a deal happen), try Finding Your Wings: How to Locate Private Investors to Fund Your Venture, by investment banker Gerald A. Benjamin and writer Joel Margulis (John Wiley & Sons, 800-225-5945, $34.95). It includes a useful analysis of what private investors look for in angel deals, as well as a valuable section on the due-diligence process. (The book's checklist of sample questions may scare off some entrepreneurs--but those folks probably wouldn't be the strongest contenders for angel financing, anyway.)
These days an increasing number of networks try to help entrepreneurs link up with private investors. To get a feel for how that works, explore the recently launched ACE-Net service, sponsored by the U.S. Small Business Administration's Office of Advocacy. It's an on-line listing service that seeks to connect entrepreneurs with potential investors.
For some business owners (especially those whose companies are start-ups), qualifying for bank financing can seem as unlikely as winning the lottery. For tips on improving your odds, try The Small Business Insider's Guide to Bankers, by entrepreneur Suzanne Caplan and banker Thomas M. Nunnally (Oasis Press, 800-228-2275, 1997, $18.95). This 152-page paperback does an excellent job of explaining how to search for the right bank and fine-tune the perfect loan proposal.
For many business owners, all that matters is winning bank financing, whatever the cost. But if you're negotiating from a stronger position, it makes sense to try to keep your borrowing costs down. That's where chapter 16 of Save Your Business a Bundle, by entrepreneur Daniel Kehrer (Simon & Schuster, 800-223-2336, 1994, $22), should come in handy. It suggests eight tactics that business owners can use to control their banking and finance costs. You won't buy a book for 10 pages' worth of information? Then check this one out at your local library. It's likely that you'll benefit from at least a couple of the tactics highlighted.
If you nurture your banking relationship, you should be able to expand your company's borrowing limits and branch out into new types of financing arrangements as they become appropriate. Borrowing for Your Business: Winning the Battle for the Banker's "Yes," by longtime banker George M. Dawson (Upstart, 800-235-8866, 1991, $19.95), does a bang-up job of advising business owners about building a relationship with bankers and planning early for loan renewals. Supplement Dawson's book with Inc.'s August 1997 article "The Art of the Covenant," which addresses the importance of negotiating for the right loan covenants.
A good introduction is Barter Basics (Barter Advantage, 212-534-7500, free), a quick guide to business-bartering arrangements. You might also want to visit the Web site maintained by the National Association of Trade Exchanges or call the group at 216-732-7171. Finally, back issues of Inc. contain specific bartering tips that entrepreneurs can use to help fuel their companies' growth. Some samples: " How Swap Deals Pay Off," " Documenting Swap Deals," " Barter: Credit Lines with a Twist," and " A Customer Can't Pay His Bill. Any Suggestions?."
We know you don't want to rely too much on credit-card financing--but you might have no other choice. If that's the case, by all means shop for the best deal. One good way to comparison shop is by ordering CardTrak's monthly report on consumer credit cards. (Send $5 to CardTrak , Box 1700, Frederick, MD 21702, or call 800-344-7714.) Or check out the Web page.
CUSTOMER OR SUPPLIER FINANCING
If you're aggressive enough to approach your customers or suppliers when you experience a cash-flow crisis or capital shortfall, you may be pleasantly surprised by the results. For some practical illustrations of ways that business owners have tapped into their customers' pocketbooks, take a look at several Inc. articles: " Consumer Finance," " There's No Harm in Asking," and " Resources: Waste-Away Financing."
Don't make the mistake of believing that your only business-borrowing option is a line of credit. Raising Capital: The Grant Thornton LLP Guide for Entrepreneurs, by Michael C. Bernstein and Lester Wolosoff (Irwin, 800 -722-4726, 1996, $50), includes a great 15-page section, starting on page 47, that succinctly steers business owners through a wide range of debt vehicles, including asset-based borrowing, factoring, and callable debt.
Figuring out what type of loan you need, of course, is only half the battle. Savvy entrepreneurs also analyze how much debt their companies can handle. Financing Your Small Business: Techniques for Planning, Acquiring and Managing Debt, by business consultant Arthur R. DeThomas (Oasis, 800-228-2275, 1992, $19.95), includes two absolutely priceless chapters: "Financing Fundamentals" and "Planning Your Financing Mix." Don't sign on the dotted line without reading them.
Finally, explore a Web site maintained by DataMerge. The site includes a "free financing-feasibility search" for business owners seeking to raise $20,000 or more. Think of this as a fill-in-the-blanks approach to money shopping: you provide your address and a brief description of your company, then DataMerge turns up plausible sources of capital. Also useful are some linked articles on topics such as how to spot "bogus lenders." (One hint: they're the ones sending all those unsolicited E-mails across the Internet, boasting how easy it is for them to find you all the capital you need.)
For a wonderfully comprehensive list of all kinds of small-business support programs, look no further than The Small Business Financial Resource Guide, a 151-page paperback compiled by Braddock Communications, in Reston, Va. The book includes key phone numbers at both the state and federal levels, as well as some valuable extra features like a quickie section on key financial ratios. There's also a very good description of the roles of the "five partners of every loan": the borrower, the lender, the accountant, the lawyer, and the insurance agent. Best of all, you can get the book free by writing the U.S. Chamber of Commerce Small Business Center at 1615 H St. NW, Washington, DC 20062. You can also order it electronically through MasterCard's Web site.
Getting involved in the international marketplace can be a great way to boost your company's growth potential, but it can also throw your cash flow into chaos. Foreign collections can be a nightmare, currency fluctuations can destroy profit margins in a flash--and then there are all those tax and accounting glitches no one ever warned you about. Here's where a top-notch reference work can really make a difference. (So can a top-quality accounting firm, preferably one with offices abroad, but that's another matter.) We recommend two: Export-Import Financing, by international banker Harry M. Venedikian and financial writer Gerald A. Warfield (John Wiley & Sons, 800-225-5945, 1996, $69.95), is worth its hefty price tag, thanks to in-depth discussions of a range of financing techniques and of the role played by U.S. banks, government agencies, and foreign lending institutions. A discussion of "exchange risks and opportunities" should be an eye-opener for fledgling international marketers. Exporting from Start to Finance, by international-business consultants L. Fargo Wells and Karin B. Dulat (McGraw-Hill, 800-338-3987, 1996, $44.95), contains a wealth of suggestions on key topics such as letters of credit, methods of payment, and international leasing.
Factoring--basically, an arrangement in which you raise cash against the value of your receivables for a hefty interest charge--can be a costly means to raise short-term capital. But since it's undeniably an option, especially for those companies that can't raise funds from banks, it makes sense to educate yourself. Unfortunately, there's not much available on the subject. But we can recommend pages 41 through 45 of Finding Money: The Small Business Guide to Financing , by Kate Lister and Tom Harnish (John Wiley & Sons, 800-225-5945, 1995, $17.95). The authors explain different types of factoring arrangements and include a valuable list describing some typical factoring-company policies. If nothing else, that list could help you comparison shop for better terms.
FAMILY AND FRIENDS
If your company is so new or so small that your only hope of attracting outside investors is to hit up your relatives or buddies, tread carefully. Start Up Financing: An Entrepreneur's Guide to Financing a New or Growing Business , by entrepreneur William J. Stolze (Career Press, 800-CAREER-1, 1996, $16.99), offers some good advice on this topic. For a sobering look at the emotional complications of borrowing from your parents, read " The Parent Trap," Inc.'s October 1990 cover story. If you decide to go forward anyway, you'll find a practical tip on structuring those deals in " CEO's Notebook" in the March 1997 issue of Inc.
There are plenty of good, well-balanced guides that discuss raising capital through an initial public offering. But remember, if your accounting and legal firms are well versed in serving the entrepreneurial community, they should be able to provide you with plenty of resources (human as well as written) to supplement whatever reading material you find on your own.
If you're just looking for a really quick introduction, a good place to start is with Arthur DeThomas's book Financing Your Small Business (listed above). It certainly isn't the only guide worth considering, but we do like its concise, easy-to-scan approach. You can learn a lot in its well-written 14-page chapter on going public.
For a quirkier exploration of the whole process, we'd like to recommend a short play (yes, play) written by two lawyers, Lloyd E. Shefsky and Misty S. Gruber. The two felt that they needed a more humorous and accessible approach for conveying technical IPO information to their clients. While the title, Prospectus Perspective: Private Deliberations About Going Public, is hardly catchy, this offbeat document has a great deal to recommend it, including some fairly realistic discussions among its characters about whether to hire a top-tier accounting firm ($9; not available in stores). To order a copy, write Lloyd Shefsky, Shefsky & Froelich Ltd., Suite 2400, 444 N. Michigan Ave., Chicago, IL 60611; call 312-836-4001; or fax your order to 312-527-9931.
Would you love to sell stock to the public but can't get Wall Street's big players to give your company the time of day? Then you might decide to investigate the direct-public-offering option. Your accounting and legal advisers should be your first source of information on this one. But for an overview of the subject, look up " When Mom and Pop Go Public," in the December 1996 issue of Inc.
Still interested? Then check out Direct Public Offerings: The New Method for Taking Your Company Public, by lawyer Drew Field (Sourcebooks, 800-432-7444, 1997, $19.95). DPOs aren't simple, so it pays to devote serious attention to chapter 5, "How to Do a Direct Public Offering." There's also a good chapter about selling stock through the Internet, and chapter 8 includes some fascinating case studies.
Savvy entrepreneurs know that leasing equipment can sometimes alleviate cash-flow pressures. If you're contemplating a leasing arrangement, the Internet is worth browsing, if only to give you the broadest possible list of contact names. But if you're also seeking to learn more, try www.bworks.com/funding. Our favorite feature there is a glossary of typical terms involved in leasing deals.
If you're planning to raise capital through the private sale of equity or a debt-and-equity package, then you'll be conducting a private placement whether you think of it in those terms or not. To do a substantial private placement, you need the right team of financial advisers--but don't go into one of those deals without doing some self-education, too. How to Finance a Growing Business: An Insider's Guide to Negotiating the Capital Markets, by investment banker Royce Diener (Merritt, 800-638-7597, 1995, $24.95), is quite informative, especially in a chapter that describes types of private placements and typical components of those deals (such as sinking funds, kickers, convertibles and--well, now you see why you need to read a book on the subject). Raising Capital: How to Write a Financing Proposal, by business consultant Lawrence Flanagan (Oasis, 800-228-2275, 1994, $19.95), is light on other details but offers a good sample private-placement circular. Finally, to get a good sense of how exhilarating, exhausting, and complex the financing experience can be, read Inc.'s October 1996 story " The Deal," an account of one company's odyssey through a private placement.
If your company is new or young, your best bet for growth capital might be a local nonprofit or economic-development program. You can probably track down some leads just by networking through your local chamber of commerce or community college (many coordinate entrepreneurial-support networks) or an industry group. For a helpful contact list, try Free Money for Small Businesses and Entrepreneurs, by Laurie Blum (John Wiley & Sons, 800-225-5945, 1992, $14.95). You won't find any frills here, but you will find plenty of useful details about a variety of funding sources, including descriptions of eligibility standards and restrictions.
U.S. SMALL BUSINESS ADMINISTRATION
For all too many owners of small companies, the best way to obtain adequate bank financing is through some type of Small Business Administration financing assistance--most likely an SBA guarantee to raise the comfort level of an otherwise reluctant banker. If you believe that the SBA process is too complicated for most business owners to navigate without plenty of hand-holding from a real live person, then what you need from a resource is lots of leads to possible financing sources (and plenty of sample application forms to give you some sense of what you're getting into). Look no farther than The Insider's Guide to Small Business Loans, by former SBA official Dan M. Koehler (Oasis, 800-228-2275, 1996, $19.95). In nearly 100 pages of addresses, you'll find listings of small-business investment companies, certified and preferred lenders, and financial institutions participating in the Microloan Demonstration Program.
If you're interested in "just the facts, ma'am," visit the SBA's home page. Besides providing access to its on-line library, the site offers brief descriptions of various SBA financing options. While some of the thumbnail sketches are too brief to be of much help, others should be useful--especially the section on the "LowDoc" (less than $100,000) loan program, which does a good job of spelling out eligibility requirements. Technology companies interested in the Small Business Innovation Research (SBIR) program--a highly competitive program through which federal agencies issue research-and-development grants to qualified small companies--should definitely check out the excellent SBIR section.
If you're at the high end of the fund-raising spectrum--that is, you're running a hypergrowth company in an industry that strikes investors as sexy--you're probably contemplating approaching venture capitalists.
Since relatively few companies succeed on this front, it pays to do your homework first (and, probably, to upgrade your team of legal and accounting advisers). Then, since it's almost impossible to attract venture capitalists' attention through a cold pitch, concentrate on networking your way into the venture-capital community, through an investment banker, a venture-capital forum, or well-connected advisers.
There's no better way to start your research than with Pratt's Guide to Venture Capital Sources, edited by Daniel Bokser (Securities Data Publishing, 800-455-5844, 1997 edition, $325; 1998 edition, due out in March, will be $355). The book includes virtual blueprints of all the key steps involved in carrying out one of those deals, from how to prepare the right kind of business plan to how to handle a meeting with venture capitalists. There's also a clear discussion of mezzanine financing (detailing, among other matters, the investment criteria for venture capitalists in such deals). But you guessed it--the main reason to buy this book (or, better yet, to persuade your local library to do so) is to access its state-by-state list of venture-capital firms. You'll find all kinds of information here, including project preferences, minimum and maximum investment levels, and industry preferences.
If you're cheap, opt instead for Directory of Venture Capital, by venture capitalist Catherine E. Lister and entrepreneur Thomas D. Harnish (John Wiley & Sons, 800-225-5945, 1996, $34.95). You'll get a crib sheet of useful background on more than 600 large venture-capital firms and small-business investment companies across the country. While this book lacks the sophistication and exhaustive scope of Pratt's massive tome, it does include some useful sample documents.
Jill Andresky Fraser is Inc.'s finance editor. Research assistance was provided by Cheryl McManus, while other members of the Inc. staff provided additional reporting.
WHAT'S A SINKING FUND, ANYWAY?
Don't panic. You too can learn to speak financialese
You don't need to be a financial whiz to realize that bankers and investors speak a different language from the rest of us--and that most of them seem to like it that way, since it keeps power squarely in their courts. One effective way to strengthen your position as a seeker of capital is to learn their lingo. Here are two surprisingly accessible and comprehensive dictionaries: Dictionary of Finance and Investment Terms, by financial journalists John Downes and Jordan Elliot Goodman (Barron's Financial Guides, 800-645-3476, 1995, $11.95), and Dictionary of Banking Terms, by Thomas Fitch (Barron's Business Guides, 800-645-3476, 1997, $12.95). Buy whichever one fits your current financing quest. If you spend just an hour or two leafing through some of the thousands of entries, you'll improve your ability to talk to potential backers.
MAKING YOUR CASE
How to sell to investors
Sometimes, running a company seems simple compared with the pain and suffering involved in presenting your company to prospective investors. Unless you're a born salesperson, you could probably use some savvy advice. Turn to Winning Strategies for Capital Formation, by Linda Chandler (Irwin, 800-722-4726, 1997, $32.50), a business consultant who claims to have raised more than a billion dollars for an impressive list of companies. As you'll see, Chandler is obsessed--for good reason, we might add--with the importance of a good presentation. "Your job is to convey your passion, conviction, competence, vision, reliability, determination, and teamwork capacity," she tells business owners. Better still, she goes on to advise them how to accomplish that mission in both 15-minute and 2-minute pitches. Whether you're making your pitch to a banker or to an investor, you'll benefit from her firm suggestions about eye contact, body language, and word choices.
WHY THEY SAID NO
Maybe it was your business plan
Here's the hard truth: you'll have a hard time attracting capital if you don't keep good financial reports--or if you don't know how to prepare an effective business plan. So consider these resources:
- Managing by the Numbers: Financial Essentials for the Growing Business, by former entrepreneur and banker David H. Bangs Jr. (Upstart, 800-235-8866, 1992, $19.95), is one of many guides that aim to teach nonfinancial executives how to manage their growing businesses. But it happens to be one that we really like because it's accessible, comprehensive, and full of lots of good examples. If you're uncertain about whether your company's financial reports are good enough to wow potential investors or lenders, it pays to pick up this book--or one like it.
- www.once.com/gcg takes you to an Internet version of a 302-page guide written by Clinton Richardson. (In its print life, the book was called The Growth Company Guide to Investors, Deal Structures, and Legal Strategies.) The site offers good tips on writing an effective business plan, including a sample format. Also worth exploring: sections on bridge loans and deal terms, as well as links to other Web sites.
SPECIAL REPORT: HOW TO FINANCE ANYTHING
- How to Finance Anything by Jill Andresky Fraser
Capital is easier to get than ever, and there are brand-new places to find it. Here's the smart way to land your share
- The Trouble with Angels by Stephanie Gruner
Where's a good old-fashioned angel when you need one?
- Don't Start a Business Without One by Phaedra Hise
Credit cards are now among the most common small-business financing tools
- All Dressed Up and No IPO by Jerry Useem
What happens to companies that fail to get their initial public offerings off the ground? Wired Ventures offers a painful example
- Where's the Capital of China? by Joel Kotkin
Are Chinese banks the lenders you've always dreamed of?
- A Hitchhiker's Guide to Capital Sources by Jill Andresky Fraser
Our street-smart guide to the latest information about raising money