How to Finance Anything
Despite the tumultuous and unpredictable state of today's capital markets, entrepreneurs still have plenty of ways to raise funds for their companies. Here are 20 that offer particular promise in the current economic climate. Some represent new marketplace solutions to the perennial financing problems of business owners; others offer new twists on time-tested strategies or financing tools. But don't get us wrong--we're not suggesting that you overlook traditional financing strategies, such as approaching angel investors or proposing financing deals to your customers or suppliers.
1. SBA Express was launched last fall in yet another effort to lessen the paperwork hassles attached to applying for a Small Business Administration-backed loan. Bank-qualified business owners can borrow up to $150,000 without going through the standard SBA application process and are guaranteed a loan decision within 36 hours. Since the loans are guaranteed by the government agency only at 50% of their face value, many of the 500 or so eligible "preferred" lenders (which include commercial banks and other financing institutions with good track records on their other SBA loans) have yet to sign on. To track down active lenders in your area, contact your SBA district office, or visit the agency's Web site.
2. Community banks, the antithesis of all those huge financial institutions that are merging and acquiring themselves into the deal-making stratosphere, offer the best (and maybe the only) chance for many small or young companies to start building a banking relationship. While the small banks may have fewer products than the giants do, their advantage to entrepreneurs is their flexibility. To locate possible lenders in your region, contact the Independent Bankers Association of America, which can provide leads to more than 5,000 community banks. You can visit the association's Web site, call the group at 800-422-8439, or reach it by E-mail.
3. The (self)chosen few is the way we like to think of that select group of national banks that do more than just talk about their interest in backing start-up companies. Their loan officers are out there--even in today's chilly credit climate--aggressively launching new products and actually approving deals. Silicon Valley Bank perennially crops up on this list; so, increasingly, do Chase and Fleet Bank. (One caveat: companies with less than big-scale growth plans need not apply.)
To tell if a big bank belongs to this limited group, look for new products that demonstrate a commitment to today's credit challenges. At Fleet Bank, one program worth noticing is Small Ticket Leasing, which allows business owners to finance anywhere from $5,000 to $250,000 worth of equipment at competitive rates. For companies that qualify, the bank will preapprove a leasing line of credit up to $50,000, even before any equipment has been purchased.
4. Asset-backed borrowing may be the only game in town for many entrepreneurial companies, as long as bankers keep buzzing about the need for "credit-risk premiums," a "flight to quality," and other euphemisms for reducing their risk. If that is the way your company must go, so be it. But don't think in narrow terms. An asset-backed loan can be anything from a home-equity line of credit or an SBA deal backed up by your kids' college-savings account, to those pricey, but ever-handy, transactions tied to accounts receivable, contracts, or inventory. A very good source of information is GE Capital's Guide to Asset Based Lending. (Call 800-572-1838 to obtain a free copy.) You may want to skip the 6-page sales pitch about the company's various business lines, but the 19-page glossary is a must-read.
5. Microloans, which typically range in size from hundreds of dollars to the low six figures, make so much sense for start-ups and struggling small companies that it's practically un-American to say anything bad about them. The barrage of good publicity about this financing strategy includes a recent SBA study showing that microloan activity was up by 27% for the period June 1996 through June 1997.
We recommend considering this early-stage option if a small infusion of capital could make a difference to your venture's cash flow or growth-related activities. However, reports from the field suggest that microlending activity is slowing down. "Microlenders have been bailing out on us left and right," is the blunt assessment of Hedy Ratner, copresident of the Women's Business Development Center, in Chicago. It should probably come as no surprise that some lenders regard microloans as too small to be worth the effort.
6. Third-party loan guarantees typically require that a relative or close friend cosign a credit-line agreement when a company's credit history (or that of its owner) leaves something to be desired. But with personal indebtedness significantly on the rise, entrepreneurs may have trouble finding among their nearest and dearest someone who is both willing to cosign and is also deemed creditworthy by prospective bankers.
A new breed of financing intermediary has stepped forward that will consider cosigning your corporate credit line for the right price (either a fixed fee or a percentage of the face value of the loan). Since these guarantors will be liable for any borrowing you can't repay, expect a close evaluation of your financial credentials. Still, their standards are probably more lax than a banker's. For contacts within this relatively new profession, network through your accounting, legal, or financial advisers.
7. Venture leasing, a trend that's been around for much of the decade, has become a hot ticket among fast-growth companies. It is generally available to companies that have already been granted institutional funds (or are in the midst of closing a deal with a venture capitalist or a similar type of financier).
The advantage to the lessees is that they don't have to raise more capital for equipment (or tie up venture funds to pay for equipment, rather than growth activities). But it isn't cheap. Venture-leasing deals typically require payments of 100% of principal, plus 8% to 12% in interest charges over a 24-month to 60-month lease horizon (plus the lessor gets the equipment when the lease period ends). Prediction: if demand stays up, expect rates to increase. Still, venture leasing is cheaper than giving away more equity, particularly in today's tight capital market. For leads to the small group of leasing firms and banks that are aggressively servicing this market, network through your accounting firm and local financing intermediaries.
8. Credit cards have always been the mainstay of the small-business owner. But these days any entrepreneur who relies on his or her credit-card company for just, well, credit cards is walking around blindfolded. Some of the perks, like yet another free on-line news service for business owners, don't exactly ring our bell. What we do like, though, is the range of unsecured credit-line alternatives offered by both Visa and American Express. If bankers slam the door in your face, contact all the major credit-card suppliers to compare prices and options. As you would with a bank, make sure you'll have opportunities to increase your borrowing limit (and add on other financing sources, such as equipment leasing) as necessary, once you've proved that your company is a good customer.
If you don't really care about the credit-card part of the equation, consider a conversation with Merrill Lynch, whose portfolio of small-business credit products looks good these days. We particularly like a working-capital revolving line of credit, WCMA Reducing Revolver Loan, that's competitive with what most banks could--but wouldn't--offer many fast-growing companies.
9. On-line credit search engines are practically a dime a dozen. (OK, so we exaggerate. But so do many of them.) The best are the ones that guarantee confidentiality, don't charge an up-front fee, and can point to successful results in hooking up companies like yours with legitimate lenders. One site that we like ( www.getsmart.com) launched a business-financing section last July. It's affiliated with 17 banking and nonbanking lenders, including American Express, Heller Financial, and First Union. But don't overestimate your company's prospects--the site draws about 1,700 loan applications from small businesses each month.
Family and Friends
10. Tapping personal ties to raise cash for a company that's either too new or too small to get financing elsewhere is an age-old formula that still makes sense. But here's one risk too big to ignore in today's highly competitive capital marketplace: if you don't follow professional standards in structuring and documenting "F&F" loans or equity arrangements, your sloppiness will likely come back to haunt you.
That's because if and when your company grows to the point at which it can credibly approach banks or professional investors for funds, their lawyers will examine your corporate and capitalization structure with a fine-tooth comb. Even in the best of times, the lenders would delay the closing of any deal until errors or inconsistencies got cleaned up. In today's market that could mean you'd wind up losing opportunities altogether. Paying a lawyer now is a cheap way of avoiding problems later.
11. Asset sales to relatives or friends can offer a neat and relatively simple alternative to either loans or equity deals. Put simply, your company sells one or more assets (which could run the gamut from computer equipment to real estate) to someone you know and trust; he or she then leases those assets back to the business at a price that seems fair to both of you. Your pal gets the tax deduction and regular income stream; your company gets a onetime infusion of capital and, presumably, better leasing terms than it would have received if it had been dealing with an independent financier. Best of all, your capital structure remains clean.
12. Performance-oriented, flexible terms can make or break a deal in these risk-averse times, especially for a private-equity investor who is weighing the most attractive opportunities that have been around in years. One thing that can help lure investors is the so-called clawback technique. A financing deal starts off with one set of terms--your equity investor receives a certain percentage of stock in return for a specified capital investment--but those terms can shift, depending on how successful you are in meeting agreed-upon goals according to a fixed set of deadlines. "What I tell business owners all the time is 'Who cares how much stock you give away going into the deal as long as you maintain control? If you can get a good chunk of it back based upon your performance results, that's what matters," says A. Gordon Tunstall, a financing consultant and intermediary in Tampa. "Meanwhile, these kinds of terms increase the comfort level of private investors in times like these."
13. Redeemable preferred stock is another technique that can ease investors' jitters in uncertain times. A decade ago redeemable preferred stock was a way to give investors guaranteed credit status in case a company went bankrupt. Now it's used to give investors an extra bang for their buck if a company's initial public offering--and thus, the deal's payoff--gets delayed. The preferred stock may, for example, be structured so that if an IPO takes place in five years instead of two, investors will receive the full value of their original investment plus stock at exit time. It may cost you more to build techniques like these into a deal. But they can make a closing happen--and if the IPO market settles down fairly quickly and you are able to achieve your original goals for taking the company public, you won't even take a hit financially.
14. The wide world of the Internet still offers a mixed bag for the corporate seeker of capital. Once you start visiting financing Web sites (which seem to proliferate endlessly), you can find yourself in a black hole--unable to turn off the computer but also unable to come up with any cash. Still, cynical though we may be, we recommend that you check out some of the best sites, which offer business owners the chance to research a wide range of funding options. Among the sites we like is www.vfinance.com, which provides information on more than 200 venture-capital firms, as well as frequent news updates about the industry.
On-line investment banking is a new trend that will only get bigger, but a lot will depend on the quality and payoff of early deals. It's a strategy still reserved for the inner circle of hot growth companies. (If your company couldn't attract any attention from traditional investment bankers or private-equity investors, you'll be better off approaching your dentist.) The biggest player here, to date, is Wit Capital, which has concluded more than 40 offerings so far, including IPOs and public and private venture-capital and other equity deals.
15. Investmentor commercial-banking links can come in handy in an economic environment like this one, in which public-equity offerings can be on-again-off-again on a fairly unpredictable basis. Here's one way to protect your company's short-term interests: If you hook up with an investment-banking or underwriting firm that is affiliated with a commercial bank (the way that Salomon Smith Barney and Citibank are, as part of the newly christened Citigroup), you and your advisers can plan for an either-or scenario. Take the company public, certainly, if the markets happen to cooperate. But if recent deal valuations drop below an acceptable level, or investor interest in your industry begins to look shaky, then your banker can use his or her influence within the organization to negotiate an interim line of credit (think bridge loan) to tide you over until an IPO can squeak through.
That strategy gained credibility during the fourth quarter of last year. This year marketplace pressures should force all the big underwriters to come up with some alternative like it--even if that means an independent player like Goldman, Sachs needs to ante up its own bridge loan when deals get put on hold.
16. Strategic partnerships aren't just a much-talked-about trend; they're the best alternative for many companies that find themselves either shut out of traditional financing deals or unwilling to swallow the equity valuations or interest charges required to make those deals happen. Cash infusions connected with strategic partnerships are usually much smaller than they might have been with a traditional financing deal (and sometimes investments aren't a factor at all). When a partnership's synergy clicks, however, the resulting growth can often yield far greater capital options later on.
17. Financing international accounts receivable makes a lot of sense for U.S. companies hoping to shelter their cash flow from volatility abroad. Two time-tested methods still work well: international factoring deals, for companies that are willing to pay a fee in return for quick cash infusions without the hassles of collecting receivables; and letters of credit. One caveat here: given the severity of economic problems in some regions--especially in countries like Brazil and Russia--it has become more important than ever to verify the soundness of banks issuing the letters of credit, as well as the financial health of your customers. Rely on your international accounting or legal experts or on your domestic banker for assistance on this one. You (or your foreign customers) may also want to check out a new twist on letters of credit. Some financing institutions will guarantee your company payment within a relatively short time while offering your customers the opportunity to extend their payments for several months or longer. Again, ask your international advisers for leads to reliable financing institutions.
18. International strategic partnerships can pick up the slack for companies whose bankers have gotten anxious about funding corporate activities abroad, especially in emerging markets. An outright infusion of capital from a corporate partner never hurts. Neither does a well-timed introduction to an international banker or private-equity firm that may view your risk/reward ratio more optimistically than cautious U.S. lenders do. Finally, if your company--like many--will need to devote more attention to minding cash flow in 1999, it may help to have a corporate partner in key regions helping you negotiate payment terms and collect receivables promptly.
The Right Contacts
19. Capital intermediaries have been around a long time, and we're the first to admit that they're a mixed bag. Still, a skillful intermediary with valuable contacts at a wide range of capital sources can be, simply, the best friend a business owner has. But do your homework. Talk to absolutely every businessperson you respect (including your team of advisers) and ask each one to recommend an intermediary who typically handles companies similar to yours in size and industry.
When you've generated a short list, ask each intermediary for 10 business references, including satisfied customers, bankers, lawyers, and so forth. Make sure the references include names you recognize (and don't hesitate to check out any that strike you as dubious). We'd like to recommend that you stay away from intermediaries who charge up-front fees, since that's a typical scam technique, but we won't because there are some very credible and successful intermediaries who insist on them.
20. Entrepreneurship programs can be a great way to build valuable financing contacts while also enhancing your business savvy. But you've got to be picky. Two examples of these programs at their best: GE Capital Small Business College, based in Stamford, Conn., runs miniprograms several times each year and can be a great way of introducing small-business owners, especially women and minorities, to its vast array of financing operations; and (at the other end of the spectrum) the in-house entrepreneurship program recently launched by Weiss, Peck & Greer Venture Partners, in San Francisco, which allows a select few to observe the venture-capital decision-making process firsthand (and with any luck improve their prospects for raising financing down the road). Some of the programs are well publicized; others operate on a strictly who-you-know basis. Lawyers, accountants, bankers, and financing intermediaries should be good sources for leads about the programs.
Jill Andresky Fraser is Inc.'s finance editor.