Strictly Business

Wednesday, Oct 03 2012 12:00 PM

RUSS ALLRED: Understand realities of getting money for your business

BY RUSS ALLRED Contributing columnist

Do you need money for your business? Have you approached your bank for a loan, only to be rebuffed? Have angel investors unceremoniously denied your appeal for cash? There is a right way and a wrong way to pursue illusive capital. To avoid having too many doors slammed in your face, you should understand the truth about getting money for your business.

If you are desperate for cash to make payroll or pay bills, then it's probably too late to ask a commercial funding source for money. Don't waste your time filling out a loan request. It's just as futile to ask for money if your industry is on the commercial lender's black list. For example, I haven't seen a bank loan to a restaurant or bar in years. Statistically, those industries are just too risky.

The basic rule of thumb is if your business is in trouble or is troublesome then you won't get a loan. You may ask, "What good is a bank if they won't lend you money when you need it?" Your banker will answer, "We can't loan you money to survive, but we want to loan you money to grow."

One of the few remaining funding sources is a "venture capitalist" or "angel investor." These folks are anything but angelic. Except for local angels and your personal acquaintances, they don't like little deals.

If your need for funds is under $1 million, you will still need the money after visiting them. Your investment is as critical as the size of the deal. They want you to have skin in the game. Before you ask them for money, you had better invest everything you have first. They want a proven track record of profitability and a plan to make money in the future. To prove those things, you must provide financial statements, tax returns and a business plan.

A curious requirement of venture capitalists is an exit strategy. While the entrepreneur wants longevity, the investor wants finality. Your financial projections must convince the investor of several things including:

* A viable model that the business will produce a profit.

* How frequently the business will make payments to the investor such as dividends or interest payments.

* How long until the business value will equal the total investment in the business and

* When the business will repay the original investment to the investor.

The last requirement is the most puzzling. An angel investor may want to know your exit strategy before you even give birth to the business. While you want to produce your product or service, they simply want a high return for their money. There is an opportunity cost to the money they give you. As long as you have it, they can't invest it elsewhere. They may choose to leave the money with you when your deal matures, but that will be their option. Hopefully the pearly gates of angel investment will be open to you.

-- Russ Allred, MBA, is a business consultant and author with Sunbelt Business Brokers & Advisors. These are his opinions, not necessarily those of The Californian.

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