Facing tough times on the money trail - business financing; includes related article

Black Enterprise, Jan, 1993 by Kevin D. Thompson

Small business loan applications are often rejected faster than you can say "Next." Unfortunately, most black business owners have become conditioned to leaving a bank or venture capital office the same way they walked in--with empty pockets.

Philip Davis remembers the tough time he had finding investors for his product--a children's deodorant called Fun 'n Fresh for girls and Cool 'n Fresh for boys. "I approached close to 3,000 people and I got a variety of reactions," recalls Davis, president of 5-year-old BertSherm Products Inc. in Cleveland. "I got laughed at and people thought the idea was silly. They were also uncomfortable with the level of risk."

Davis now has 41 investors in his company, which is projected to gross $600,000 in revenue in 1992. Says he: "Investors want to know what that competitive edge is. And you have to be willing to expend a lot of time and energy in telling your story."

The credit crunch has forced banks, investors, credit unions and the government to become more discriminate with their dollars. For example, according to Venture Economics Publishing Co., a Newark, N.J.-based company that tracks the venture capital industry, 1991 disbursement dropped 41% to $1.4 billion, from $2.3 billion in 1990. Tight credit, however, is not the only reason most African-American entrepreneurs have a better chance of hitting a $20 million lottery than getting a $20,000 loan. Despite economic hard times, the fact of the matter is, banks are still making loans and investors are still investing billions of dollars in small businesses each year. Somebody's getting all that money.

Davis and other business owners who have successfully secured financing have one thing in common: They are prepared to answer every key question that any provider of cash will ask. Those questions are answered in the entrepreneur's business plan, finance proposal and during those face-to-face negotiations that usually determine whether money will be forked over. Even though capital is hard to come by, many black business owners walk away empty-handed because their loan proposal or oral presentation was weak--not because the money wasn't available.

It's true that the needs of loan officers, investors and government agencies differ. However, there are some basic questions that every financier will ask. Being prepared to specifically answer those questions--both verbally and in writing--will greatly improve your chances of getting the financing you need. Below are the most frequently asked questions during a business owner's quest for capital.

What Are Your Company's Objectives?

A goal-orientation must be demonstrated if you expect to attract capital and establish banking and, ultimately, long-term lending relationships. Investors need to know that there is a clear, well-thoughtout mission for the business. The first step toward defining that mission is creating and following a written business plan. This may seem obvious, but studies by major accounting firms show that 80% of the nation's businesses operate without a business plan.

Everything communicated by you and other representatives of your company, whether verbally or through your finance proposal, must be consistent with your business plan. Your business plan should describe the products or services you plan to bring to market, as well as how you expect to get them there. In it you must detail your business premise, the quality and composition of your management, a marketing plan, methods of production and operation and current fiscal position. Your plan should clearly detail your knowledge of the industry and your company's place in it. It's also your chance to establish your competitive edge--whatever it is that makes your product or service viable to the marketplace, and, therefore, potentially profitable.

Your plan should be clear, concise, thorough and professionally done. Remember, it must stand up to the scrutiny of loan officers, potential investors, and their analysts, attorneys and accountants. (See "How To Write A Winning Business Plan," BE Special Report On Small Business, Nov. 1992.) Without a good business plan, it's impossible to raise money. In fact, you won't even be able to get an appointment with most loan and investment sources.

Who Are You?

Surprisingly, many black business owners can't answer this--or fail to understand the underlying question: "So it's a great idea--why should I believe you can pull it off?"

Despite the necessity of a solid business plan, people don't invest in ideas or business proposals; they invest in people. Melvin E. Benson, senior vice president and senior loan officer for the Boston Bank of Commerce, says it's not enough to just bring a fancy resume and cash flow projections to loan officers. "The person should be able to bring a sense of what they're about as an individual," notes Benson, whose bank is ranked No. 15 on the BE FINANCIALS LIST. "They may be asking for a business loan, but we loan to individuals."

Investment sources share that sentiment. According to Lancelot E. Drummond, Chairman and CEO of Economic Resources Corp. (ERC), a Los Angeles-based venture capital firm, "One of the first things venture capitalists look at in a proposal is the industry information. Then they look at the knowledge and expertise of the entrepreneur."