Finance
A growing number of options are available in raising capital

When it comes to getting the money to launch or expand a business, there are definitely two sides to the coin. While it can be tough to find a willing lender or investor, the good news is there are more financing options than ever before for small and mid-sized companies with a good product or service and a sound business plan.

Available financing
There are several major categories of financing for new or growing businesses, and it's fairly easy to narrow your options based on your type of business or its stage of maturity. Startups or small businesses often rely on internal or "bootstrap" financing such as owner savings, family loans, credit cards, a second mortgage, accounts receivable factoring, inventory financing or equipment/ office leasing. Once these avenues have been exhausted, and if bank debt or venture capital is not an option, strategic partnering or alliances, or outsourcing can help fill the gap.

For many small businesses, Small Business Administration 7(a) loan guarantees can provide up to $750,000. If your company owns real estate, invests heavily in capital equipment or a manufacturing or distribution facility, 504 CDC (Certified Development Company) loans become an option. If your business has a history of profitability and positive cash flow, conventional bank financing becomes easier. Finally, for technology and research and development ventures, the Small Business Administration offers the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) grant programs. The programs provide funding to encourage innovation and research and development.

If these sources aren't available or don't provide enough for an aggressive growth strategy, consider venture investors or private equity groups. Equity financing can improve a company's creditworthiness and make bank financing more accessible.

Lending requirements
When it comes to the expectations of a lender, there's a big difference between banks and venture capital investors. Both expect you to provide copies of basic legal and organizational documents, financial statements and tax returns. The loan officer at the bank will spend more time reviewing these. The bank, after all, wants to protect its capital and make sure that the cash flow in your business model will generate enough revenue to make loan payments.

But angels and venture capital investors will pay more attention to your business plan, revenue model and potential growth or scalability, because they're looking for significant returns. Equity investors will spend much more time reviewing your projections and various strategic options than historical financial information. What's more, the venture capitalist, whether an angel or institutional investor, is willing to wait for a significant return on their investment - often five to 10 years.

Private equity investors
There are basically two types of private equity investors - individual angels and venture capital funds. The source for venture capital funds is a group of private investors who pool their money so that their investment potential is larger and their risks are somewhat reduced. The most successful capital-raising processes often rely on both angels and funds, and typically institutional or fund "rounds" of equity financing are preceded by one or more angel investments.

There are some good resources for finding equity investors, such as the ACE-Net Internet database for angel investors and Pratt's Guide to Private Equity Sources for private equity groups or funds. But these are better for educating yourself about who is investing in what businesses than actually identifying the best investors for your company. Introductions by a professional adviser are often the best way to put your company in a credible position.

Individual angels, angel clubs and pledge funds are typically looking at six-figure investments in companies with $2 million to $10 million in revenue that can grow to $20 million before another round of equity financing is needed or the company anticipates being sold. Larger private equity funds are usually looking for seven-figure investments in companies that can grow to more than $50 million in revenue. There are also mezzanine funds that provide investment capital in smaller deals, being reflected between bank debt and pure private equity on the company's balance sheet.

It's important to work with an experienced adviser - such as an investment banker, CPA or attorney - who can guide you through the steps of finding equity investors. Guidance from someone who frequently represents companies in search of venture capital means he or she can share their established network with your company and guide you through a more efficient, focused and targeted process. The worst thing a company can do is knock on too many doors, because bankers and investors all talk among themselves. The important thing is to be patient. The normal capital-raising process can take up to six months and, once funded, you need to be committed to a five- to seven-year company growth effort.

Virginia is a particularly good feeding ground for angel investors, given its popularity as a second home and retirement destination. For angel investors, you will probably be looking within a two-hour drive of your principal business location because the new self-made, baby boomer angel crowd prefers to invest in something they can easily visit and have an effect on without getting involved in operations. But more important than location and even knowledge of your business is the "good chemistry" you have with your investors. If you don't like them, don't take their money - this goes for angels and private equity groups alike.

As you investigate the financing market, you will probably find yourself negotiating with an angel investor or venture capital fund manager. To be prepared, memorize your business plan thoroughly and lead off the discussion with the risks, the competition and the weaknesses. Then, be ready with a clear explanation of how the company will deal with these challenges. Private equity investors will want you to be a hard worker and a visionary, but they also want you to understand how you could fail and lose their money.

You should also have a clear idea of what you want - how much money, the uses to which it will be put and your ultimate personal and business goals. Have a contingency plan with options if the investor's answer is "no." Next, determine what the investor wants as early in the process as possible and focus on a win-win for both sides. The best venture capital investors view it as good business to be fair and to give the key owner a real incentive to achieve their mutual objectives. Finally, never say "no" or "yes" too quickly during individual discussions or at significant negotiating phases.

To have the greatest chance at raising equity capital, surround yourself with the best and brightest professional advisers and include them as part of your management team. Focus more on equity and "enterprise" value than on multiples of earnings and ownership percentages. And lastly but perhaps most important, always be open and honest in your business negotiations.

Finding financial backing for an established business
As an established business, your capital needs are probably $1 million or less, and finding financial assistance from the right lender should be part of your initial strategy.

Here are some of the key components of a solid business plan, which you'll need to persuade lenders to back you: Start with a cover sheet - the name and contact information for your business and its owners, and details about the building you want to rent or own. Next is a one-page synopsis of the business plan, which should include details such as the company's products or services and market size, along with your rationale for the business. A brief overview of any existing financial data should be included as well if available.

What follows are details about key elements, including:
• The business: Explain in more detail your specific goals and unique qualities, as well as who your competition is. And explain your financial need, and the expected benefits of getting funding.

• Management and organization: Who are the key managers? Include their résumés and salaries. Explain how many people you intend to hire and how they'll be compensated, and outline your total payroll expenses. Describe the company's decision-making process and management philosophy.

• Market analysis: Identify your customers and your strategy for reaching them. List any existing contracts and any products or services you plan to stress in marketing.

You'll also want to set some revenue targets and explain in detail your product-pricing model and how it compares with competitors.

• Financial data: Provide three years worth of tax returns and financial statements (if available), along with current financial reports such as a balance sheet and income statement. Show your projected financials for the next three years. List your capital equipment, manufacturing/shipping plans, and details about your funding sources and spending plan. Work closely with your financial advisers, and try to do as much of the data collection as possible, so you'll fully understand it.

Once your business plan is ready, identify short-term and long-term capital needs. And consider how much risk you're willing to accept. Lenders like it if you're committing your own money as opposed to expecting the lender to provide all the funding.

A good starting point for small businesses is the Small Business Administration, which offers a federal guaranty on loans with low down payments. Or, go to a bank that handles your current accounts or loans. Bankers there will have a history with you that could help. Make sure you work with someone who specializes in small-business loans.
The SBA sponsors a group called the Service Corps of Retired Executives (SCORE), which helps potential and existing entrepreneurs with business-related challenges.