Financing the small business

New Mexico Business Journal, Feb, 1997 by Charles Poling

To raise capital, you have two basic choices, debt or equity. Equity capital is money you raise from investors or business partners, perhaps through selling stock. Debt is - well, you know what debt is: a loan from a bank, savings and loan, credit union, development company, or even family and friends.

Steven Bercerra, director of the South Valley Small Business Development Center in Albuquerque, talks about the conventional and unconventional sources of capital. Conventional sources are banks. Among the options with banks are loans guaranteed by the U.S. Small Business Administration. The SBA guarantee allows a bank or other lender to offer longer terms on loans normally up to $750,000. The unconventional sources, which may be willing to take bigger risks than the bankers do, include organizations like Accion of New Mexico, New Mexico Community Development Loan Fund, and the Women's Economic Self-Sufficiency Team, Inc. (WESST Corp.).

Whichever approach you choose, keep a few things in mind. Before anyone gives you money, they will want to know a lot about you, about your business, and about your prospects. Investor, lender, banker, or friend, each is risking money on your ability to turn a profit. "You are living off their loaf of bread," says Sherman McCorkle, president of Technology Ventures Corporation, which helps investors and technology-related entrepreneurs get together. Think about what it would take to persuade you to part with your money, he adds.

Make Your Case

You must have a business plan, or a business case, as McCorkle calls it. A former banker, he waves off the charge that New Mexico is a dry state in terms of venture capital. "There's a lack of valid, verifiable, clear, comprehensive business cases," he counters. "If you have one, capital will find its way to you. But if you have a keen idea and only six or eight pages of a pseudobusiness plan, no credible investor is going to spend much time with you."

Bercerra agrees. "We can't push that enough," says Bercerra. "It shows that you know where you are going and that you have a methodical way of doing it." Yet he finds that most small businesses in New Mexico don't have a plan, and he blames the high percentage of business failures on that shortcoming.

In the plan, describe your business, its history, your marketing plan and your financial plan. Provide a biography of the principals and key personnel. Describe the management structure. Give your credit background and describe any guaranty or collateral arrangements. You should also include at least three years of tax returns, a personal financial statement and financial projections. Describe the market and the competition. Include supporting documents for your list of assets and liabilities and any pertinent contracts (You'll find several snazzy, fill-in-the-blanks business-plan programs at your friendly, neighborhood software shop). Commercial loan officer Patty Groth of Sunwest Bank also suggests getting your credit report to check for any blemishes before you sit down with a loan officer.

McCorkle, who deals in the technical sector, likes to see considerable detail in a business case, including today's financial statement and three years of monthly financials, with income, expenses, salaries and so forth, then quarterly detail for years four and five. "You have to do your homework," he warns. Finally, create a presentation that flows and makes sense. "It's going to take six months. If you don't have that level of dedication, you're playing in the wrong arena."

"We explain to small business owners that there is a critical need for them to keep current and accurate financial information," says Emerson Hall, Southwest regional vice president for GE Capital Small Business Finance Corporation. GE is a non-bank lender of SBA-guaranteed loans, with several million dollars loaned out to New Mexico companies. "If we can get a clear picture of the financial health of the business, we know what we can and cannot do with that business."

And if you're seeking capital from investors, you need to provide what McCorkle calls the "exit strategy" - when and how they'll get their money back and the anticipated percentage of return.

Raise Money by Borrowing

If a borrower you'll be, your first stop might be the bank. Bring your business plan and be prepared to show how you'll pay back the loan if your business stumbles. "What do you have to fall back on if your projections don't pan out?" Groth asks. "That's the biggest trouble with start-ups, Often people will quit their jobs to start a new business and they don't have an income stream right off." So figure out how you might pay off the loan if your business cash flow starts to trickle: it might be a second job or your spouse's income, or it might be collateral.

Groth says banks also want the borrower to have something at stake themselves, either money or collateral. SBA-guaranteed loans require 25 percent down for most businesses; for existing businesses, they require a debt to equity ratio of 3 to 1. Hall, of GE Capital, weighs five factors in a prospective borrower: Equity, cash flow, management experience, collateral and personal credit. Weaknesses in one area may be counterbalanced by other strengths. But in any case, he emphasizes cash flow projections need tangible documentation. And business owners should pump their own cash back into the business.