Raising Capital, 2nd edition

Get the Money You Need to Grow Your Business

Author: Andrew J. Sherman
Pub Date: 2007
Your Price: $24.95
ISBN: 0814408567
Format: Hardcover

• Raising Capital, 2nd edition
• Sample Chapter 4
• Praise for this book
• Table of Contents
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Raising Capital, Second Edition

Chapter 4
Start-Up Financing

RAISING CAPITAL AT ANY STAGE of a company's growth is challenging and requires creativity and tenacity, but these hurdles are especially difficult to conquer at the earliest stages of an enterprise's development. In this chapter, we'll take a look at where and how to raise capital at the seed level - when you're first organizing your business, or when it is at its earliest stages of growth.

In the chapters that follow, we'll look at funding strategies that are commonly used after a business gets past the start-up phase and establishes a steady flow of customers and a reliable revenue stream, even if the company is not yet profitable. These include: alternatives for raising capital at the early stages; private placements (a more organized and expanded method of angel financing for moderate- growth companies); commercial debt financing (once the business has assets in place to serve as collateral for the loan); and ways to acquire resources that you would otherwise purchase if you had raised capital. Later in the book, we'll explore growth ­financing strategies such as seeking institutional venture capital (for rapidly growing companies that offer exceptional potential returns on investment) or raising capital by taking your company public with an initial public offering (IPO). Then we'll offer some creative alternatives to traditional financing as ways to grow your business. The main thing to understand is that no one plan fits all: The strategies available- and useful- for a particular company depend mainly on its stage of development and the nature of its business. What works for a start-up retailer may not work for a ten­year-old manufacturer, and neither of those strategies may work for an early-stage technology or life sciences business!

At the seed level, you are looking for capital to acquire the ini­tial resources that you need to launch the enterprise, attract and hire employees, conduct research and development, acquire com­puter systems, and build initial inventory. (These expenditures are commonly referred to as the allocation of proceeds.) The sources and uses of capital are described in the business plan as discussed in Chapter 3.

I'm devoting the rest of this chapter to the likely sources of seed and early-stage capital described in Figure 4-1. Although this time in your business is characterized by frustration, struggles, setbacks, and delays, there are many sources of cost-effective seed capital available if you are creative and aggressive in your search and still maintain control and majority ownership of the business.


Financing the Business with Your Own Resources

The combination of your own financial investment and time investment ("sweat equity") is a prerequisite to obtaining capital from third-party sources. The capital markets expect you to put your own funds at risk before asking others to risk investing in your business. This is often called the "straight-face test" because you are able to look a venture investor in the eye and demonstrate your own commitment and belief in the potential of the new enterprise. If you have cofounders, all of you are expected to make this type of commitment. This is true even if the level of personal investment varies due to differences in the partners' financial circumstances or the degree to which a particular individual contributes a particular skill, recipe, knowledge, or relationship - the intangible, nonfinancial aspect of contribution.

Your initial capital may come from savings, 401(k) plan loans (where permitted) or withdrawals, home-equity loans, credit cards, or other sources as set forth below. Of course, this also violates the OPM (Other People's Money) rule: Wherever possible, use other people's money to invest in a risk enterprise. But in the world of new-venture financing, the OPM rule usually goes out the window unless you're a veteran entrepreneur with an established track record and can demand that others risk their capital without investing your own funds in the enterprise.

So where do some of America's most successful entrepreneurs raise seed and early-stage capital? Each year Inc. magazine selects the 500 fastest-growing companies and conducts various surveys of the companies selected, including their capital formation strategies.

According to the 2003 Inc. 500 survey, seed capital came from:

Note: Percentages do not equal 100% because many companies use multiple sources.


If I Don't Have a Rich Uncle, Where Can I Get the Initial Seed Capital?

Traditionally, entrepreneurs have used their own savings and cred­it (credit cards, home-equity lines of credit, and so on) to finance the prelaunch expenses and initial seed investment for their com­panies. If you don't have liquidity in your personal or retirement savings, you may be able to borrow against your 401(k) account, pension, or life insurance policies.

Only you can dictate what portion of your life savings you're willing to risk, and prudence should dictate some level of conser­vatism, which may vary depending on your immediate cash needs as well as your short- to medium-term goals and needs. An indi­vidual with limited savings and two children nearing college age should be very careful with his or her savings and may want to reconsider whether this is the right time to launch a business venture at all. Conversely, a young couple with toddlers and one work­ing spouse may decide that this is a perfect time to use their savings to launch a business. They know that they have a steady source of income from the working spouse and plenty of time to replenish their savings if the business venture is unsuccessful.

FIGURE 4-1. MATCHING CAPITAL NEEDS TO LIKELY FORCES

Family, Friends, and Fools

After exhausting that portion of your life savings and available credit lines to finance the start of your business, the next most likely source of capital usually comes from those who love and trust you, or the three "Fs"-family, friends, and fools. Whether it's an equity investment or a formal or informal loan, entrepreneurs often turn to old friends and family members, who typically provide capital on the basis of a relationship rather than on the basis of financial rewards.

If your family is anything like mine, however, you may want to reconsider this strategy. You would have to be prepared to provide business-plan updates at family dinners and to be reminded weekly of "who helped you get started." The benefits of this inexpensive capital may be outweighed by the costs of the family dynamics and by the complex emotions of guilt, despair, and frustration if the business fails and the family investment is lost.

Turning to old friends for money may also be unwise, particu­larly when the friend is investing in your new business based on trust and can't really afford to lose the money if things go south. Business loans and investments have ruined a lot of long-standing relationships over the years. The catch-22, of course, is that if things go very well, then your family and friends wind up arguing with you because you didn't give them a chance to participate. Again, you know your friends and family and their tolerance for risk, and only you can decide whether it will be advisable or appro­priate to approach them for seed and early-stage capital.

If you decide to solicit friends and family as a source of capital, you must be very open and honest about the risks and rewards of the enterprise-and the risks are likely to be much more significant than the rewards in the early stages of the business. Make sure that they know that this is not like investing in the public stock market where public reporting, a track record, and the availability of liquidity protect against downside risk. You should also put the terms of the investment arrangements into writing to formalize the transaction and to avoid confusion about the rights and responsibilities of the parties.


Heaven on Earth - Finding an Angel Investor

Once you've demonstrated that your own funds are at risk and that you have exhausted your "emotional investors" (family, friends, co­workers, and others who love and trust you), it's time to begin your quest for an angel. If flying with angels isn't your cup of tea, then pay close attention to the other likely sources of seed and early­stage capital, discussed later in the chapter.

The term "angel" originated on Broadway, where wealthy investors provided funds to aspiring directors to finance the pro­duction of a new musical or drama. The motivation for the investment included financial reward but was mainly driven by the love for the theater and the chance to develop friendships with aspiring actors, playwrights, and producers. The point was that these investors provided high-risk capital and were motivated by some­thing more than money. Even today, playwrights, artists, producers, and musicians often rely on the altruism of others to advance their projects or careers; likewise, an aspiring entrepreneur must rely on something other than financial reward as an impetus for the invest­ment. Your focus in meeting and presenting to angels must be on what makes this person motivated to invest more than what Internal Rate of Return (IRR) will be attractive to their wallet.

Beyond Broadway, angel investing has become a critical source of financing for seed and early-stage companies. From Arthur Rock in the early 1960s, whose angel dollars and capital-formation efforts helped launch companies such as Intel and Apple Computer, to cashed-out entrepreneurs such as Lotus founder Mitch Kapor, whose angel investments include RealNetworks and UUNet, to new­economy multimillionaires and Internet pioneers like Ted Leonsis of America Online, and the early-stage investors in Google, thousands of modern-day angels have played a key role in the launch, development, and financing of scores of early-stage companies, as well as the mentoring and assistance to thousands of entrepreneurs.

Angels come in different shapes and sizes and often invest for very different reasons. Some are motivated by something much larger than financial return - a good thing, since it is hard to convince someone with a net worth of $125 million that your deal will make them rich. There are "checkbook angels," usually friends, neighbors, and others who typically invest $5,000 to $25,000 on a passive basis hoping to get in early on the next Yahoo!. Then there are "capital-X' angels who typically invest $50,000 to $250,000 on a more active basis and who may insist on some advisory or men­toring role as a condition to their commitment. Finally, there are the "superangels," the cashed-out multimillionaires and even bil­lionaires who have the capacity and the guts to invest $500,000 to $2 million in an early-stage enterprise in a deal that may look more like a venture-capital transaction (from a legal paperwork and con­trol perspective) than like a deal made in heaven!


The Importance of Angels

Although the business media tends to focus on the activities of the institutional venture-capital firms, the amount of money that is invested annually by angels or private investors in growing busi­nesses is much, much greater. Researchers at the Center for Venture Research at the University of New Hampshire estimate that 250,000 active angel investors are investing some $20 billion annually in 30,000 ventures, which represents over 80 percent of the total start­up and seed capital investments in the United States. Angel investors have become a critical source of seed capital at a time when venture capital funds are leaning toward latter-stage investments. The amount of money managed by venture-capital (VC) firms has grown dramatically, from $2.3 billion in 1986 to more than $60 billion in over 800 VC firms in 2003, according to a recent Venture One study. But the number of ventures under management remains small because it takes as much time to research and manage a small investment as a large one. Thus, the minimum first­round investment by a venture-capital firm is now about $4 million, eliminating many entrepreneurs who are looking for investments of as little as $50,000. The enormous success of the venture-capital industry has opened a window of opportunity for angels or private investors looking for start-ups in which to invest.


Angels Versus Venture Capitalists

Before the second half of the twentieth century, American private­equity investing was dominated by families and individual placements in emerging-growth opportunities. Wealthy families and individual investors provided start-up capital for companies such as Xerox and Eastern Airlines. The birth of the venture-capital industry is generally attributed to the formation in 1946 of the first pooled and professionally managed fund, American Research & Development (ARD). As a limited partnership, ARD and other early funds offered a passive, diversified approach for investors in earlier-stage private companies.

Over the last forty years, the VC fund model has become a centerpiece of the alternative-asset arena. Venture firms have grown larger, with more funds coming from large institutions, pension funds (which were permitted to make a limited amount of venture­capital investments when the "prudent man" rules were revised in the 1980s), corporations, and endowments. Today only 20 percent of institutional venture capital is derived from individuals and families. Paid professionals-general partners of these limited-partnership vehicles-have taken over responsibility for searching, researching, negotiating, closing, monitoring, and developing exits for these types of investments.

Angel investing has grown significantly in recent years as baby-boomers near retirement with significant wealth. Angels also include cashed-out entrepreneurs who may have feathered their nests by selling their business or taking it public. Some angels provide capital to entrepreneurs as a type of "quasi-philanthropy:' a way to give something back to their communities in the spirit of fostering local economic growth. Others are savvy private investors who also are helping an entrepreneur launch a new business along the way. It is critical for an entrepreneur seeking angel investment to understand the angel's need and motivations then take steps to meet these needs. Maybe you're the son or daughter these angels never had; maybe you remind them of themselves when they were younger; or perhaps they just want someone to coach. Maybe they've retired and need to get out of the house and feel useful; maybe they have expertise and relationships that they want to share, or they're just bullish on your industry and looking for a way to participate. It's your job to discover the reason and structure your relationship accordingly. It is critical to understand, however, that the attractiveness of being an angel became somewhat diminished in the years 2000 to 2003 and many angels are only just recently willing to look at deal flow again, with smaller amounts being invested and with tougher terms and conditions being attached. Many angels suffered severe valuation and dilution battle scars during the market adjustment in 2000 to 2003 as follow-on rounds of investment were made in companies where angels had provided the entry-stage financing. Terms such as "down-rounds," "cram-downs," and "corporate restructuring" dominated the theme of these financings where the newest money in took steps to protect itself at the cost and expense of the early­stage investors.


Profile of a "Typical" Angel

Generalizations about a group as diverse as the informal investor population are hazardous. Nevertheless, the data reveal a number of interesting characteristics. Despite the pitfalls, and as a starting point for discussion and further research, the following profile of the mythical, "typical" angel is offered:

* Age 47

* Postgraduate degree, often technical

* Previous management experience with start-up ventures

* Invests between $20,000 and $50,000 in anyone venture

* Invests approximately every two years

* Participates with other financially sophisticated individuals

* Prefers to invest with start-up and early-stage situations

* Willing to finance technology-based inventors when technology and markets are familiar

* Limited interest in financing established, moderate-growth, small firms

* Strong preference for manufacturing ventures, high technology in particular

* Invests close to home - within 300 miles and usually within 50 miles

* Maintains an active professional relationship with portfolio ventures, typically a consulting role or service on a board of directors

* Not especially interested in diversification or tax-sheltered income as an investment objective

* Expects to liquidate investment in five to ten years

* Looks for compound annual rates of return on individual investments, ranging from more than 50 percent from inventors to 20 percent from established firms

* Looks for minimum portfolio returns of about 20 percent Often will accept limitations on financial returns or accept higher risks in exchange for nonfinancial rewards

* Learns of investment opportunities primarily from friends ,and business associates

* Would like to look at more investment opportunities than present informal system permits


Finding an Angel  

While you can find individual angels through referral from an accountant or attorney, angels increasingly participate in a variety of networks.


Nonprofit Angel Networks. There are more than fifty loose-knit organizations nationwide through which investors learn about opportunities, attend programs about investing, and develop a sense of community. These networks are usually run by nonprofit entities, have tax-exempt status, and are oriented toward economic development. The greatest benefits come from community building among investors and creating a more efficient marketplace for entrepreneurs to approach sources of capital.


Pledge Funds. A more recent phenomenon involves pools of funds in which investors (anywhere from a handful to dozens) pledge a specific amount of money to be invested in private equity transactions that are selected and managed by the group. Sometimes the group has a centralized paid staff; sometimes it is led and organized by a lead investor. These groups set legally rigorous standards, are focused, and are designed to profit from multiple transactions.


The Club Approach. In this model, investors place a set amount into a "club" account that is used like a venture fund to make investments found and voted on by club members. This approach can be staffed or unstaffed. More money can be accumulated than an individual can afford and a more diversified fund can be created. Group dynamics are involved because each member must review potential opportunities in order to decide to "vote" for or against a deal.


CEO Angels. A small venture fund, usually a limited partnership, is created by investors drawn from a specific business community. They provide assistance as well as capital to chosen companies, which are usually from the same field. Members of the group may take on general partnership responsibilities, or professional managers can be employed. This model is very similar to the traditional venture­capital model, except that investments are more focused and the limited partners are more active in helping to find opportunities and to provide hands-on assistance to the companies chosen. An example is the Next Generation Fund in Northern Virginia.


Active Angels. In this model, angels are more active in the role that they propose to play in the growing company once funds are committed. Some angels in this model are really looking for full or almost full­time employment with the companies in which they invest.


Angels Online. These are Web sites that seek to match angels and entrepreneurs as well as provide information and resources for early-stage companies seeking to raise public or private capital. These "e-capitalists" all focus on different niches and services at different fee levels, but the industry pioneers whose sites are worth a look include Garage.com, Seedstage.com, Vcapital.com, ACE-NET.unh.edu (an SBA-supported project), Umbrellaproject.com, Svv.org (Silicon Valley Venture network site), Offroadcapital.com, Capital-Connection.com, and TheCapitalNetwork.com. These Web sites provide services from simple database listings to complete screening and advisory services. The online angel networks make their money by charging entrepreneurs and investors subscription fees-about $500 for the entrepreneurs to list their company and their business summary, and for the angels to have access to listings.

Typically, the entrepreneurs are asked to fill out forms that outline the history of their business, the market for their product or service, the amount of capital they are seeking, and related background information. The online matchmaker will then screen submissions and post them, or in some cases it will match entrepreneurs with interested angel investors. Some sites offer online chat areas where angels and entrepreneurs can meet to discuss the business plans. Other sites post the business plans, and still others simply encourage the investor to contact the entrepreneur directly. The sites are open only to institutional investors and venture-capital funds.


Asking an Angel to Dance

From a practical perspective, it's just as important for you to perform due diligence and prequalify your prospective funding sources as it is for the angel to scrutinize your business plans and evaluate management (see Figure 4-2). In addition to the regional or national angel networks mentioned above, there are a number of online resources to direct entrepreneurs to private investors. You should also attend venture and trade fairs and forums (see Figure 4-3). Networking through friends and associates-getting out there and talking to as many people as possible-is still the best way to find an angel. Remember, dancing is, in the end, a person-to-person activity.

You can also find potential angels through networking in business and venture groups, private investor clubs (which usually have organized monthly presentations by entrepreneurs to potential prequalified angels), venture-capital networks, incubators, industry trade associations, university and fraternity alumni meetings, social and country clubs, and virtually any other place where semiretired and cashed-out entrepreneurs may hang out. Angels may invest alone or as a group through clubs and networks ("bands of angels"), and while many won't consider a deal that requires more than $50,000, a growing number of individuals with very high new worth ("superangels") will invest $500,000 or more of their own money and help you identify other potential investors. These superangels also bring respect and credibility to a new business because others respect their expertise and industry knowledge.


FIGURE 4-2. HOW WEALTHY DO I WANT MY ANGEL TO BE?

The ideal angel will have a net worth that is not too high or too low relative to the amount of seed and start-up capital that you need to raise. For example, if you need $250,000 in seed capital from an angel, an ideal net worth would be $5,000,000 to $10,000,000, which is a large enough net worth that the angel can afford to lose the entire investment if things go poorly and can also be a source for some follow-on financing. Since the investment also represents 3 to 5 percent of their net worth, it will still be taken seriously. An angel with a net worth significantly lower ought not to be taking this level of risk in their portfolios, and conversely an angel with a $100 million net worth may view the deal as too small and/or not take the investment seriously thereby being too focused on other deals or projects, or lacking the time and attention that you want them to devote to your company.

As I mentioned earlier, you've got to do your own due diligence on each angel you consider. Remember that the relationship is akin to a spouse or parent-so you have to be sure that you can get along personally with the individual. You'll also need to define your nonfinancial expectations and have a meeting of the minds on these issues. A good angel offers you (and your business) a lot more than money, and you need to reach an agreement regarding how much of the angel's time will be available for advice, coaching, and mentoring as well as what doors the angel is expected to open on your behalf. Ideally, your angel should have a diverse (and current) rolodex, deep industry experience, and significant company-building experience in addition to being a source of seed capital. The angel-entrepreneur relationships that don't work out over the years often fail because of misunderstandings about the nonfinancial aspects of the relationship.


Angels or Devils-You Be the Judge

In the rough-and-tumble world of new-venture investing, one common myth is that angels-because they invest in part for nonfinancial reasons-are somehow kinder and gentler in the way they structure deals. While it may be true that few angels want seven inches of legal documents to govern their deals, they also will not tolerate a cocktail-napkin or handshake deal. They didn't amass their wealth by being pushovers, and the same holds true in their venture investing. Be prepared for some tough one-on-one negotiating over risk, control, and rewards with a sophisticated angel who has a first-rate advisory team. These high-paid advisers usually view their mission as protecting the wealthy client from bad deals or transactions that aren't carefully thought out or properly structured. For more information on the advantages and disadvantages of attracting an angel investor, see Every Business Needs An Angel by John May and Cal Simmons (Random House, 2001).


Understanding Angel Investment Club Criteria

Each angel club has their own processes and criteria for the decision­making process and some of these vary by region. Set forth below are the "10 investment commandments" of the California-based The Angels Forum (www.angelsforum.com). which made its first investment in 1998 and today remains an active investment club. *

1. Management: Thou shalt invest in good management that demonstrates an ability to execute the business plan rapidly, provide sound cash management, raise additional cash, lead the organization, and adjust the business plan when necessary. Thou shalt seek leaders with industry expertise who are driven and charismatic.

2. Board of Directors: Thou shalt invest only in companies where the majority of the Board of Directors is composed of strong outsiders, who possess solid business experience in the industry and/or in the stage of the company. Said Directors shall push the company to execute the business plan rapidly within cash constraints and shall also have the ability to recognize the need for a CEO change and act swiftly in implementing it. Thou shalt seek Directors with good contacts for initial customers and/or for raising capital.

3. Business Plan: Thou shalt seek business plans that effectively address the technology, customer acquisition, and competitive challenges, to establish the business with realistic gross margins, unit volume, and return on capital invested.

4. Access to Capital: Thou shalt identify and establish relationship with sources of capital with a history of investing in like kinds of businesses in the amounts needed for the company. Thou shalt work with these co-investors for the betterment of the company and all investors.

5. Product Need: Thou shalt invest in companies that have an in-depth knowledge of their customers' usage habits and needs (through to the end user). Thou shalt forsake all those "nice to have" products or services and save thy resources for "must haves."

6. Sustainable Differentiation: Thou shalt invest in companies that have advantages such as patents, first-mover position, world-class technologists, proprietary processes, and/or key customers under contract.

7. Market Size and Trajectory: Thou shalt invest in companies that have large and/or rapidly growing markets or can realistically create such markets. Thou shalt invest in companies with a low risk of market loss to alternative technologies.

8. Technology Risk: Thou shalt have sufficient technical expertise at the table, or through thy trusted contacts, to evaluate all product and technology claims before committing thy resources.

9. Investment Execution Risk: Thou shalt have established the ability to influence key company decisions, create and link milestones to capital rounds, and seek early customer learning, as through use of prototypes. Thou shalt receive a fair valuation on thy investments and not release investment funds until the full round is raised. Thou shalt stay involved and work with companies to assist-aggressively if necessary-in their success. Thou shalt invest only in those companies that provide a clear exit strategy for thy investment.

10. Investment Evaluation Risk: Thou shalt ask tough questions of the company, listen to the market, and discuss the company with other investors. Thou shalt always speak truth with thy fellow Members and be loyal in voicing any opposition or apprehensions, now and forever and ever.

FIGURE 4-3. WHERE TO FIND AN ANGEL

Other Sources of Seed and Early-Stage Capital

Let's assume that your personal funds or credit lines are limited, your friends and family either have no money or you don't want to ask them for it, and investing is not for you-what alternatives do you have? There's still hope for finding money at the early stages, . although you may have to work a little harder and wait a little longer than you expected. In the realm of high-probability/low-cost capital formation options, consider the following creative sources.


University and Private Incubators

Many universities have established business incubators, to both foster entrepreneurship and assist in the "birthing" of new businesses and ideas. (See Figure 4-4.) These incubators offer shared resources, on-site advisers, cooperative research and development, and the natural synergies of having entrepreneurs with different ideas all at the same venue. A more recent trend is the "private incubator," often established by cashed-out entrepreneurs who offer their expertise as well as the physical facilities to foster business growth and development.


Advantages of Business Incubators

* Greatly increase the likelihood of survival for start-up firms

* Creates jobs in the community, helping to retain individuals who might leave the area due to lack of job opportunities

* Target low- to moderate-income groups

* Place fledgling businesses together, allowing tenants to participate in joint problem solving, supporting others facing similar problems, exchanging information, and discussing mutual commercial interests

FIGURE 4-4. INCUBATOR RESOURCES

Disadvantages of Business Incubators

* Require long start-up time (but the community can be working with entrepreneurs during the start-up time to provide business planning and assistance)

* Carry high start-up cost

* Demand a continual operating budget

* May never become self-supportive

* Most businesses started in an incubator do not grow to be large businesses

* Existing businesses may not be supportive due to fear of competition

© Copyright 2003. The Angels' Forum Management Company- LLC. All rights reserved. Used with permission.


Economic Development Agencies (ED As) and Community Development Corporations (CDCs)

The U.S. Department of Commerce's Economic Development Administration was established by Congress to generate jobs, help retain existing jobs, and stimulate industrial and commercial growth in economically distressed areas of the country. EDA assistance is available to rural and urban areas of the nation experiencing high unemployment, low income, or sudden and severe economic distress. The EDA works in partnership with state and local governments, regional economic development districts, public and private nonprofit organizations, and Indian tribes. Its programs include: public works, urban development, economic adjustment, research and evaluation, economic development districts, local technical assistance, national technical assistance, trade adjustment assistance, university centers, and redevelopment centers (see Figure 4-5 ).


Customer Financing

No one (besides you) is more interested in your success than your customers, and they may be willing to provide funds or other resources to facilitate your launch. In addition to equity, the customers may want some type of partial or full exclusivity to a given product or service, and can play an expanded role in influencing how the product will be offered, distributed, or packaged. For example, a group of retailers may be interested in an early-stage software company whose product, once finished, could streamline their inventory-management systems. In some cases, the customers may form a consortium or buying group to invest in the company. Customers with a vested interest in a business are likely to stay long-term, offer free expertise, and lead to new customer referrals.

An alternative to an equity investment would be for the customers to prepay for the product or service in exchange for a discount or other benefits. These customer-financing arrangements can be especially useful if the business requires large up-front development costs, such as the software industry, where targeted licensees/customers could provide early-stage financing in exchange for perpetual, royalty-free, and unlimited rights of use in the end product.

FIGURE 5-5. CUSTOMER FINANCING

Vendor Financing

This form of early-stage financing is fast becoming one of the most popular methods used by small businesses to acquire resources they need for growth. Statistics from the Equipment Leasing Association, based in Arlington, Virginia, show that vendor financing leapt from a seldom-used sales option to a $13-billion-a-year industry between 1992 and 1998.

Vendor financing can be obtained through companies of all sizes, from small suppliers to large corporations. The firms listed in Figure 4-6 are finance companies owned by major manufacturers. The trade associations listed there can provide information about vendor financing and help you find a vendor that meets your needs.

Usually business owners select the equipment or supplies they need and then apply for financing through a vendor that offers such arrangements. Some businesses work in reverse, first locating a vendor that offers financing and then selecting equipment from that vendor. Most vendors will prepare the documents in-house, even though financing is a transaction separate from the lease or purchase of the equipment and may be handled by an outside company.

Vendors may also be a useful source for other resources that you would otherwise be raising money to obtain, such as research and development, advertising and promotion, and even customer referrals. Typically, larger vendors in a wide variety of industries offer formal programs, have large budgets for customer support and services, or focus on smaller, emerging-growth companies that may mature into larger customers. Talk to your largest vendors, and shop competitively for products and services they may be in a position to offer. You'll be pleasantly surprised how many larger companies have targeted the small-business customer as a high priority and have resources ready to offer you at little or no cost.


FIGURE 4-6. VENDOR FINANCING RESOURCES

Canon Financial Services
(office equipment)
(800) 220-8880
www.cfs.canon.com

Equipment Leasing Association
(all types of equipment)
(703) 527-8655
www.elaonline.com

GE Capital
(all types of equipment)
(800) 553-7287
www.gecapital.com

Hewlett-Packard
(high-tech equipment)
(800) 752-0900
www.hp.com

IBM Global Financing
(IBM products and services)
(800) 678-6900
www1.ibm.com/financing/

IKON Capital
(office products)
(912) 471-2300
www.ikon.com

John Deere Credit/Leasing
(agricultural and construction equipment)
(515) 224-2800
www.deere.com

Oracle Credit Corp.
(computers and software)
(650) 506-2020
www.oracle.com

© 2005 Andrew J. Sherman.
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