Where to look for nest eggs to hatch your enterprise soundly
Barbara O'Brien ``bootstrapped'' her dollhouse curtainmaking business in South Weymouth, Mass., starting with $1,000. Other small businesses also start out with money begged or borrowed from friends, relatives, or insurance policies, or culled from second home mortgages.
But there comes a time when you just can't grow fast enough -- and you need to borrow money. And that's what happened to Mrs. O'Brien.
She needed $5,000 to keep her contract workers busy sewing and blocking the miniature curtains during the slow season. Instead of exhausting her stock after a New York trade show, where she writes quite a few orders, she would have enough finished curtains to ship out immediately after the show.
With several 90-day loans from her banker, she filled twice as many orders in the two months after this year's show as she did last year -- and her profits went up, too.
Mrs. O'Brien advises developing a relationship with your banker. ``I think the smaller banks are more neighborly,'' she says. ``You can work out a relationship with the president or one of the officers.''
Let your banker see how well your business is doing before you need money. Set up a line of credit before you really need it.
For a growing business, a good banker is indispensable. As well as lending you money to keep the business growing, he can give you some good advice on business problems.
In general, a young company may get money from two different kinds of sources. They are divided into debt (loans) and equity (selling part of your company). Which kind should you tap?
If your company is strapped for cash but is growing fast and has a high gross profit margin (high markup), it could be a good candidate for venture-capital funding, says David Gumpert, associate editor of the Harvard Business Review in Boston and co-author of ``Business Plans That Win $$$'' (Harper & Row, New York, $19.95).
When venture capitalists lend money, however, they are actually buying part of your company in hopes of a 35 to 65 percent compounded annual return within four to seven years. They expect to have some say in how your company is managed. Although some entrepreneurs appreciate the help in solving business problems, others don't like to share control of their company.
Borrowing money from a bank can keep you a little more independent. Banks, although also very interested in how well you do, mainly want to know if you can pay back the loan or to know what they can sell to get their money back if you can't pay it off.
Sometimes you can borrow small amounts for the short term if you have good personal or business credit. But you often need tangible assets as collateral to borrow from a bank, such as personal real estate, receivables, inventory, and production machinery. And you do need a more positive cash flow to cover the loan payments.
The Small Business Administration lowers a bank's exposure with its guaranteed loan program, says Anina Liberty, a financial consultant to small business, in Charlestown, Mass. It guarantees up to 90 percent of the loan. This helps young companies that, without the guarantee, have been turned down several times before by banks.
Small-business investment corporations (SBICs) are federally licensed but privately owned. They lend to or invest in small companies for the long term. The federal government guarantees an appreciable part of the loans.
Your suppliers can also help finance your business with trade credit. After you pay cash for several shipments of raw materials, ask if you can open an account with them. This usually puts off the day of reckoning at least 30 days. If you promise them a certain level of trade, you may be able to get more days or a deeper discount, Ms. Liberty says.
What stage is your company in now? Do you just have an idea for a company, or do you have an up-and-running, profitable firm? If your low-tech company is only an idea, your own savings, friends, family, insurance policies, or second home mortgages are about the only sources available to you.
But the federal government will fund research for some ventures through the three-year-old Small Business Innovation Research Act. ``Every department of the federal government has an R&D budget they need to give out,'' says Daniel E. Geffken, audit manager of the small-business high-tech practice group at Peat, Marwick, Mitchell & Co. in Burlington, Mass. Five percent of their budgets, totaling an estimated $450 million in 1987, must be spent on R&D, he says.
Companies receiving these grants must have fewer than 500 employees and be independent -- and should not be a division of another company.
Up to $50,000 is available to about 1 out of 10 companies submitting idea proposals in Phase 1, and up to half a million is available in Phase 2 to further develop the product. By Phase 3, it is generally expected that the company will be able to get financing from private sources.
Are you past the prototype stage but not yet in production? You might seek money from informal investors. These investors will often be available for smaller amounts of money, $10,000 to $100,000, says Mr. Gumpert, unlike many venture-capital firms, which are not even interested unless they can invest at least a million.
Most informal investors like to invest within 50 miles of their homes and are difficult to find, since most are wealthy and like their privacy. A banker, financial planner, or accountant with well-to-do clients may be able to help find these people.
If your product is in production but you have few customers, you may be able to interest an early-stage venture-capital firm in investing. Be sure to pick one that usually invests in your industry, says Mr. Gumpert, and don't just send out your business plan cold. Ask your banker or accountant, or a friend of a friend, to introduce you. Or meet such people at how-to-get-financing seminars or at Massachusetts Institute of Technology enterprise forums, where small-business owners go to present their business plans. These forums, expanding from the original in Cambridge, Mass., are in operation in nine large American cities.
Venture capitalists expect their money back within four to seven years, so be sure to provide some way in your business plan for them to cash out. You could plan to go public or be acquired by a larger company a few years down the road.
Profitable businesses may be able to borrow up to 80 percent on their receivables or inventory from banks or finance companies.
Venture capitalists may also be interested in your up-and-running company, but by that stage you will have to see a very big benefit to you from the faster growth to make up for giving up part of your company.