It May Not Grow on Trees, but Finding Money Can Be Simple
For many people trying to open a small business or expand one, the pursuit of capital becomes an obsession. But the problem may be that they are asking the wrong people for money.
“This country has millions and billions of dollars available to anyone who needs it,” proclaims Bruce Blechman, founder of the Capital Institute in San Mateo, Calif. “The problem is that there is not enough information about how to get the capital.”
Blechman, who has worked as a stockbroker and investment banker, set up his company to help small-business owners find investment or start-up funds. He compares himself to a traffic cop who can direct business owners to the right source of money. In most cases, he steers clients away from bankers and venture capitalists, turning them instead toward private investors, fellow business owners, receivable lenders and other non-traditional sources of money.
But before you ask anyone for money, Blechman suggests taking a hard look at your business plan. He said he is shocked at the number of plans he sees that are not only riddled with misspellings and typographical errors but written from the wrong point of view.
“Ninety-nine percent of business plans fail to attract money because they are written from the owner’s point of view rather than the investor’s,” said Blechman.
One of the first things he does for a client is to rewrite his or her business plan to portray the company as an attractive investment.
This is accomplished by stressing the company’s assets rather than liabilities. Contracts, patents, invoices, back orders, receivables, equipment and leases are among the most obvious assets. But Blechman reminds business owners to list such things as Oriental rugs or paintings, company-owned cars and even country club memberships.
Once all assets are listed, Blechman takes an honest look at the liabilities, including credit rating and any bankruptcy or criminal charges. These have to be included but not emphasized, he said.
When the plan has been rewritten to answer all questions a potential investor may have, Blechman suggests making a list of all possible sources of money. Many of his clients have borrowed successfully from private individuals who are accessible through their attorneys or accountants.
His firm currently focuses on helping companies in Northern California but it is expanding to Southern California.
Most entrepreneurs wrongly assume that venture capitalists provide the main source of money for new businesses. In fact, private investors far exceed the $30 billion invested by venture capitalists each year, according to Robert Gaston, author of “Finding Private Venture Capital for Your Firm,” published by John Wiley & Sons.
For short-term financial relief, Blechman suggests turning to what is called a receivable lender. These companies lend money based on the amount of money that people owe you. Some lenders will assume the full risk of collecting the receivables; others will require you to collect the money.
Many finance companies will lend up to 80% of the value of your receivables that are no older than 90 days, Blechman said. He said financing receivables is a good way to fuel a fast-growing company because it allows sales revenue to be put back into the company immediately.
Financing your equipment rather than buying it outright is another way to free up capital for other uses. If possible, Blechman suggests selling major pieces of equipment to a leasing company for cash and then leasing it back.
“Creditors and customers are often overlooked as sources of financing,” Blechman said. He said it is not uncommon for creditors to work with or invest in a business in exchange for shares. Customers may also be interested in providing capital.
Blechman has another interesting financing suggestion involving the purchase of a zero coupon bond, which is a bond sold at a discount because it pays no interest.
If your company needs $700,000 to expand or pay debts, go to private investors and raise $1 million. You can guarantee your investors that they will be repaid the $1 million in 10 years when the bond matures.
Then, the business owner buys a zero coupon bond for about $300,000, which will be worth in the neighborhood of $1 million when it matures, leaving $700,000 to spend on the business. This transaction has various tax consequences, so you should consult an accountant for further details.
Books List Sources for Capital
Every year, dozens of books promising to help small-business owners raise money flood the bookstores. Two of the better ones, both published by John Wiley & Sons, are “Free Money For Small Businesses and Entrepreneurs,” by Laurie Blum and “Start-Up Money,” by Jennifer Lindsey.
“Free Money” provides a nationwide directory of foundations and trusts set up to give away money for a variety of purposes. There is money out there to renovate historic buildings or to host a business conference. There are federal grants available for companies exploring non-nuclear energy sources and money available to promote soil conservation techniques. Many funding sources are regional or limited to residents of one state, but the listings and information cover most parts of the country. Blum, a professional fund-raiser, also provides a sample proposal and tips on how to ask for funding. The 227-page paperback costs $14.95.
“Start-Up Money” is a comprehensive guide to the sources of capital and where to find them. Lindsey contends that many small businesses have trouble finding financing because they are involved in the service sector of the economy rather than manufacturing.
“Lenders and debt investors avoid financing service start-ups because they lack tangible output, as measured in the goods-producing industries,” writes Lindsey. “Their collateral, measured in brains, talent and creativity, isn’t considered bankable.”
Her book contains a detailed listing of funding sources, trade associations and a glossary of key financial terms. The 239-page book costs $17.95. Both books can be ordered from John Wiley, 605 Third Ave., New York City, New York 10158.
77% of New Firms Succeed
A three-year, nationwide study of about 3,000 new businesses surprisingly revealed that 77% of them succeed.
“This study helps debunk the myth that most new businesses fail,” said Barbara Barsa, vice president of small-business services at American Express.
The study, released earlier this week, was commissioned by American Express and the National Federation of Independent Business.
Three years after opening their small businesses, more than 90% of the owners said they would go into business for themselves again. Sixty-four percent said their level of personal satisfaction equaled or exceeded their initial expectations.
The study found that businesses with an initial investment of more than $50,000 experienced an 84% survival rate after three years. But 74% of the businesses that started with less than $20,000 also succeeded.
Hard work is essential to the success of a small business. The study found that 80% of the owners who worked between 60 and 69 hours a week remained in business after three years. The survival rate for those working fewer hours than 60 was 76%.
The survey, titled “Profiles of Success,” also found that successful entrepreneurs are more interested in the quality of their lives and their family’s future than making a lot of money. Seventy-eight percent said having greater control over their life was an important factor in starting their business. The firms were surveyed in May of 1985, 1986 and 1987.
