In a stressful economy, it is not uncommon to hear that many organizations are expressing frustrations with their inability to acquire loans from banks.

However, while the banks have tightened underwriting criteria, it is also important to take into consideration that the banks are federally regulated, and are prohibited from engaging in risky investments.

Whereas most business owners do not believe their business would be considered “risky,” it is not uncommon for owners to have a faulty strategic plan that is built upon several years of financial loss. In reality, posting losses year after year is not a “smart” tax strategy, but a faulty foundation for building your business.

Ultimately, an organization’s financial statements are the primary determinant for a bank in assessing a loan application. Speak with your accounting professional about a long-term financial strategy that understands that your business is like most businesses, and may require bank financing in the future.

Businesses that plan ahead have a much easier time obtaining the financing they need, when they need it.

# # #

ALTERNATIVE SOURCES OF CAPITAL FOR YOUR BUSINESS                                                                         

As recently reported in the Wall Street Journal, only half of small businesses that tried to borrow last year got all or most of what they needed. In the mid 2000’s, 90% of businesses said they got the loans they needed. That’s no surprise if you happen to be a small business looking for a loan or increase in your credit line.

Banks are taking a much harder stance on extending credit in the wake of billions in loan write-offs and continuing economic uncertainty. While the Federal government tries different ways to jumpstart commercial lending, there are alternative sources of capital available to businesses.

The first is private equity, which as the name implies are private investment funds that lend money to businesses. Lending criteria for private equity is typically less stringent than a traditional bank, however businesses still need to demonstrate an ability to repay the loan. Private equity capital is not cheap. Interest rates can be as much as 8% to 12% or more. In some cases private equity lenders also receive a warrant to purchase stock in the business at a predetermine price. In most cases all of the stock is sold back to the business after the loan is satisfied.

Venture capital is another source of funding that many businesses might not consider. When people hear the words venture capital, they immediately think of a startup business in the back of someone’s garage. The reality is that most venture capital transactions occur with revenue producing companies. Venture capital firms typically like to invest in companies that have some kind of proprietary intellectual property, experienced management and the potential for aggressive revenue growth. Unlike private equity, venture capital firms receive shares in the business, which they hold until the business is sold or goes public.

Before approaching private equity or venture capital investors, it’s important to be prepared. Most investors will want to see an initial two or three page maximum executive summary of your business to determine initial interest. The executive summary should be compelling and explain your product and the problem it solves, the market opportunity, competitive advantage, business model, management team, summary financial projections and capital requirements.

Another important document that you will need for investor meetings is a pitch-deck AKA PowerPoint presentation. A pitch deck should expand on the points covered in your executive summary in no more than 10 to 15 pages including the cover. Use large font sizes, stay away from too much detail and be prepared to speak to each page in 60 seconds or less. 

Also, be ready to go through your financial projections and underlying assumptions. Investors will want to know that you thoroughly understand your business finances and how the capital you are requesting will be used.

Finding private equity and venture capital firms is as easy as looking on the Internet, however, it’s always better if you can be introduced through a business associate, your attorney or accountant.

Private equity and venture capital are widely used alternatives to traditional bank financing, but like any business transaction, make sure that the cost has a direct correlation to revenue growth or other measureable benefits.

# # #

Bruce Newman is a Principal at Pipeline LLC, a financial advisor to businesses seeking alternative sources of capital. 631-862-1231; brucen@plinellc.com; www.plinellc.com.