Your business was founded on good ideas, hard work and proper execution, but if you want to reach the next level of success, it will take financial resources. Find out how to raise capital now.
By Tara Alexander
You have a plan for growth, and you’ve got some experience under your belt. But how can you translate these into a meaningful opportunity? Capital is often what separates an idea from a reality and a plan from a working project. While “capital” may be the obvious answer for getting more and better business, finding out how to obtain it is anything but simple.
“It’s like the old adage, ‘Institutions always want to lend you money when you don’t need it,’” says Chris Holman, who owns several companies and is the publisher and owner of The Greater Lansing Business Monthly. Holman, who was appointed small business advocate for the state of Michigan, says he deals a lot with the problems of small business. The irony is that small businesses need financial investment the most, yet have to jump through more hoops and harder obstacles to obtain it. Because they see smaller businesses as a greater risk, banks often will charge higher interest rates and offer highly collateralized loans, for which you must risk more assets that might be seized should you end up defaulting on the loan. In addition, there can be a lot of paperwork and bureaucracy when small businesses borrow money. “Small businesses are usually in the position to least afford time and business energy,” Holman says.
One way to keep your business from becoming more than just a number is to use a community bank rather than a national chain, according to Holman. A community bank can take community development into account when deciding terms of the loan. “[National banks] have a larger margin of error, but they don’t have as vested an interest,” he says. Before seeking a loan, it’s important to establish a rapport with the community bank that demonstrates you are a reliable, trustworthy individual.
Raymond Arth, president and founder of Phoenix Products Inc., in Avon Lake, Ohio, says his company was satisfied with its big regional bank until his high-volume, low-cost, faucet-production company ran into a rough patch. “Our company ran into some financial difficulties that are largely related to industry trends,” he says. “Basically, my big regional bank didn’t want to be bothered with me.” Despite a history with the national bank, the relationship became increasingly impersonal. “Too quickly the loan decision just became a formula,” he says. “We are now working with a smaller community bank.”
Tap the Government
When it comes to acquiring capital, low-interest loans and grants are some of the most straightforward solutions. “Your real hope is to get a grant, but your chances of getting a low-interest loan are much greater,” Holman says. Grants are an excellent tool for getting cash but there is often a lot of competition for a limited number of opportunities. Also, grant money tends to be earmarked for very specific purposes that may not fit your plans. Low interest loans are far easier to secure, but there may be a lot of paperwork associated with the process. Check with your bank to find out about state and federal loan options, such as the U.S. Small Business Administration’s 7(a) Loan Guarantee, Certified Development Company loan or short-term Microloan.
There might also be loan opportunities available to you that your bank does not know about. The best way to discover these alternative loan sources is by networking with other small business owners and getting to know small business lenders. Your local business association is a good place to start the process of networking and learning about potential lenders. Put together a formal loan proposal and send it out to a dozen banks, suggests Arth.
Seek Private Funding
Look also to the private sector as a source for financial backing, Holman says. Your bank can put you in touch with investment bankers or angel investors. “They’re going to want to know as much as they can about your company,” Holman says. Increase the likelihood that an investment bank will choose to back your company by demonstrating that you have as much to lose as they do. “They’re going to want to know that you’ve invested a little of your money and your sweat,” he says. If an investor believes in your plan, he may provide you with the financial backing you need. But be prepared to present an airtight case for your cause—this means lots of planning and lots of paperwork. Also, you may need to cede some control of your company as part of the deal.