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About Smoke signals. (Grand Ronde, Or.) 19??-current | View Entire Issue (March 15, 1999)
Smoke Signals 8 Whatto do when the bank says AWb!f Many companies fail in their search for the capital they need to grow simply because the approach the wrong sources. Why Banks Say No A bank usually won't lend a fledg ling business the money it needs for growth because that's not the "deal" it has made with its depositors. Banks can make loans only in situ ations where their money is safe and repayment almost certain-to estab lish companies that can repay the loan from cash flow or, if necessary, from the sale of assets. If a young company is lucky enough to get a bank loan, it will only be with strings attached. Loan payments must be paid each month. Companies, though, typically book new business at a random pace. Many companies simply aren't yet in a position to take on the financial burden of fixed monthly payments. Better Alternatives , Among the top tried-and-true ways of getting a new business of the ground is with the support of family and friends. With very short busi-( ness track records, new entrepre neurs often have little choice other than asking people close to them for loans or equity investments. The terms for such arrangements are limitless, depending on the fi nancial status of the lenders or in vestors ...and hisher level of confi dence in the new company's pros pects. More well-established small busi ness networking should seek sup port from outside equity investors. Like family members and friends, equity investors have a focus that is much closer to the entrepreneur's. They will stick with companies they've invested in in order to get their investment back or to sell out to other investors who will pay them substantially more than they origi nally put into the business. Equity financing comes in many different forms, ad companies must decide what type is right for their business. Sources of equity capital for amounts of $25,000 to $1 mil lion include... 1 Angels. They are wealthy indi vidual investors working alone or in loose confederacies to invest in small businesses that show excellent growth potential. 2 Public venture capital. This is money raised by stock sales to the public in initial public offerings or direct public offerings. Institutional venture capital firms, which are partnerships that manage and invest a pool of money and are O Small businesses can pursue a variety of alternatives to get the financing they need. often quite large, will sometimes in vest large amounts, range to $250,000 to $15 million. Institu tional venture capital is an ex tremely limited source of funding that is appropriate for very few companies. Blessings from Angels For most smaller businesses, eq uity capital from angels is the opti mal form of financing. Reasons for preferring it... 1 Money from angels is the most, abundant source of capital avail able to smaller borrowers. Despite what you read about venture capi talists, merchant bankers and in vestment bankers, for the majority' of small businesses-perhaps as many as 90 of them- angel inves tors represent the most viable and appropriate way to go. 2 The amount of capital needed for , early stage businesses, typically ' $250,00 to $5 million, matches the commitments that angels like to make. Often they may invest in sev eral different businesses that inter est them or that match their own business expertise. 3 Angels add value because they can provide contacts as well as strategic planning assistance that growing companies need. Usually they invest for reasons that are not purely economic. They like your business and want to help make it a success. They may want a job with you. meet to evaluate the company and the deal, in front of the entrepreneur who authored the business plan. There is lively audience participa tion, with questions and answers that provide excellent feedback. The end result is decision to move forward with investment in the new company... or to move on to another candidate. 2 Venture capital clubs. These are groups of private investors who meet on a regular basis to hear formal presentations from entrepre neurs seeking capital. Often these investors own companies themselves, but are eager to invest in others. Or they may be retired executives with large sums to invest. Typically, clubs solicit business plans that are reviewed by a screen ing committee that is often affiliated with a university or an economic de velopment council. Selected entre preneurs are then invited to spend ' between 10 and 30 minutes present ing their business plan to member. How to find Angels They are literally everywhere, and today there are many ways to ac cess... 1 Venture capital forums. These are often sponsored by Chambers of Commerce, economic development coalitions, publishers and professional services organiza tions such as law firms and account ing firms. You can attend and mingle with potential investors by paying a nominal fee of $14 to $50. Forums are also found around col leges and universities. Example: The MIT Enterprise Fo rum, Inc. (Web site: htlpi web.mit.eduentforumwww) now operates in 14 US cities. At its fo rums, a panel of professional ven ture capitalists-who have read a promising business plan in advance- ...and Other Sources Even if your plan is not selected, the people who reviewed it can of ten suggest other possible sources... 1 Private capital networks. These are electronic matching services designed to bring angels or venture capital firms together with entrepreneurs with similar needs and preferences. Most have an af filiation with a university or an eco nomic development council. How they work: Private investors register with the network, providing detailed information on their pref erences for certain industries or tech nologies, deal size, geographic loca tion, willingness to coinvest with oth ers, stage of development, hands-on involvement, etc. For a fee of $100 to $500, entrepreneurs can register a summary of their business plan and financial needs. Network administrators match companies with investors and notify both how to contact each other. En trepreneurs can keep their compa nies on the network for six months to a year and can periodically up date their information. 2ACE-Net. ACE-net (Web site: http:ace-net.sr.unh.edu) is one of the most promising capital-formation tools ever to emerge in the US. It is a private capital network, na tional in scope, designed to match entrepreneurs with accredited indi vidual investors. It was developed by several private venture capital networks and the Small Business Administration, with assistance from the Securities & Exchange Commission and state securities regulators. More Creative Financing Sources 1 Community loan-development funds. These are non profit groups staffed by community and business leaders.. .sponsored by churches... private citizens or, some times, banks. They make small, community-based loans aimed' at at tracting jobs. They can go where banks fear to go. . ' For information on, where to locate a fund, visit the Web site of the Na tional Community Capital Associa tion (www.communitycapital.org). 2 Put your business in an in cubator. There are more than 500 so-called incubators organi zations that offer small business cli ents financial and professional as sistance that typically includes flex ible space and leases... orchestrated exposure to various kinds of consult ants and university resources.. .and entree to new business opportuni ties through cooperative ventures with other incubator clients. Re search this option by visiting the National Incubation Association's Web site (www.nbia.org). Reprinted in part from Bottom Line Business, March 1999, interview with David R. Evanson, author of Where To Go When The Bank Says No. Tribal Resource For your small business needs, please call the Tribe's Small Business Development Division at 879-2476 or 1-800-422-0232. The SBD staff can help you with your business plan, financing, tax preparation, research, and much more! Find out more about what the Tribe can do for you and your business. Call today!
