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Show Me the Money

November 15, 2003

Business funding has become more challenging lately as rates appear to be on the rise and venture capital seems to have dried up. What were yesterday’s obvious funding solutions may seem to be a pipe dream as both banks and investors become more reluctant to assume the same risks that, in the evolving economic environment, may result in reduced profits. Consequently, today’s small to mid size businesses have to be more creative in their quest to find the necessary financing that will allow them to prosper. Companies that can show increasing revenues, possess strong business plans, and have stable management teams remain viable risks for financiers.

Conventional banks are often the best starting point for business financing. However, this is a time when tunnel vision is not appropriate. If financing is necessary to achieve one business goal, it is possible that other concurrent needs may also be appropriately addressed simultaneously. Packaging total needs and shopping the package to a prospective lender can open the lines of communication with loan officers and quickly determine the ceiling that a conventional lender is in a position to provide. Often businesses find that a combination of loans, including traditional mortgage loans, term loans, and lines of credit, can be satisfactorily negotiated to accomplish the task.

It is possible however; that a business’s total funding needs may be beyond the scope of a single conventional lender’s capabilities. This is when it is time to start thinking out of the box. One of the most popular alternative scenarios is to seek out private financing. This comes in many forms, and careful consideration of the options can usually produce at least one viable option. For example family members, friends and other potential private investors may be approached for an influx of necessary cash, however this is not a time for handshake deals. Any arrangement for private investment into your business should always be in writing with the advice of professional counsel to facilitate future funding success and avoid both timely and costly litigation down the road.

Private equity is another available resource. This venture typically involves an investment of equity in exchange for a certain percentage of ownership in the business, which may be concurrent with the timing of the investment or in the nature of options or warrants exercisable by the investor at a future date. The established triggers for the exercise of such options/warrants may be performance based, and thus shift in time relative to the success of future performance against established goals. This risk may be worthwhile if business owners are confident in their ability to succeed; and therefore maintain control of their company.

Strategic partnerships may also be utilized to secure additional capital. Joining forces with another company can sometimes secure a distribution channel or ensure a steady product flow, which may be very attractive to a vendor, client or even a competitor with cash to spare. Reviewing all business alliances may reveal a synergy with a company that could prove mutually beneficial by providing the funding you require while providing your new business partner with a specific benefit they desire.

Merging with another company can also provide the means of obtaining necessary capital. The combined assets of the two companies will be stronger than the assets of either singly, so this puts the merged business in a better borrowing position. Granted, the identity of one of the merging entities may be lost in such a merger, however this is usually overshadowed by the additional exposure, increased customer base and enhanced security of the stronger, surviving company.

Venture capital (VC) is money invested by professional investors into cutting edge companies that possess great potential to grow rapidly. Most venture capitalists look to exit such a business within 3 to 7 years, so their goal is to realize their profit on their investment as quickly as possible. They typically look for product leaders and/or new technology developers in fast growing markets. Their investment targets usually have a strong and stable management team in place, or favor the VC’s assistance in developing such a team. Since the eventual acquisition or a merger of the target company is usually the goal of VC’s investment, the company must also have the potential to become an attractive commodity in a relatively short period of time.

Tax-exempt bonds are another attractive option for businesses in Massachusetts. Available from the Massachusetts Development Finance Agency, these bonds can save businesses an additional 1.5 – 2 percent on the cost of their borrowing when compared to private sector funding while providing tax free income to the ultimate bond purchasers. Typical recipients of these bonds are municipalities, school districts, hospitals and other non-profits, developers of low income housing, and manufacturers who plan to build facilities or acquire new capital equipment that would create new jobs within their businesses.

In today’s changing business climate, a conventional bank may be the first stop in a journey rather than a final destination. Fortunately, various other financing options are available for meeting your business’s particular needs. The fact is that a growing company with a good track record, solid management team, and viable business plan remains an attractive investment target. The money is out there; now it is simply an issue of getting creative about finding it. Professional counselors have relationships with and knowledge about various funding resources, so they may be a good first step when researching available options.

Gary G. Breton, Esquire, is a member of Bacon & Wilson, P.C.’s Banking and Finance Department. His major emphasis of practice includes representation of financial lending institutions, as well as both individual and business borrowers. He also represents numerous business clients in the startup, purchase and sale of businesses. Gary can be reached at 413-781-0560 or [email protected].

by: Gary G. Breton , Esq.

Valley Business Outlook
November 2003