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Facing tough times on the money trail.

Small business loan applications are often rejected faster than you can say "Next." Unfortunately, most black business owners have become conditioned to leaving a bank or venture capital office the same way they walked in--with empty pockets.

Philip Davis remembers the tough time he had finding investors for his product--a children's deodorant called Fun 'n Fresh for girls and Cool 'n Fresh for boys. "I approached close to 3,000 people and I got a variety of reactions," recalls Davis, president of 5-year-old BertSherm Products Inc. in Cleveland. "I got laughed at and people thought the idea was silly. They were also uncomfortable with the level of risk."

Davis now has 41 investors in his company, which is projected to gross $600,000 in revenue in 1992. Says he: "Investors want to know what that competitive edge is. And you have to be willing to expend a lot of time and energy in telling your story."

The credit crunch has forced banks, investors, credit unions and the government to become more discriminate with their dollars. For example, according to Venture Economics Publishing Co., a Newark, N.J.-based company that tracks the venture capital industry, 1991 disbursement dropped 41% to $1.4 billion, from $2.3 billion in 1990. Tight credit, however, is not the only reason most African-American entrepreneurs have a better chance of hitting a $20 million lottery than getting a $20,000 loan. Despite economic hard times, the fact of the matter is, banks are still making loans and investors are still investing billions of dollars in small businesses each year. Somebody's getting all that money.

Davis and other business owners who have successfully secured financing have one thing in common: They are prepared to answer every key question that any provider of cash will ask. Those questions are answered in the entrepreneur's business plan, finance proposal and during those face-to-face negotiations that usually determine whether money will be forked over. Even though capital is hard to come by, many black business owners walk away empty-handed because their loan proposal or oral presentation was weak--not because the money wasn't available.

It's true that the needs of loan officers, investors and government agencies differ. However, there are some basic questions that every financier will ask. Being prepared to specifically answer those questions--both verbally and in writing--will greatly improve your chances of getting the financing you need. Below are the most frequently asked questions during a business owner's quest for capital.

What Are Your Company's Objectives?

A goal-orientation must be demonstrated if you expect to attract capital and establish banking and, ultimately, long-term lending relationships. Investors need to know that there is a clear, well-thoughtout mission for the business. The first step toward defining that mission is creating and following a written business plan. This may seem obvious, but studies by major accounting firms show that 80% of the nation's businesses operate without a business plan.

Everything communicated by you and other representatives of your company, whether verbally or through your finance proposal, must be consistent with your business plan. Your business plan should describe the products or services you plan to bring to market, as well as how you expect to get them there. In it you must detail your business premise, the quality and composition of your management, a marketing plan, methods of production and operation and current fiscal position. Your plan should clearly detail your knowledge of the industry and your company's place in it. It's also your chance to establish your competitive edge--whatever it is that makes your product or service viable to the marketplace, and, therefore, potentially profitable.

Your plan should be clear, concise, thorough and professionally done. Remember, it must stand up to the scrutiny of loan officers, potential investors, and their analysts, attorneys and accountants. (See "How To Write A Winning Business Plan," BE Special Report On Small Business, Nov. 1992.) Without a good business plan, it's impossible to raise money. In fact, you won't even be able to get an appointment with most loan and investment sources.

Who Are You?

Surprisingly, many black business owners can't answer this--or fail to understand the underlying question: "So it's a great idea--why should I believe you can pull it off?"

Despite the necessity of a solid business plan, people don't invest in ideas or business proposals; they invest in people. Melvin E. Benson, senior vice president and senior loan officer for the Boston Bank of Commerce, says it's not enough to just bring a fancy resume and cash flow projections to loan officers. "The person should be able to bring a sense of what they're about as an individual," notes Benson, whose bank is ranked No. 15 on the BE FINANCIALS LIST. "They may be asking for a business loan, but we loan to individuals."

Investment sources share that sentiment. According to Lancelot E. Drummond, Chairman and CEO of Economic Resources Corp. (ERC), a Los Angeles-based venture capital firm, "One of the first things venture capitalists look at in a proposal is the industry information. Then they look at the knowledge and expertise of the entrepreneur."

Before any source of financing will consider loaning money or investing in your venture, you must be prepared to define yourself as a person with the competence, integrity, experience and dedication to meet the objectives spelled out in your business plan. Your net worth, credit record, job history, formal education, industry experience, past business endeavors, long- and short-term financial obligations and personal history may all be factors that, depending on the financing source, will determine whether they'll see you as worth the investment risk. Your credentials and experience as relates to your company and industry should be concisely summarized in your business plan. Other information should be available to financing sources upon request.

Don't expect your financing sources to just take your word that you are credible. "One of the first things venture capitalists do is check out the character of the individual," says John Douglas, president of Douglas Broadcasting Inc. (DBI), a $7.5 million Palo Alto, Calif.-based holding company for 10foreign language radio stations. "They want to see a track record and how you've handled adversity."

When Douglas was looking for $350,000 in venture capital to help start a San Francisco television station in 1980, he did what all smart current and aspiring business owners do--he played up his strengths. "I tried to position myself as someone who could anticipate economic and industry changes," says Douglas. "I was the first black securities analyst on Wall Street covering the high-tech industry, and I was a senior securities analyst at Bear Stearns. I wanted them to know that I was someone who could look to the future."

The strategy worked. Eighteen months after Douglas started hunting for venture capital, he received funding from four minority enterprise small business investment companies (MESBICs). He wound up raising $4 million in total from banks, venture capitalists and personal savings.

However, while playing up your strengths, you should also be prepared to discuss weaknesses or past problems that might affect the potential financing source's perception of you. If you try to hide them, they'll probably find out anyway, and the fact that you weren't up front about it may remove any reason for them to trust you with their money. "Venture capitalists will ask you for references and they will touch base with friends and former employers," says Douglas. "They have quite a network of contacts. Sometimes they even hire private investigators."

Ellis Gordon Jr., senior vice president and chief credit officer of Founders National Bank of Los Angeles (No. 19 on the BE FINANCIALS LIST), says banks can be just as thorough. "We run a credit check on everyone," he explains. "In Los Angeles, we use TRW. We also do a Dun & Bradstreet report for existing businesses."

By taking the initiative in addressing past mistakes, you get a chance to explain the situation from your point of view. "If the background has been spotty, that gives us cause for concern," says Gordon. "But we don't automatically turn down a person because he has bad credit. If something happened three or four years ago and he has maintained an impeccable record since then, we will listen to all plausible explanations."

Who Is On Your Management Team?

Venture capitalists and loan officers don't waste their time sinking money into one-man operations. They want to see a solid--and balanced--management team in place. This is especially the case for venture capitalists. "They want a classic business plan that focuses very strongly on the management team," says Ronald E. Merrill, coauthor of Raising Money: Venture Funding & How To Get It (American Management Association, New York) and the president of a Los Angeles data base company. "They want to know who these people are."

Potential investors will want to know that you have a team that is committed to your company's objectives and can execute your business plan. Edward Dugger III, president and CEO of UNC Ventures Inc., a Boston-based venture capital firm, says every key player in your operation should be in place when you're hunting for capital. "You should be able to say, "Here is my management team and we have a commitment to do this,"' advises Dugger. "All we need now is the working capital."

While the members of your team may vary, depending on your business' industry, size and objectives, a solid management group usually includes people experienced in production/operations, finance, sales and marketing as well as your corporate counsel and consultants. The members of your team should also have direct or related experience in your industry. "If you are in the automotive industry," says Gordon, "you wouldn't want a person on your team to be in the computer industry."

How Much Money Do You Need?

This is no time to be vague. Your request should be for a specific amount of money that is realistic, well-thought-out and consistent with the premise of your business plan. "As much as you're willing to give me" is an absolutely wrong answer. So is "I need it tomorrow."

Depending on the amount of money you need, the purpose of the financing and how soon you need it, certain sources of financing will not participate no matter what you say. For example, both banks and venture capital firms are unlikely to invest in start-up businesses.

Seek out sources of financing that have a history of making loans or investing in your industry or that have provided financing to other companies in the range of the amount you're trying to raise. Be prepared to come to the financing table with a detailed capital expenditures spreadsheet. You should know--to the penny--how much money will be allocated for staffing, equipment, inventory, etc.

Cash providers don't like surprises. Don't say that you'll be using the money for expansion, if you really want to use the money to market a new--and unproven--wonder widget. They also don't want to hear that you need the money because business is bad and your cash is exhausted. Most sources of financing are not interested in bailing out failing businesses. "Financiers want to know that their money will be used to grow and protect the company," says author Ronald Merrill. "They don't want you to use the money to pay off a previous investor or as a slush fund."

A related question: How much have you invested in the business? Most lenders and investors want to see what other avenues you have pursued to finance your business. Have you exhausted your savings? Borrowed against your home? Who else are you obligated to? If you don't have any of your own money invested in your company, forget about getting a loan or finding an investor. If you don't think your business is worth the risk, why should they?

What Can Go Wrong?

Financing sources want to know that you've really considered--and prepared for--the risks involved in any venture. You should not only know what can go wrong, but you should already have planned what you will do about it to protect their investment.

More often than not, business owners spend too much time gushing about their "innovative" product or service. "That's a business owner," notes Merrill, "who has fallen in love with his product. That means he's no longer objective."

Pitching your business ideas as foolproof will give the impression that either you are ill-informed about your business or that you think your potential financing source is. Either impression will doom your chances of getting the money you want.

The point is, you must know what could trip you up, so that even if you expect the best, you can plan for the worst. Two years ago, Benson says the owner of an independent distributor in Newton, Mass., walked in looking for an SBA-backed guarantee loan. "He was working with a consultant and they had a plan that laid out how the bank would be paid in a worst-case scenario," Benson recalls. "Interestingly enough, things didn't work out. The company was liquidated two years later and we got back everything they said they would give back."

What's In It For Me?

|What's in it for me?' a question on the minds of many entrepreneurs can easily translate to: How and when do I get my money back? It may be hard to believe, but many entrepreneurs who are novices at seeking outside financing are genuinely shocked that financing sources expect to get something in return--and want the specifics of that commitment up front, before any money changes hands.

The business owner seeking capital must be able to clearly state how the financing source will profit from their investment in your company. Again, the answer will vary depending on the source of the money. Commercial loans and other debt instruments want their money back on time and with interest. "Banks do not lend against collateral," says Benson. "That's only a stop gap if we have to collect under extreme circumstances. We never make loans because the collateral is great. We make loans because the cash flow is going to be there."

Venture capitalists expect a guarantee of a high return on investment (at least 20%), and may expect you to either go public or be made attractive enough to be bought by another company in order to realize that return. Meanwhile, they'll want an equity stake as well as representation on your board of directors. Says ERC's Drummond: "They want to control the entrepreneur so he doesn't run out and buy a Rolls Royce the first time he gets financing."

The same is often true of individual investors. Philip Davis owns 75% of BertSherm Products and his investors control the remaining 25%. Three of his investors are on his board of advisers. "They rely on me to keep them updated on what's going on with the company," says Davis.

Some financing sources, such as small business investment companies, expect a combination of debt--either interest payments or dividends--as well as equity participation.

Belinda Hughes, president of Boo-Boo-Baby Inc., a New York-based maker of children's coats, knows all about negotiating with equity-hungry investors. Hughes, whose company grossed $263,000 in sales for the first three quarters of 1992, has been searching for $250,000 in expansion capital since last January. So far, Hughes has managed to raise only $10,000 in personal loans from three friends.

The 32-year-old designer says she needs the money for a new showroom, inventory and staffing. Hughes projects 1992 sales will slide to $300,000 from $340,000 in 1991 because she was unable to raise the money. Says she: "I had to turn away some orders."

As of October, Hughes was negotiating with a manufacturer of children's and women's clothing who's interested in investing in Boo-Boo-Baby. The problem? How much equity in her company is Hughes willing to give up? She's holding the line at 40% while her potential financier is looking for 50% ownership. "They're flexible, but I don't want to give up more than 40%," she says firmly. "It's very frustrating, but I won't give up."

The bottom-line is that financing is a transaction, not a gift. Forget about social responsibility, "corporate citizenship" or affirmative action as the deciding factor for whether a financing source will come through with the money you need. There is only one reason any serious investor puts money into a business: To make money.

HOW TO WRITE A WINNING FINANCE PROPOSAL

Not sure what to include in your finance proposal? Here are the key elements:

* EXECUTIVE SUMMARY: Think of this section as your company's resume. In it you should explain your product or service, detail your competitive edge and outline your company's short-term and long-range goals. You should also play up previous achievements. For example, if your company implemented a new Total Quality Management system that boosted profits 50%, mention it. Also, include background information on the company, Provide details on your company's age, current sales and number of employees. Name the people on your management team, list their track records and show what they bring to the table. Don't forget to tell your financier how much money you need and what you plan to use it for. Remember, be specific.

Edward Dugger III, president of UNC Ventures, a Boston-based venture capital firm, adds that business owners have to go one step beyond talking about their business. "We want to know why this is a good investment," Dugger says. "Many times people tell us what a wonderful business this is, but they don't tell us how the investor will prosper."

* INDUSTRY INFORMATION: Identify your customers and competitors. Define your target customer's buying habits and explain how you will satisfy those needs. List your competitors' strengths and weaknesses. Enumerate industry trends that will help your product or service. Show how your products differ from your competitors' and say how much of the market you plan to capture. Also, make sure you spell out how you plan to do it.

* FINANCIAL INFORMATION: Provide such financial statements as cash flow charts, profit and loss projection statements, balance sheets, capital expenditure breakdown and income statements for the past three-to-five years. "Make sure all the numbers add up," says author Ronald E. Merrill. "It has to come out that you're going to make a profit one day and that you will have positive cash flow." If you're applying for a loan, list all collateral you're willing to put up. Also, provide the names of former lenders and investors as potential credit references.
COPYRIGHT 1993 Earl G. Graves Publishing Co., Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:business financing; includes related article
Author:Thompson, Kevin D.
Publication:Black Enterprise
Date:Jan 1, 1993
Words:3092
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