The Money Hunt

Lori Bonn Design Inc., based in Oakland, Calif.; founded in 1991

Industry niche
Designing and manufacturing a jewelry line between mid- and upper-price points

Financial snapshot
$3 million in revenues in 2000; profitable since its first year of operation

Financing history
The owner bootstrapped the launch with $1,000 in personal savings. She started factoring accounts receivable after establishing a customer base that included such retailers as Nordstrom and Saks. In 1998 she switched to a small community bank from a factoring company

Fund-raising goal
To move to a larger bank that could increase the current six-figure credit line; perhaps to raise additional capital through a private-equity placement to support growth plans

I'm grappling with a dilemma right now," says CEO Lori Bonn Gallagher. "We could keep chipping away at a very steady pace -- funding our growth largely through cash flow and moderate bank borrowing, the way we have so far -- and in five to seven years we might grow to, say, $10 million in sales. But my product is selling really, really well right now. I can't produce enough to meet the demand from my customers. There's so much opportunity. We could get to that size much faster, but to do that I need significantly more capital than I've gotten so far."

Complicating the fund-raising picture for Gallagher is the fact that she has other management objectives as well, and all of them are costly. "I need help in management, especially in the financial area, which would free me to concentrate on what I can do best, which is design and marketing. I'd like to pursue international customers, launch a more aggressive national marketing effort, and broaden my base of overseas suppliers. And I'd like to work on improving my inventory controls," she says. "When I think about all that, I say to myself that what I really need is a couple million dollars and a smart person or two to serve on my board."

But Gallagher still controls 100% of the company's stock, and she's not certain that she's ready to give a big stake away. "The alternative for me would be to hook up with a really good bank that could help get us to the next stage. Right now we've reached the lending limit of our current bank. At the minimum I know that we need to restructure that relationship."

The experts

Brett W. Kaplowitz
Vice-president of Potomac Valley Bank, a Maryland-based wholly owned affiliate of Mercantile Bancshares Corp., a multibank holding company

"This owner has got a lot of good ideas about what she can do to promote growth. But as a lender I'd want to know very specifically what short-term steps (for the next year) and long-term steps (for the next three to five years) she plans to take to grow her business. For financing that growth, I'd want to know how much money will she need, what will she need it for, and what will it accomplish?

"If she switches to a larger bank or one like ours -- which is a community bank that's part of a larger lending network -- she should be able to explore a range of different options. She might, say, be able to work out a seven-figure lending limit for the company, through a multitiered arrangement that could support her working-capital and expansion needs. There could be two loans, for example. A working-capital line of credit would be at a lower interest rate and could be collateralized through the company's assets -- in this case its receivables. For another type of company, inventory might also serve as collateral. But here it's not too likely, since banks don't usually lend against supplies that are easily movable, such as jewelry.

"A term loan for expansion would be a higher-risk component with a higher interest rate, as it's not backed by the company's assets, but it could be guaranteed by the Small Business Administration. If the owner wants to go another route instead and couple a working-capital line with an equity sale to get funds for expansion, the right type of bank might even be able to help her there. That's because a growing number of banks, like ours, also have private-equity operations that can find investments for their important business customers with good growth potential."

Kathy Elliot
A member of Renaissance Ventures, a group of angel investors (affiliated with the Boston-based Center for Women & Enterprise) interested in funding businesses led by women

"Venture-capital investments are directed toward technology companies. Revenues would have to exceed, at the very least, $50 million within five years to spark the interest of angel investors or VCs. That's unlikely in this case.

"Ruling out private equity early on will save her a lot of time and frustration."

--Kathy Elliot

"In summary, this business doesn't appear to be a candidate for a private-equity investment. That is not to say that this is a bad business. In fact, it looks as though this particular entrepreneur has done a number of things well. But ruling out private equity early on will save her a lot of time and frustration and allow her to focus on pursuing more viable funding options. Those may include a large bank loan, merging with another manufacturer with complementary product lines and distribution, or perhaps looking for a strategic investment from a key customer."

Bradley Payne
Director of Kurt Salmon Associates Capital Advisors Inc., an Atlanta-based firm with financing expertise in the retailing sector

"I'd have to agree that this isn't a company that's likely to attract the private-equity community. One of that community's concerns would be the size of the company and lack of depth in the management team. Then there's the retailing industry. But the strength of this company's financial fundamentals probably wouldn't be sufficient to attract an investment from a major retailer.

"I'd recommend that the owner make the transition to a larger bank and attempt to increase her credit availability. Meanwhile, she could pursue supplier financing. If she could negotiate longer payment terms, she could control her needs for working capital, even in a growth scenario. Then she could concentrate on achieving some of her near-term goals such as building brand identity and broadening her distribution before trying to attract an angel or a strategic partner.

"Her priorities should be driving growth, building a professional management team, and developing a real personality and branded presence for her line of jewelry. You know one thing that could help her? Maybe she could bring in a transitioning or retired retailing executive interested in pursuing a second career. Someone like that might be in a position to make a financial investment in return for a management role and equity stake. And that type of person could bring further credibility to the business."

Jill Andresky Fraser is Inc. 's finance editor.

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