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

Black Enterprise, Jan, 1993 by Kevin D. Thompson

A related question: How much have you invested in the business? Most lenders and investors want to see what other avenues you have pursued to finance your business. Have you exhausted your savings? Borrowed against your home? Who else are you obligated to? If you don't have any of your own money invested in your company, forget about getting a loan or finding an investor. If you don't think your business is worth the risk, why should they?

What Can Go Wrong?

Financing sources want to know that you've really considered--and prepared for--the risks involved in any venture. You should not only know what can go wrong, but you should already have planned what you will do about it to protect their investment.

More often than not, business owners spend too much time gushing about their "innovative" product or service. "That's a business owner," notes Merrill, "who has fallen in love with his product. That means he's no longer objective."

Pitching your business ideas as foolproof will give the impression that either you are ill-informed about your business or that you think your potential financing source is. Either impression will doom your chances of getting the money you want.

The point is, you must know what could trip you up, so that even if you expect the best, you can plan for the worst. Two years ago, Benson says the owner of an independent distributor in Newton, Mass., walked in looking for an SBA-backed guarantee loan. "He was working with a consultant and they had a plan that laid out how the bank would be paid in a worst-case scenario," Benson recalls. "Interestingly enough, things didn't work out. The company was liquidated two years later and we got back everything they said they would give back."

What's In It For Me?

|What's in it for me?' a question on the minds of many entrepreneurs can easily translate to: How and when do I get my money back? It may be hard to believe, but many entrepreneurs who are novices at seeking outside financing are genuinely shocked that financing sources expect to get something in return--and want the specifics of that commitment up front, before any money changes hands.

The business owner seeking capital must be able to clearly state how the financing source will profit from their investment in your company. Again, the answer will vary depending on the source of the money. Commercial loans and other debt instruments want their money back on time and with interest. "Banks do not lend against collateral," says Benson. "That's only a stop gap if we have to collect under extreme circumstances. We never make loans because the collateral is great. We make loans because the cash flow is going to be there."

Venture capitalists expect a guarantee of a high return on investment (at least 20%), and may expect you to either go public or be made attractive enough to be bought by another company in order to realize that return. Meanwhile, they'll want an equity stake as well as representation on your board of directors. Says ERC's Drummond: "They want to control the entrepreneur so he doesn't run out and buy a Rolls Royce the first time he gets financing."