As an investment banker specializing in the pet industry, I get a minimum of one contact a week from entrepreneurs (over ½ are female) seeking money to grow their business. It’s the good news and the bad news. It’s good news because it means there are lots of us out there who are continuing to innovate and need cash to take their business to the next level. It’s bad news because if you are an early stage or cash-flow challenged company looking to raise growth capital, there are few options available.
It takes money to grow a manufacturing company. Period. So if you weren’t lucky enough to have the proverbial “rich uncle”, the age old question is: where can I get access to capital?”
Of course the first thing that comes to most people’s minds when asked that question is “the bank, of course!” That is true for people who are profitable or have assets that can be collateralized, and have a good credit score. If that is you – congratulations! If not, stay tuned and I’ll review some other options available towards the end of the article.
Bank Loan Options
Fortunately for people with good credit histories, there are more choices than ever to expand or grow a business. Most of the choices fall into one of these categories:
TERM LOAN: This is the most common general purpose loan and is used for working capital, expansion, and acquisitions. Repayment is made monthly over a term based on the expected lifespan of the assets you are purchasing.
SBA loans fall under this category. “SBA loans are typically for a longer term, usually seven to ten years.” explains Tommi Homuth. Vice President of Lending at Wells Fargo in Dallas. “They are easier on your cash flow and can be easier to get because they are partially guaranteed by the government.” For more details go to www.sba.gov.
LINE OF CREDIT: If the amount required is under $100,000, Homuth recommends a line of credit versus a term loan. They are a great solution for short-term fluctuations in cash requirements such as quarterly payroll taxes, extra inventory for the holiday season, or to take advantage of special promotions and discounts.
HOME EQUITY LINE OF CREDIT (HELOC): this line of credit uses the equity accumulated in a home as collateral. It’s a good option if a traditional bank line of credit isn’t available – but only if the owner is confident that paying it back won’t be an issue because he/she is literally “betting the farm.”
What are the Chances of Getting a Loan?
While there is no doubt that the recent mortgage fiasco has made it more difficult to qualify for financing, it has also resulted in lower demand for borrowing, thus increasing the amount of money available to lend. A business will have the best chances if they follow these guidelines:
- MAINTAIN A HIGH CREDIT SCORE. “It is more important then ever to have a high personal credit score – higher than the mid 600’s” urges Homuth.
- ESTABLISH A BANKING RELATIONSHIP. A business owner will have the most clout and get the best interest rates with a bank that knows his/her history, so they should always start with the place where they keep their money. Ideally, find a banker that understands the pet industry.
- KEEP BUSINESS AND PERSONAL CREDIT SEPARATE. Separating business and personal credit profiles will not only professionalize and simplify the credit picture but has many tax advantages as well.
- SHOW YOUR “TRUE” PROFITABILITY. As a small business owner, it’s certainly a good business practice to take advantage of all of the tax benefits and write-offs associated with running a company. However, when preparing to borrow money, keep in mind that the “tax-return profit” is a factor considered by lenders. In other words, the tax return should be an accurate reflection of a company’s real earnings. This will help secure that important loan approval as well as ensuring a better sales price in the event the owner decides to sell the company.
“The pet industry is one of the only industries considered by banks to be recession proof,” explains Homuth. “As long as you maintain a good credit score, keep an open relationship with your banker, and have a successful track record, it will not be difficult to obtain financing.”
Alternative Options
If you are early stage or not-yet-profitable, bank loans are generally not an option. So how else can you find money to fuel your passion?
EQUITY RAISES: Equity is the most expensive money you will acquire. That’s because investors who are willing to take the risk putting equity in an unproven or early-stage venture want a much higher rate of return then someone who lends money. Expect to pay 25% to 50% “interest” on equity money. Also, I’ve discovered that unless you need over $1 million dollars, raising equity from a Venture Capital or Private Equity Group is pretty much impossible. Most companies I talk to need between $200,000 and $500,000. So their only option for raising equity is either through what we call “Friends and Family” or through Angel Investors. You know where to find Friends and Family….but where do you find Angel Investors?
If you live in a large city, there’s a good chance there is at least one Angel Investing club in your area. In Denver we have Rocky Ventures Club that puts on an event every year called Angel Capital Summit. You’ll have to dig around a little to see what is available in your town. In addition, there are these options:
- www.KeiretsuForum.com: Keiretsu Forum is the world’s largest angel investor network with 850 accredited investor members throughout twenty-one chapters on three continents. Since Keiretsu Forum’s founding in 2000, its members have invested over $260m in companies in technology, consumer products (including pet), healthcare/life sciences, real estate and other segments with high growth potential. Forum members collaborate in the due diligence, but make individual investment decisions, with rounds in the range of $250k-$2m. Visit their website for more information.
- www.AngelCapitalAssociation.org: ACA is a trade group for Angel Investors. The website provides a range of helpful information for entrepreneurs including Q&A about angel investing, a director of angel groups, and more. The site also includes links to research papers and other publications.
PEER-TO-PEER LENDING: Web sites like www.Lendingclub.comand www.Prosper.combring individual borrowers and lenders together. Lendingclub.com bases loan rates on the borrower’s credit profile. At Prosper.com, parties on both sides negotiate the rate, though borrowers can set a maximum they are willing to pay. The companies oversee loan repayment and provide all the necessary paperwork.
MICROLOANS: Generally made for $35,000 or less, they are available to minorities, women, the poor, and people with disabilities, who often have trouble obtaining conventional financing. For more information, visit www.microenterpriseworks.org.
With interest rates at record lows and baby boomers feathering their empty nests with furry and feathered creatures, now might be the perfect time to explore obtaining the capital needed to expand your growing business.
Carol Frank of Boulder, CO, is the founder of four companies in the pet industry and a Managing Director with BirdsEye Advisory Group, where she advises pet companies in M&A transactions and Exit Planning. She is a former CPA, has an MBA, is a Certified Mergers and Acquisitions Advisory (CM&AA) and holds Series 79 and 63 licenses. She highly values and incentivizes referrals and can be reached at cfrank@birdseyeadvisory.com.