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Unlocking the Solution to Accessing Capital

12 May, 2011

By: Jennifer Alten

Unlocking the Solution to Accessing CapitalBusinesses in all stages of development, from startups to publicly traded companies, need capital to grow and expand. A company's business plan, balance sheet, industry and even location can make all the difference between receiving the funding they need to grow - or not.

As everyone knows, cash from various sources was readily available in the late '90s and most of the 2000s, coming to a screeching halt in September 2008 when the real estate market collapsed and investment banking giant Lehman Brothers declared bankruptcy.

The good news is numerous financial services experts in the capital markets agree that 2011 has seen a marked improvement compared to the previous year - and are cautiously optimistic that this trend will continue.

Even in 2009, when capital sources virtually dried up, some deals with the right credentials did get financed. Today, more businesses are receiving the funding they need, due to a combination of smart business practices and taking advantage of numerous sources of capital from state and local incentives, federal government programs, angel investing, venture capital and, yes, even conventional bank financing.

In this article, investment experts detail some of today's sources of financing that businesses are using and share advice and best practices for those looking to access capital.

What went wrong

Paul Habbi, professor of real estate at the UCLA Anderson School of Management
Paul Habbi, professor of real estate at the UCLA Anderson School of Management

The late-2000s financial crisis, sometimes referred to as The Great Recession, caused a liquidity shortfall in the United States' banking system. It was triggered by the collapse of the U.S. housing market that peaked in 2006, causing the value of securities tied to real estate pricing to plummet.

Paul Habibi, professor of real estate at the UCLA Anderson School of Management, said that with the overhang in the housing market, lenders had a significant pool of troubled assets.

"Their inability to size up losses severely reduced the capital on their balance sheets and created a lot of uncertainty about how many additional write-downs the banks would have to take," Habibi said. "That threw lenders into a paralysis mode until they could understand the extent of the bad assets in their portfolio."

To help banks get out of this turmoil, the Federal Reserve loaned money at zero interest, Habibi explained. Plus, the government was purchasing assets and equity from banks with TARP (the Troubled Asset Relief Program), the $700 billion bank bailout.

Tom Peacock, president of Peacock Financial, who formerly ran regional commercial real estate operations for Huntington National Bank, described TARP.

Ryan Krauch, principal at Mesa West Capital
Ryan Krauch, principal at Mesa West Capital

"It was a recapitalization of the banking industry, a point that has never been clearly made to the rank and file. It provided liquidity to a system on the verge of collapse. People didn't understand how bad things were," he said.

What partly led to the real estate bubble was that banks weren't imposing a prudent discipline on borrowers or critically evaluating projects.

"Many people lost the concept of a viable business plan and thought that if the banks liked their project, it was indeed sound," said Peacock. "But the problem was, the banks didn't have adequate personnel in the right positions to examine whether projects were good."

"If you don't provide a certain level of discipline on the borrower, they will take what they can get. Did they analyze the project well enough to see if they had a viable operation or did they build because funds were available to build? Frequently, it was the latter," he added.

Ryan Krauch, principal at Mesa West Capital, a privately held portfolio lender, differentiated TARP from the savings and loan crisis of the 1980s and the Resolution Trust Corporation (RTC), which was the government-owned company that bought bad assets and loans from banks.

"We're not seeing the RTC approach today. Instead, we're seeing a Japanese approach, which continues to prop up bad banks. However, today's challenge is greater than we had in the '80s because the real estate crisis happened in the midst of the global economic meltdown," said Krauch.

Master Workholding is a North Carolina based manufacturer that creates workholdings for machining centers
Master Workholding is a North Carolina based manufacturer that creates workholdings for machining centers

In the midst of this crisis, companies saw funding dry up and lines of credit taken away.

Master Workholding, a North Carolina-based manufacturer that creates workholdings for machining centers, saw their lines of credit revoked in late 2008, which nearly caused the company to go under. Mike Powell, the company's president, received two lines of credit in 2007 for $950,000 and $250,000 to help grow his business. After purchasing several million dollars-worth of equipment in 2008, he found his lines of credit taken away and no credit prospects on the horizon. To survive, he had to lay off numerous employees. Despite this crisis, the company maintained an 18 percent EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) in both 2009 and 2010 and had a net profit of eight percent.

"In '09, you couldn't get a bank to talk to you. The only people who talked to me were loan sharks or those wanting to finance accounts receivable," said Powell.

In 2010, the company finally received a $750K line of credit, but faced closing costs that were double what he paid in 2007, along with a new requirement that he insure his receivables.

What's happening today
The good news for business leaders and companies everywhere is that 2011 is already markedly better than the previous few years. Companies have experienced revenue growth, leading to new opportunities for growth and expansion. While capital still isn't as readily available as it was pre-2008, lending and sources of capital are loosening up.

Ed McCallum, senior principal at McCallum Sweeney Consulting
Ed McCallum, senior principal at McCallum Sweeney Consulting

"They call this the new economy, but I feel like what happened over the past half-decade was an aberration. The hyper-inflated real estate market was a house of cards, with subprimes and leveraging debt upon debt. Today, lenders are taking a more conservative approach on the risk they're willing to take," said Ed McCallum, senior principal at McCallum Sweeney Consulting, a firm that provides site selection and incentive negotiation services.

According to Dennis Donovan, principal at WDG Consulting, a corporate location advisory firm, the reason that money isn't being lent is that companies are risk averse. Plus, the uncertainty in Washington contributes to a significant degree of unwillingness to lend except to the highest rated firms.

"I see that changing, especially when we get the regulatory and tax situations more clear," said Donovan. "The economy is definitely improving and later this year, we should see lending levels increase, which will contribute to a robust expansion around Q3 this year."

Donovan said he's seeing an uptick in companies looking to add new capacity, especially those in the areas of financial institutions, back offices, industrial goods manufacturing and R&D. He said that consumer goods and distribution companies haven't seen as much growth, partly because of the tenuousness of the economy for consumer goods and partly because of overcapacity that's still being worked off.

"In a good market, there's free flowing credit with high loan-to-value ratios. When you have stagnation in the economy, banks retrench and stop lending like they did," said Paul Habibi. "So, we went from one extreme to the other. In between is the responsible part of the spectrum. Banks are either over promiscuous or so tight that even good projects can't get financing. Lending will get better over the next year. I think things will slowly improve over 2011 but 2012 will be solid for finance allocation."

Some businesses are finding access-to-capital easier than others

Harry Moser, Founder of the Reshoring Initative
Harry Moser, Founder of the Reshoring Initative

However, today, some firms have an advantage finding the capital they need. Larger companies typically have assets, history and credit lines that they can leverage. Or, if they're looking to finance real estate, if they're situated in areas of higher growth, they're more likely to be successful. Startups and smaller companies are still having difficulties accessing financing, along with anyone looking for construction loans. Because lenders have become more conservative, projects and companies that are seen as moderate or high risk won't be financed, unless it's through venture capital - and the number that receives VC funding is small.

Banks still aren't doing "dirt deals" and construction projects, according to Leslie Rubin, principal of Rubin Advisors, who leverages government resources to enhance and sustain private sector investment.

"Most banks are timid and are looking for high equity requirements. Before, you could get away with no money down and five percent equity. Today, banks require 20 percent cash and it goes up from there. They also require a great deal of redundant guarantees - not only collateral, but also a letter of credit and a personal guarantee," she said.

Harry Moser, who heads up the Reshoring Initiative and is the former president of AgieCharmilles, said, "The vast majority of companies are small and they're the ones having the problem getting the loans. Companies up to 500 employees are more likely to face instances where they're unable to get capital, even if they think they're credit worthy."

Larger companies that are financially strong are the ones with the most to gain in today's market.

"Over the past three-to-four months, (these companies) have been active, whether it's been purchasing real estate or entering financing arrangements for business expansion, because they can do it for 30-to-40 cents on the dollar. This is a good sign for the long-term in our economy," said Larry Gigerich, managing director at Ginovus, an Indianapolis-based firm that offers economic development consulting.

Leslie Rubin, principal of Rubin Advisors
Leslie Rubin, principal of Rubin Advisors

Ed McCallum agrees. "Companies that have a bright future should lock in debt as much as they can now, because they won't see money this cheap again. It's a once-in-a-lifetime occurrence."

What it's going to take for lenders to feel more comfortable lending
"If you look at lenders and investors, there is uncertainty about the strength of recovery," said Paul Habibi. "Once investors and lenders see signs of a more robust recovery, they can start investing more in businesses, projects and concepts. That's been slow in coming because we've had such a deep and lasting recession coupled with uncertainty regarding policy measures. While we're seeing a rebound, it's still not as strong as after most recessions. We're seeing GDP in a three-to-four percent range rather the typical five-to-seven percent rebound after a recession."

Adding to this is the instability in the Middle East, rising oil prices and uncertainly about the policies in Washington, D.C.

"Banks are in an uncertain new regulatory environment. Until the Dodd-Frank Bill is fully implemented, they will not know what it costs them and what it demands of them," said James Swofford, an economics professor at the University of South Alabama Mitchell College of Business.

"The cost of oil plays a part," said Leslie Rubin. "It impacts the cost of transportation, location choices for employment and impacts pass-through costs that manufacturers have to pass on to their customers. If a company has transportation costs as part of its business plan, rising oil costs makes the bank that much more nervous about lending."

Jay Biggins, executive managing director at Biggins Lacy Shapiro and Co.
Jay Biggins, executive managing director at Biggins Lacy Shapiro and Co.

Low interest rates are also having a dampening effect on lending.

"Banks will lend more readily when it costs them not to lend. That is, if interest rates go a bit higher, then the foregone interest from not lending gets higher and banks have a greater incentive to lend. Not lending costs them less at low interest rates than at high interest rates," said Swofford.

Types of financing available
With bank financing still difficult to obtain - or even out of reach - for many businesses, savvy firms are looking beyond big banks to track down these elusive dollars. While most of these avenues have existed for years, they have become more important in light of the past few years. These types can include incentives and public sector financing, privately held lenders, community banks, venture capital, angel investors, government programs such as those through the Economic Development Administration and Small Business Administration and for those who need equipment, leasing programs.

Incentives and public-sector financing
At the state and local level, economic developers are attracting business to their areas with incentives, which might include property tax abatement, payroll tax rebates, job training and cheap or free land, along with tax increment financing.

"Because companies are confronting a shortage of capital from conventional institutional sources, it is creating funding gaps. States and localities, if they want to compete for where these projects are to occur, are being creative and aggressive with gap financing to attract these companies," said Jay Biggins, executive managing director at Biggins Lacy Shapiro and Co., a firm that specializes in location economics, including developing incentive strategies. "This includes a wide range of different forms of capital, including grants, to offset or mitigate capital costs that would otherwise have to be privately financed at terms that might not be feasible," he continued.

Bob Hess, executive managing director of consulting at Newmark Knight Frank's Global Corporate Services
Bob Hess, executive managing director of consulting at Newmark Knight Frank's Global Corporate Services

Bob Hess, executive managing director of consulting at Newmark Knight Frank's Global Corporate Services, agreed. "Incentives are under siege but they are still out there and offer another source of cash. These incentives help businesses compete and survive today, especially smaller businesses. That's a positive for the economy, because 80 percent of jobs have always been created in small and medium-sized businesses."

Prior to 2008, some companies eschewed public grants for expenses like training, because they felt that the application process was too time-intensive, especially since they could easily obtain capital from other sources.

"Today, the response is, 'How quickly can I have the money?' At the corporate level, economic assistance used to be the icing on the cake and they used it to make their numbers look better. Today, without economic incentives, a number of operations would shut down," said Leslie Rubin.

Examples of incentive and public financing abound
Nordic Wind Power was a green technology startup that benefitted from government programs, this time in the form of state incentives. Headquartered in Silicon Valley, the company wanted to build a production facility in the Midwest wind corridor, but as a new company, it didn't have a balance sheet or cash flow beyond a Department of Energy loan, which meant that they were having difficulties finding capital to build in their desired location. Newmark Knight Frank worked with them and the state of Missouri to negotiate an incentive package.

"The state gave them a monetized incentive to give them the cash upfront they needed to build," said Bob Hess. "There was a lot of creativity between the public and private sector."

Nordic Wind Power, headquartered in Silicon Valley
Nordic Wind Power, headquartered in Silicon Valley

Large companies are also getting their share of incentives. Biggins Lacy Shapiro and Co. had a client, a large financial services company based in lower Manhattan, that wanted to relocate to decentralize its operations from a risk management perspective. After looking throughout the U.S. in financial services-rich employment centers like Tampa and Charlotte, it chose to relocate to nearby Jersey City, New Jersey, because it received state and local grants in excess of $1 million to offset the costs of relocating a high-tech operation.

An example of a large corporation taking advantage of tax increment financing is Dow AgroSciences, a subsidiary of Dow Chemical, which announced one of the largest economic development projects in 2010, a $340 million project in Indianapolis that would create 675 new jobs.

"We used tax increment financing from property taxes to be generated to fund aspects of the project," said Larry Gigerich at Ginovus. "We worked with the city of Indianapolis and they agreed to commit $20 million in tax increment financing for infrastructure improvements, site preparation, purchase of equipment and help fund part of first research building being built. The city agreed to this because they'll capture property taxes over the next 20 years to help pay off the bonds that were used to generate the $20 million."

Another way public programs are helping is by enabling technology-based startups to pursue additional research.

Ginovus headquarters
Ginovus headquarters

Headquartered in San Jose, California, Stion develops and manufactures thin-film solar panels. Frank Yang, director of business development there said that though state and federal programs take an effort to seek out, they're enabling the company to focus on research projects that might not be financed by the private sector.

"This spring, we received a $1 million grant from the National Renewable Energy Lab (NREL) to work on our second generation technology, which enabled us to accelerate our work on it," he said.

Drawbacks of incentives and government financing
These programs take time and effort to navigate. According to Leslie Rubin, local programs are often the shortest term, with the quickest turnaround. While a property tax abatement program might be able to be put in place in 60 days, state programs can take three or four months - and federal programs frequently take 12 months or more.

Also, Dennis Donovan cautioned that companies who put incentives at the top of list for where to locate a new facility are making a mistake.

Strion's solar panels
Strion's solar panels

He said, "If you look at the overall cost of doing business over a 10 year horizon, incentives will be a minor component. There are many more other vital considerations such as labor market, utility infrastructure, natural disaster risk, unionization and transportation access. Incentives should come into play after viable communities have been identified. They need to look at factors such as site and building costs and length of time it takes to get permits and then look at incentives."

Another mistake companies make is being attracted to the promise of a tax credit, according to Donovan.

"75 percent of the new facilities being built today are branch plants, which are typically cost centers, not profit centers. So, while a company can book a credit on the balance sheet, if they can't use it - and typically they can't transfer it if they sell the facility - they can be essentially meaningless," Donovan said.

Tax-exempt and taxable bond markets
Another form of public sector financing is the tax exempt bond market. While access to the tax-exempt bond market isn't necessarily any easier than receiving financing through conventional bank loans, companies with projects that qualify use them primarily for their interest rate cost advantage.

Jason Grubbs, executive vice-president at The Frazier Lanier Company
Jason Grubbs, executive vice-president at The Frazier Lanier Company

"With tax-exempt bond financing, a company may save a 100-plus basis points on their annual interest expense," said Jason Grubbs, executive vice-president at The Frazier Lanier Company, an investment banking group that specializes in corporate and municipal finance throughout the U.S.

Another option for projects that don't qualify for tax-exempt bonds is taxable bond financing. These bonds can sometimes have rate and term advantages over conventional financing.

"Sometimes, only a portion of a project may qualify for tax-free bonds, in this case we will also work with clients to finance the balance of the project with taxable bonds," said Grubbs.

Dennis Donovan backs up the idea of bond financing. "For projects that are $10 million or more, companies should look at possibility of doing taxable bond financing where the state or community floats bonds but they are taxable. At least it's a source of income. In many cases, companies will be awarded sales tax exemptions on machines and equipment in lieu of property tax payments. It's an interesting way to go and I don't think enough companies look at this."

Federal government programs
"Government programs are attractive places to get money, such as the Small Business Administration (SBA) and through the American Recovery and Reinvestment Act, the $787 million stimulus program," said UCLA's Paul Habibi. But that's not all.

Brian McGowan, U.S. Deputy Assistant Secretary of Commerce for Economic Development
Brian McGowan, U.S. Deputy Assistant Secretary of Commerce for Economic Development

An additional government source is the U.S. Commerce Department's Economic Development Administration (EDA).

"Small businesses are the backbone of our nation's economy," said U.S. Deputy Assistant Secretary of Commerce for Economic Development Brian McGowan. "Expanding access to capital to America's small businesses and entrepreneurs is a top priority for the Obama administration and EDA's investments and programs, such as the Revolving Loan Fund, the White House's Startup America and i6 Green Challenge, go a long way to promote regional business development and strengthen these enterprises that create two of every three new jobs in America."

The EDA Revolving Loan Fund (RLF) Program supplies small businesses and entrepreneurs with the gap financing needed to start or expand their business. As part of the White House Startup America initiative, EDA's i6 Green encourages innovative ideas that accelerate technology commercialization, new venture formation and job creation across the United States.

Meanwhile, the SBA is launching two $1 billion initiatives for impact investing and early-stage seed financing. The Impact Investment Fund provides money to companies located in underserved communities, as well as emerging sectors like clean energy. The Early-Stage Innovation Fund provides gap financing for early-stage companies who lack the necessary assets or cash flow for traditional bank funding. This fund provides a 1:1 match to private capital raised by early stage seed funds.

Another noteworthy program is the SBA 7(a) loan program, which companies can use to establish a new business or to assist in the acquisition, operation or expansion of an existing one.

Dennis Donovan, Principal of Wadley Donovan Gutshaw Consulting
Dennis Donovan, Principal of Wadley Donovan Gutshaw Consulting

"Many smaller businesses don't think about SBA financing and their 7(a) loan guarantee program that provides an effective loan guarantee. With its credit enhancement program, the SBA serves as a backup, allowing the bank to get paid back first," said Larry Gigerich.

The U.S. Department of Housing and Urban Development (HUD) and the U.S. Department of Agriculture (USDA) also have funds that can be used for infrastructure and other construction projects.

According to Leslie Rubin, both offer community development block grants. "In general, HUD grants are applicable in urban environments with a population of 50,000 or greater, while USDA is traditionally used in rural environments, although there is some overlap," she said.

Banking and lending sources
While it's still difficult for many businesses to receive bank financing, the ones who can meet stringent requirements are finding success. And others are turning to private lenders, such as Mesa West Capital, the privately held portfolio lender.

"Many investment management firms are dealing with the same banks and institutions - and many of those are gone, like Lehman Brothers. They've had to search for new sources of capital and we've picked up new clients," said Mesa West's Ryan Krauch.

Banks are also looking to offset their risk through government programs, SBA 7(a)'s loan guarantee.

Sample CapLinked deal
Sample CapLinked deal

Mark Charlton, president of Tech Financial Services that provides machine tool financing and part owner of Hiawatha National Bank in Wisconsin, said that banks feel more comfortable when businesses have several lending or capital sources.

"Find a couple of partners on the finance side and stick with them. It makes lenders more comfortable by spreading out the risk," he said.

Plus, Charlton is seeing more team efforts to get deals financed. "Guys like me are stepping up the fill the banking void. Community and smaller, regional banks are doing deals that the big banks aren't doing," he added.

Venture Capital
Venture capital deals have dried up along with conventional bank financing. They're not an option for many, because venture capital firms are typically interested in bankrolling technology and biomedical research companies rather than ones in areas like manufacturing.

"VC firms have been pretty stingy," said Bob Hess at Newmark Knight Frank. "Money hasn't been flowing because people need to put together a plan that shows that shows that their business is sound. There is money out there, but it won't be released until businesses go through what I call a normal business process, like they did 20 years ago."

 

Richard Burns, a finance professor at the University of Alabama School of Business
Richard Burns, a finance professor at the University of Alabama School of Business

Harry Moser, the former president of AgieCharmilles, added, "For many companies, venture capital isn't a viable option. VCs want to invest millions and they want significant control over the outcome. For the larger companies, VCs wouldn't be interested. And the smaller companies don't want the suit-and-tie guys telling them what to do."

Only 1,000 to 1,500 companies get venture capital funding, according to Eric Jackson, CEO and co-founder of CapLinked, an internet site that connects accredited private investors with deals. "It's rare and a crap shoot," he said.

Richard Burns, a finance professor at the University of Alabama School of Business noted that venture capital can be a smart choice for qualified companies.

"There are some who don't want to accept equity money because they don't want to give up control of their companies or their intellectual property. But, it's a smart way grow. Ultimately, most business people would rather have 49 percent of millions of dollars, rather than one hundred percent of nothing," said Burns.

Angel Investing
Angel investing is simply a way to describe when accredited individuals - which the SEC defines as someone with an income greater than $200K per year or a net worth of more than $1 million - provide capital for a business.

One of the biggest downfalls of angel investment is the regulatory risk if the deals aren't structured properly, as well as the difficulty of matching investors to deals. An innovative and increasingly lucrative company that's spurring on angel investing is CapLinked. Co-founder Eric Jackson, a fomer PayPal executive, describes it as a "LinkedIn-meets-Salesforce.com for private investing."

CapLinked provides a private, secure environment for companies, investors and their advisors to share deals, closings and updates as well as perform due-diligence.

Steven Yazdani, Managing Director Lucent Capital
Steven Yazdani, Managing Director Lucent Capital

CapLinked success stories include Peninsula Entertainment, a film company that wanted to raise a six-figure amount of capital to create a new film. Using CapLinked, the film company was able to find investors and finance its project.

Additional Sources of Capital
"Leasing is another area to consider. Many people don't consider it a source of money, but that's what it amounts to," said Richard Burns at University of Alabama. "Instead of owning an asset, you have the use of it."

Harry Moser agrees. "For smaller companies looking for machine tools and equipment, they should be working with their salesperson, distributor and equipment manufacturer to finance their equipment, because these companies typically have financing plans and it's in their best interest to get the prospect financed."

Moser also suggested that companies which aren't able get longer-term leases should consider short-term rentals or refurbished equipment.

"Use the used equipment for two years, and use the profits to improve your finances so you can qualify for newer equipment."

Other potential sources of capital are state retirement systems. While states' retirement systems are highly conservative, typically they are also tasked with economic development by the state.

Ed McCallum of McCallum Sweeney Consulting said, "We've seen retirement systems tapped into. We've seen them successfully used as a bridge until the company gets additional financing."

With all of the various sources of capital out there, businesses can make sense of it all with advisors that can connect multiple capital sources with the right opportunity.

"There are tons of lenders, with new ones entering the market and old ones reentering the marketplace with new programs after being out for the past few years. There are banks, CMBS (commercial mortgage backed securities), mortgage REITs, debt funds and more. The job of advisors like us is to make an appropriate match," said Steven Yazdani, principal of Lucent Capital.

Mark Charlton of Tech Financial Services agreed. "If you partner with the right people, get creative and come up with ways to solve problems, you come up way ahead. There are a lot of capital sources out there."

 

Advice and best-practices for those looking for financing

1. Develop a solid business plan.
Virtually every expert said the same thing: that a solid business plan is a vital way to convince lenders that a business is worthy of credit.

"If you have a good business plan, a good project and can show good use of the money you're asking for, you're much more likely to be able to convince that lender to make a loan. To me, it's all about having a viable plan," said Steven Yazdani.

He has seen companies make the mistake of not having a comprehensive business plan that discusses exactly why they need the financing. For a company looking to buy a new facility, that would include going into detail about why they need the new facility, their plans for expansion, the challenges they'll face, how expanding will enhance their bottom line and why buying a new facility is better than leasing.

2. Leverage the assets you already have and reduce debt.
Before trying access capital, business leaders should examine their existing assets and focus on reducing their expenditures.

"Many times, companies aren't leveraging their existing assets. They have locked-up capital in areas like real estate, assets and patents that they can leverage as collateral for debt," said Ed McCallum. "Plus, sometimes the best source of financing is reducing your debt for more efficient operations. You need to run a business as lean as possible and by streamlining operations, you can leverage more."

Mark Charlton agrees. "There's a finite amount of money that a bank or lending institution will give you. If you use that money for capital purchases like equipment, you're running an opportunity cost risk that you won't be able to receive financing for other things like hiring or if you get a big contract and need to expand."

3. Match your project to like-minded investors - and make sure you are located in an area amenable to your goals.
Strategically identify and work with groups that are most likely to provide capital to a project like yours. And, make sure you're locating your project in an area that is suitable. For example, if you're trying to finance an entertainment project, you're more likely to have success in California that you are in areas like the Midwest.

"Don't take a scattershot approach. Identify target groups that are receptive to work with your type of project, whether it's a manufacturing operation extension or building a retirement community," said Leslie Rubin. "Then, you mirror that to whatever funding sources, government programs and guarantees are available. At the same time, geography plays a role. While it's important for communities to diversify (from entrenched sectors such as manufacturing), the reality is that when times are tough, banks will be more likely to lend to projects they understand."

4. Avoid being overleveraged.
Don't take on so much debt that it impedes your company's cash flow or causes you to miss opportunities that may present themselves in the future.

"Leverage only acts as a magnifying glass. It makes good deals great and lousy deals horrible," said Paul Habibi. "If things aren't going well, it can cause your demise overnight. We saw that all through the banking industry."

5. Spread out your risk though multiple capital sources.
By tapping into several sources of capital, both private and public, businesses can increase the amount of money they receive - and be in a better position for growth.

"Don't rely only on your bank or let the lowest rate drive everything," counsels Mark Charlton. "This leads to putting all your eggs in one basket. You might think that your bank has your best interests at heart, but that's not true. It's safer to access capital from several sources."

Jay Biggins agrees. "Take time to plan capital structure that includes both public and private sources. Public sources will provide significantly better leverage and lower-cost capital but may require more time and planning than is sometimes available to companies."

6. Think about the long-term implications of your financial decisions.
In the same vein as not putting all your eggs in one basket, it's crucial to examine the ramifications of your financial decisions. And, make sure you're not over-leveraged, which limits your ability to take advantage of opportunities.

"Not thinking about long-term implications can end up handicapping a business down the road," said Larry Gigerich. "I've seen businesses burn too much money monthly on operations or enter into financing arrangements that preclude them from borrowing more money, which means they might miss out on opportunities because they have limited flexibility."

7. Avoid variable rate loans.
Take a cue from what happened to residential housing borrowers in the 2000s and avoid variable-rate loans.

"Pre-2008, you saw a lot of young companies that believed they'd hit it big quickly. They'd seek out short term financing with variable rate loans, similar to what you saw in the housing market. Today, it's important for companies to structure loans with a view to the long-term by choosing fixed-rate loans with 10- or 20-year terms, because they are predictable. We know that interest rates will likely only go up over the next several years - and that variable rate loans will likely bite you over the long term," said Larry Gigerich.

8. Don't pass up equity financing because you don't want to give up part ownership.
Whether it's pride in their big idea or the drive that got them where they are, some entrepreneurs aren't willing to accept equity capital, which gives up part ownership in exchange for capital. This desire for total control can backfire and stunt their business growth.

Larry Gigerich gave virtually the same example as Richard Burns, the finance professor at the University of Alabama School of Business.

"At end of the day, you have to decide, do you want to own 70 percent of a $10 million company or 100 percent of a $2 million company? The $10 million company will be worth more," said Gigerich.

9. Take time to make decisions if at all possible and use a board of advisors for diverse, sensible advice.
Though business moves quickly, it's important to take some time when making key investment and location decisions, and choose courses of action which better position your company for growth. Companies of all sizes benefit from putting together a board of advisors to provide sound feedback and outside ideas.

"Because of the operational exigencies when managing high growth profiles, many decisions get lost in the blur in the pace of the average day. If at all possible, companies should take a step back - and have a board with diverse leadership to provide timely advice," said Jay Biggins.

10. Take advantage of community financing for long-term support.
Another advantage of local and state public financing is the long-term support that you'll receive, because it's in the community's best interests to ensure their investments pay off.

"A lot of CEOs forget the fact that once you secure capital from a bank or other institutions, it's done. But when you secure capital from your local partners and neighbors, they're always there and will continue to help you however they can. You get a lot of externalities with public financing," said Ed McCallum.

11. Don't underestimate how hard it is raise capital.
Finding investors and capital is a long process. Business leaders set themselves up for failure by starting out thinking it will be easy and then quickly getting discouraged.

"People underestimate how hard a capital raise is," said Eric Jackson. "Entrepreneurs often aren't persistent enough. You have to stick your neck out to stay in front of people and push for an answer."

12. Work your network.
It's vital for business leaders to make of the most of their network when seeking out investors and sources of capital. Think about your network in terms of the people you know who are potential investors, as well as the referrals you can receive.

"One of the mistakes I see is businesses failing to work their network properly," said Jackson. "Reach out to people for advice and introductions to get the ball rolling. This is hugely valuable."

 

 


Idea for Improving Capital Markets by Harry Moser

How about a plan to increase loans, resolve the debate over loan availability, and increase U.S. employment and manufacturing? There is a great need for more transparency on the issue of credit availability for companies. Many companies claim they are creditworthy, and would hire and expand, but cannot borrow. The banks claim that creditworthy companies can get the loans they need and that tight government bank regulatory rules prevent them from loaning to less creditworthy companies. The best solution is an online Commercial Loan Clearing House for business loans. The website would be maintained by the U.S. government, perhaps a joint effort of the Treasury and the Commerce Department:

  • The site would clearly define the criteria for being creditworthy: debt/equity ratio, quick ratio, cash flow relative to the desired loan, etc. Also, the number of jobs that the company would create within three and 12 months of receiving the loan.

  • Companies that believe they comply, but can not get a loan, securely input the relevant data to show that they meet lending requirements.

  • The large banks that were bailed out in 2008 and 2009 are randomly assigned applicant companies. The bank confirms the accuracy of each assigned company’s data and is required to make the loan if the data is accurate or provide a clear explanation of how some other critical factor makes the company non-creditworthy.

  • If the companies finally are too great a risk, our private equity and hedge funds could be offered an opportunity to invest. Taking a risk for the country would seem a fair exchange for the 15 percent maximum personal federal income tax rate that the fund managers pay on their often huge compensation for running the funds.

The benefits of this program would include: more loans, transparency on whether creditworthy companies have been getting loans, and data that would help the government decide whether to moderately relax the bank credit regulations in order to allow more loans and a promised number of jobs, perhaps flexing for targeted industries that have the largest multiplier effects in terms of employment.

Another advantage would be to keep more manufacturing jobs in the U.S. The Reshoring Initiative, www.reshorenow.org, is periodically contacted by companies that want to expand manufacturing in the U.S., yet cannot find funding here and have been offered loans to expand in China.

I look forward to a leader at Commerce or the Treasury taking up this challenge to resolve so many critical U.S. economic issues.

 

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