How-To Get That Capital!

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created for ARC/MBP by the 13th Warrior

Real Business Development

en-tre-pre-neur: a person who organizes and manages any enterprise, esp. a business, usually with considerable initiative and risk...

Virtually anyone can manage an enterprise, but true entrepreneurs do it with initiative and risk - their hallmarks. Financing your business is no different. When the going gets tough, improvise!

There are many ways to get the financing you need to get your business either up and running, or expanded. However, there is one step that is crucial to all of them: a good business plan is the best tool you can have to get the money you need. Period. Even friends and family will be more favorably disposed to lending you money if you have one. Your chances of getting the capital you're looking for are Slim to None without one. And Slim left town. So before you go looking, make sure that you have a good plan that identifies several things:

how-to-get-that-capital Who's the management team, and what makes them so great. Investors will invest in an "A" manager with a "B" product over a "B" manager with an "A" product seven days a week. Make sure you show that your team has the experience, education, accomplishment, goals, creativity, and enthusiasm to make the project a success. If you don't have it, get it.

how-to-get-that-capital How much do you need, and precisely how it will be used? How much have you already invested?

how-to-get-that-capital How will you pay the money back? The investor usually desires a 40% IRR on their investment, and a sizable chunk of your business. Don't be afraid to give up a majority of your company - if it fails, you don't want it anyway. If it's successful, you can negotiate a favorable buy-back clause. Investors look to your future payment capability, banks look at your past payment history.

how-to-get-that-capital What makes your product or service truly unique? If it isn't, make it.

how-to-get-that-capital What's the size of your market? Who are your customers and competition?

Many more things are needed to produce a good plan, especially hard (home) work and research. Make no mistake, the rewards are far greater in the long term than the short term. Sacrifice is needed to develop it. It's also prudent to have a consultant professionally review your plan - two heads are better than one.        

Now that you have a great plan, how do you use it? The most important use of a plan is internal - keeping tabs on your progress. The next most popular use? Showing it to people with money who are looking to invest in companies like yours. Though $3 billion of venture capital finds its way into eager entrepreneur's hands, only 1 percent of all deals get funded - they have the best business plans, they identify investors who would be interested in looking at their particular project, and they court them (be prepared to spend the time necessary to get the capital you need).

For those of you who aren't prepared to go through a venture capitalist, or have been turned down by your bank, take heart. There are many ways you can get the money you need. Here are a few:

how-to-get-that-capital Go the SBA Way - The Small Business Administration has a $5 billion fund that is distributed as guarantees made on loans through local banks, and as direct loans. Keep in mind that typically, the bank is making the loan, and the SBA is essentially the co-signer, with you providing a personal guarantee. You'll need to prepare some 10-12 pages of documentation and make presentations to the loan officer and/or the loan committee. This information is usually taken verbatim from your business plan. Show that to them too... There are several different SBA loan programs, ask your banker for assistance.

how-to-get-that-capital Hello, Visa? - If you've been leery about paying 19% interest on your money, but are getting desperate for capital, you can always limit out your credit cards (or get new ones - mail out 30 applications at once so the inquiries don't show...), get one of those "pre-authorized" loans, or mortgage your house. Granted, making 10% gross profit margin on 18% interest expense isn't attractive, but it gives you the short term capital you need. Just pay them off as quickly as possible.

how-to-get-that-capital Sell! Sell! Sell! - Nobody said being an entrepreneur was glamorous. Got a six-year old Cadillac? Sell it, then lease an Escort for $149 a month (with no money down). Anything else of value? Art, sports equipment, coin/stamp/baseball card collections, Star Trek paraphernalia, antiques, old clothes - whatever you have that isn't essential to your existence is a source of cheap capital.

how-to-get-that-capital The Information Superhighway - Can you think of a better way to find leads than accessing 50 million people with a common interest? With that many people on the Internet, and other on-line services, there are a multitude of routes available to find the money you're looking for: databases of other companies looking for cash that investors regularly frequent; databases of investors looking for projects; check out the hundreds of "small business", "entrepreneurial" or other pertinent forums. Seek and ye shall find.

how-to-get-that-capital Bond, Corporate Bond - Actually, not a real corporate bond (of course, if you can do it, why not?). One enterprising young man, upon graduating from college, developed a business plan on his future, then sold bonds to all his family and friends (at $5000 each), and used the money to start his business, using himself as collateral. Risking slavery, he now has a thriving laundromat company (with eight locations). Go figure.

how-to-get-that-capital It's Your Life - Insurance. If you've had a whole life policy for at least 3-5 years, you should have some cash value that you can borrow. As long as you keep paying the premiums, most companies will loan you 90% of that value,and keep your policy in force. The rates are usually better than what credit cards and/or banks offer.

how-to-get-that-capital Can You Say "SBIR"? - Eleven governmental agencies participate in the Small Business Innovation Research program, providing billions of dollars to companies that compete for federal R&D awards, and the resulting commercialization benefits. Phase I provides up to $100,000 (over six months) to companies to evaluate the technical merit and feasibility of an idea. Phase II awards up to $750,000 to build upon Phase I results, and get your product ready for market introduction. For Phase III, you're on your own. However, with previous Phase I &II backing, and the government's support, your chances for getting the capital necessary to produce and market your idea are much greater. Contact the SBA for details.

how-to-get-that-capital Get Married - To a corporate partner. Other companies that are already in the trenches are eager to find new ideas to help make them money. However, you must be willing to share some authority, know exactly what you want from the relationship, and find someone who's successfully partnered before. The most popular method is to license your patented idea for an up front fee and a royalty. If someone makes you an attractive offer - TAKE IT - and use the money to do something else. Never forget that a bird in the hand is better than two in the bush.

how-to-get-that-capital Factor This... - If you've got receivables, and need quick cash to satisfy them, any number of banks, financial institutions, or private investors would be happy to buy your purchase orders. You get your cash up front, and they collect the full amount of the receivables from your creditors. Expect 75%-90% up front, with the remainder (minus 3%-10%) when the monies are collected. This is mankind's second oldest profession, and it works.

how-to-get-that-capital The Public Has a Right - To own your stock. If you've got a really hot idea, and can show a history of accomplishment, then either do a Private Placement Memorandum (PPM) of your stock, do an Initial Public Offering (IPO), or do a Small Company Offering Registration (SCOR). The PPM will find several investors to buy into your company, the IPO will find many. A SCOR will let you get up to $1 million, by selling your stock to many people, without going through the expensive and tough Securities and Exchange Commission (SEC) hassles. However, SCORs aren't legal in Florida - but they're working on it, and you may be able to go through other states. Be prepared to let someone else run your business while you're going through any of these processes - it takes that much time and effort.

These by no means exhaust the possibilities open to you to secure appropriate financing. You are only limited by your imagination, and your efforts. Many people out there are willing to risk a significant portion of their money, because you're willing to risk a significant portion of your life. Make no mistake, it's a tough road. You (and your family) must be prepared to make some short term sacrifices in order for you to make your business work. Take the time now to do a good business plan, identify your best sources of capital, and go for it. Good luck!

(Published in the 1995 Orlando Business Journal's Business Survival Guide)

Copyright © 1995 - Rupert L. A. Meghnot


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