Financing an enterprise can be both confusing and exasperating. If you’re a beginner in the subject, you may feel lost in not knowing the “lingo.” If you have years of experience, you may find yourself needing a “refresher.” The following section sets out some sources for finding money and is meant to spark your thinking process. Entrepreneurs need to be creative, but sometimes we need a jumpstart to help us get going.
Equity Types and Sources
PERSONAL
Savings
Credit Cards
Sell Assets (boats, hobby equip)
2nd Mortgage
FAMILY & FRIENDS
Personal Investments – They invest because they know you and TRUST you
Debt (convertible) or equity
Acquaintances
ANGELS — Individual private investors are commonly and affectionately known as “angels.” and “White-Knights.” Along with family and friends, they provide the vast majority of start-up funding for entrepreneurial companies. They may invest in either debt or equity or combinations.
What they look like:
90% male, ages=40-60, masters/advanced degrees, prior start-up experience, income $100-$250k, invest 2 ˝ times a year, $25k-50k per deal-$130k tot, seldom invest in more than 10% of a deal, they seek 20% compounded per annum returns, they expect to hold their investment for 5-7 yrs, prefer manufacturing and product companies, they like to invest in technology they know, prefer start-ups, dislike moderate growth, like a consulting or board of advisor position with the company, they like to invest with others and prefer to invest close to home (50-300 miles), their motivation is a high rate of return, they learn about deals from friends, 30% from accountants or attorneys, they would like to see more deals, and they refer deals to other private investors.
Where to find them: network-network-network
Ask for referrals, use calling card file, spread the word–“have plan/will travel” anybody, anytime, anyplace. Make contact with attorneys, accountants, management consultants, customers, employees, doctors, dentists, investment bankers (pay fees). Networking is hard work.
How to present to them:
You need one page brief (2-4 page) executive summary, and full business plan. Most important, one minute pitch, 3 minute pitch, 15-20 minute presentation with visuals. Objective is to get one-on-one with investment decision maker.
For more information on Angels see: NetNews
EMPLOYEES
Many entrepreneurs overlook the possibility of obtaining investment in either debt or equity from their existing and prospective employees.
VENTURE CAPITAL
Venture capital investment firms have some very tough qualifications for their investments.
Top Management Team
Very Fast Growth (minimum zero to $20 million in 4-5 years)
Large Market Potential ($50-$100 million plus in revenues)
Larger Capital Needs
Tough Due-diligence
INVESTMENT BANKERS
Function as Agents or Advisors
Can find dollars from many different sources
Can assemble unique investment structures
Can ID strategic partners
Good experienced deal makers
MERCHANT BANKERS
Basically same as Investment bankers except frequently supply some of their own money.
STRATEGIC PARTNERS/ALLIANCES
Advances – royalty/licenses, R&D, manufacturing, distributing, marketing
Equity – options/warrants
Debt – subordinated/convertible
Debt Types and Sources
BANKS – Savings and Loans – Credit Unions
Place secured short, or medium-term loans
What they Finance What they look for
Working capital
Need some Equity
Lines of Credit
Personal Guarantees
Accounts Receivable
Plant & Property
COMMERCIAL FINANCE COMPANIES
What are they?
assets based lenders, more aggressive than banks
How do they differ from banks?
quicker processing, higher rates
What do they finance?
receivables, some inventory
LEASING FIRMS
Types, equip, VCs
How to use them
SBA
Large variety of programs
Basic programs
Approved lenders (Money Store)
Examples of lessor known
Low Doc
Handicap Assistance
What they finance
Plant & property
GOVERNMENT SOURCES
BDCs
SBICs
MESBICs
SBIRs
Grants – local, state, federal, private, foundations ($100 Billion annually)
Farmers Home Administration
Export-Import Bank
Incubators
Industrial Development Bonds
Enterprise Zones
SUPPLIERS
Floor planning
Extended Terms
Special discounts
EQUIPMENT MANUFACTURERS
Lease programs in place
Extended terms
FACTORS – deep discounts
Raw materials
Finished inventory
Accounts receivable
SOURCES of FINANCING HINTS
There are many “source guide books” and listings available. An Internet search or good libraries have numerous listing books for banks, venture capital firms, asset based lenders, investment and merchant bankers, leasing firms, commercial lenders, factors, venture capital clubs, and “Million Dollar Directories” for determining strategic alliances. There are several CD-ROM and diskette providers of financing source databases. You should also inquire with your city, county and states’ departments of economic development. See your local Small Business Administration (SBA) for information on their many programs.
Finally, see the “Sources of Everything” appendix in The McGraw-Hill Guide to Writing a High-Impact Business Plan book.
A Final Financing Note
The secret to successful entrepreneurial financing is that it takes COMBINATIONS ! Combinations of debt and equity and different time periods in the ongoing life of any enterprise.
And the secret to successfully operating a entrepreneurial company is to pay constant, unrelenting attention to:
Cashflow
Accounts Receivable
Accounts Payable
Inventory Control
For additional, more detailed information on the preceding entrepreneurial financing methods, click “Books.”
For information on writing a business plan (including an outline), click “Business Plans”
For information on Private Offerings, click “Private Offerings”.
For information on Going Public, click “Going Public”.
For information on Reverse Mergers, click “Reverse Mergers”.
For information on Internet Direct Public Offerings (DPOs), click “DPOs”.