Hunt for Capital a Paradox for Owners and Investors
Ask business owners to name their biggest problem and you often hear a simple answer--financing growth.
Ask lenders or investors to name their biggest problem and you get another simple answer--finding growing businesses to finance.
Put their answers together and you get the paradox of finance for small and mid-size businesses:
* Business owners want help to make their companies grow.
* Meanwhile, lenders and investors want growing businesses in which to put their money to work.
* And all of these folks find it very hard to track down one another.
What accounts for the paradox? Why is the search for capital so hugely frustrating to the parties involved? Most important of all, as business owners look ahead to the new year, what can they do to plan the search for capital? How can they give themselves a good chance to get the financing they need in 1999 so that, a year from now as they look ahead once again, they will see bigger and better things?
An economist would tell you that the marketplace for capital is highly inefficient. There is no central place where owners can meet lenders and investors and do business--as, for example, the buyers and sellers of stocks and bonds meet on the New York Stock Exchange.
Put another way, when it comes to financing small and mid-size businesses, the people who need capital don’t know where to find those who might provide it, and vice versa. To get the financing they need, business owners must sit face to face with those who might help--a tough job in the sprawling, loosely knit, constantly changing economy of Southern California.
Business owners often begin the search for capital at the nearest branch office of a commercial bank. They often end the search there too, not because bankers don’t want to lend money but because business owners don’t know how the marketplace for capital operates.
They also don’t know that many, many other sources exist from which they might obtain financing, among them institutional lenders, private investment groups, venture capital funds, non-bank lenders, government agencies and other sources regularly described in this column.
To get to these sources, owners must network among their professional advisors and business associates--another tough job, but essential. And they must approach the financing sources with three things: realistic plans, solid financials and professional management skills.
“Of every 100 people we see about loans, probably 25 aren’t good prospects,” says Ed Lanchantin, a Merrill Lynch vice president who heads the company’s business financial services group in Los Angeles.
“Another 50 may become good prospects, but they don’t come to the table with the basics--the business plan, the financials and the management skills.
“The other 25 do come to the table with the basics, and we recognize those people right away. Not only that, but we do business with them right away too.”
What makes for a realistic business plan in the eyes of a lender or investor? Why are good financials important, and how can the business owner demonstrate his or her management skills?
A realistic business plan doesn’t project growth beyond the capacity of the company to manage it, Lanchantin says, and its writer doesn’t expect to become the next Bill Gates. Instead, a good plan projects reasonable growth and details exactly how to bring it about.
Good financials cover three, and preferably five, years of operations, he says. The statements should be prepared by a reputable accountant, but they needn’t show huge growth or profit. The business owner should prepare personal financial statements too.
In many ways, management is the key element in the puzzle, Lanchantin says.
“If the financial statements show growth, we want to know how the management team did it. If they show periods of crisis, we want to know how the team managed them too. Both are important to show that the management team has the skills necessary to carry the company into the future.”
Equity investors want to see the same information, usually in even greater detail, Lanchantin says, and if business owners chafe at the burden of proving themselves, they must remember that lenders and investors need comfort when they put their capital at risk.
In plain English, this means that owners who seek outside financing don’t set the rules of the game, he says. But if they play by them, they get the financing they need.
“If you go looking for it with pie-in-the-sky ideas, you won’t find it. But if you prepare yourself for the search with realistic plans, good financials and solid management, you’ll get it,” Lanchantin says.
*
Freelance writer Juan Hovey can be reached at (805) 492-7909 or via e-mail at jhovey@gte.net.
More to Read
Inside the business of entertainment
The Wide Shot brings you news, analysis and insights on everything from streaming wars to production — and what it all means for the future.
You may occasionally receive promotional content from the Los Angeles Times.