Capital is the crucial ingredient for any business to grow. This holds true whether you are a one-person firm with minimal revenue or a 100-person company with significant sales. Yet so many entrepreneurs and business owners complain about how difficult it is to attain. Here are just five of the numerous ways to access capital taken from the informative new book, Solving the Capital Equation. Use these ideas to spark your creative thought process and get the money you need to elevate your business.
• Form strategic partnerships. Consider the following: Who is already reaching your client or customer base? Who offers products or services that may be a great fit for your client or customer base? Who has a skill set or functional expertise that your firm lacks? All of these entities would make great prospective partners. Identify them, then craft a win/win partnership. Why spend money you do not have when you have something else of value to offer them – your firm’s product and services! You can use partners to access the sales force, marketing, IT, accounting, management expertise - to name just a few – of the services you would otherwise have to pay for.
• Barter. As a business owner, you have a product or service that someone wants. Otherwise you wouldn’t be in business. You can barter these products or services for those products and services you need to grow your business or service your customer. Or you could barter for items you would typically remove from the company to pay yourself, then spend on personal items. You can barter for advertising, travel, legal or accounting services, televisions, landscaping, cleaning services…
• Find a strategic investor. Is there a larger company that would benefit directly from your service or product offering? If so, contact them. If you can convince them that your company can directly or indirectly positively impact their bottom line either through a sales increase or a cost reduction, you are likely to garner financing in the form of direct equity, a loan, use of their credit, prepaid contracts, or payment of development costs. Look around. Potential strategic investors abound.
• Tap your suppliers. Are you trying to rapidly expand your business and need money to pay your suppliers? Why not ask your supplier to advance you the money? If your expansion will contribute a sizable portion of your supplier’s annual receipts, you can induce the vendor to provide a 12-18 month loan by promoting how he/she stands to benefit. At the least, negotiate a 90-day payment arrangement.
• Seller finance. Who knows the business or asset better than the person or entity selling it? If you are growing your business through acquiring other businesses, seek seller financing. Give them a lien against the business so they get the business back if you default. Suggest it as a way for you to know you are getting what you paid for. Added benefit: reduces risks that the company has hidden problems which greatly decrease its value and that the owner would start another competing business.
Saturday, March 28, 2009
10 Ways to Raise Capital for Your Construction Company or Other Service Business
There are myriad sources that construction companies can access when seeking working capital for business or funds to grow the business whether that is to broaden the geographical area, expand the array of services, or pursue significantly larger contracts. (Acquisition financing is not covered here.) I have covered many of these sources in previous articles. However, the question sometimes is, “What options should I pursue and in what order?” For construction companies, the answer lies below.
Follow these steps to procure financing to grow your business
1. Personal finances.
2. Friends and family.
3. Banks. Typically a line of credit is what will provide you with the working capital cash your business needs. If you are purchasing equipment, materials, and other assets, consider financing from the seller (distributor, equipment leasing vendor, or other supplier) and credit cards. For all other working capital needs – payroll and other payments in advance of payment from customers – the line of credit should suffice.
4. Credit cards. Refer to the bank discussion. Use credit cards to purchase office supplies and other materials.
5. Accounts receivable financing or factoring. If you have contracts or purchase orders or proposals from which you create invoices, and hence receivables, then accounts receivable financing may work well for you. As mentioned in previous articles, this can be expensive but is often a great short-term solution. Comparison shop for the best service and rates. Some receivable financing and factoring firms do not finance construction projects due to the reserves/retainers often contractually required.
If you are working on specific government contracts or with a specific government sub-agency, there may be dollars set aside to provide lower interest loans tied to the receivables from the contract. Ask. Investigate. This is a good source of working capital for business.
6. Microloans. If the amount of money you need is low (under $25,000) consider microloans. There are a number of microloan providers in the Atlanta metro area and throughout the state of Georgia. The same applies across the United States.
7. Angel investors. If you have a rapidly expanding business or have a plan for one, an angel may provide the equity funds you need to grow your business. An angel that is actively involved in the business may also serve as a guarantor for a bank line of credit if your personal credit or your business credit rating is too low to qualify for a loan.
8. Joint venture.
9. Strategic investment.
10. Private equity. Business service providers such as construction companies, IT services companies, marketing firms, and business consulting providers (the list goes on) can only attract equity if and when they have a plan to expand regionally or nationally, occupy a strong market niche or have successfully differentiated their company from their competitors.
Private equity funds typically need a 20% or greater expected return and without the larger expansion plans and scope, a construction firm or other business services company will not provide the required returns. In addition, some funds do not like the lack of contractual recurring revenue inherent to the construction industry. You cannot attract equity and raise capital for your ten-person firm. However, if you have the management team, business development acumen, sales strategy, and operational foundation to grow the business to a 100-person or larger enterprise in a few years, private equity funds may be interested.
Construction firms tend to be small, local operations. Therefore, most firms will not qualify for any equity investment. However, if you want to make the leap from a small consulting type shop with historical revenue of $3 Million or less to one with $30 Million or more, you need to first create the vision and goals, then the plan to achieve those goals . If necessary, engage business consultants and coaches who can help you identify the company’s and your weak areas and put the things in place that will lay the foundation to help you achieve your goals.
If you only reached $3 Million in all of the last ten years, and now you want to make the jump to $30 Million in five years, you must address the huge credibility gap you are now burdened with. Utilizing consultants and coaches will get you on the path to raise capital sooner. These entities can also help you write a plan that incorporates the necessary changes.
If you have been on the path to larger revenue from the beginning, then you do not have the credibility gap with an equity source. However, you must clearly understand and clearly communicate how you are different and how you will achieve revenues of tens of millions when the vast majority of your peers will never come close. This is not to discourage you but to simply help you understand what the investors’ point of view will be.
Follow these steps to procure financing to grow your business
1. Personal finances.
2. Friends and family.
3. Banks. Typically a line of credit is what will provide you with the working capital cash your business needs. If you are purchasing equipment, materials, and other assets, consider financing from the seller (distributor, equipment leasing vendor, or other supplier) and credit cards. For all other working capital needs – payroll and other payments in advance of payment from customers – the line of credit should suffice.
4. Credit cards. Refer to the bank discussion. Use credit cards to purchase office supplies and other materials.
5. Accounts receivable financing or factoring. If you have contracts or purchase orders or proposals from which you create invoices, and hence receivables, then accounts receivable financing may work well for you. As mentioned in previous articles, this can be expensive but is often a great short-term solution. Comparison shop for the best service and rates. Some receivable financing and factoring firms do not finance construction projects due to the reserves/retainers often contractually required.
If you are working on specific government contracts or with a specific government sub-agency, there may be dollars set aside to provide lower interest loans tied to the receivables from the contract. Ask. Investigate. This is a good source of working capital for business.
6. Microloans. If the amount of money you need is low (under $25,000) consider microloans. There are a number of microloan providers in the Atlanta metro area and throughout the state of Georgia. The same applies across the United States.
7. Angel investors. If you have a rapidly expanding business or have a plan for one, an angel may provide the equity funds you need to grow your business. An angel that is actively involved in the business may also serve as a guarantor for a bank line of credit if your personal credit or your business credit rating is too low to qualify for a loan.
8. Joint venture.
9. Strategic investment.
10. Private equity. Business service providers such as construction companies, IT services companies, marketing firms, and business consulting providers (the list goes on) can only attract equity if and when they have a plan to expand regionally or nationally, occupy a strong market niche or have successfully differentiated their company from their competitors.
Private equity funds typically need a 20% or greater expected return and without the larger expansion plans and scope, a construction firm or other business services company will not provide the required returns. In addition, some funds do not like the lack of contractual recurring revenue inherent to the construction industry. You cannot attract equity and raise capital for your ten-person firm. However, if you have the management team, business development acumen, sales strategy, and operational foundation to grow the business to a 100-person or larger enterprise in a few years, private equity funds may be interested.
Construction firms tend to be small, local operations. Therefore, most firms will not qualify for any equity investment. However, if you want to make the leap from a small consulting type shop with historical revenue of $3 Million or less to one with $30 Million or more, you need to first create the vision and goals, then the plan to achieve those goals . If necessary, engage business consultants and coaches who can help you identify the company’s and your weak areas and put the things in place that will lay the foundation to help you achieve your goals.
If you only reached $3 Million in all of the last ten years, and now you want to make the jump to $30 Million in five years, you must address the huge credibility gap you are now burdened with. Utilizing consultants and coaches will get you on the path to raise capital sooner. These entities can also help you write a plan that incorporates the necessary changes.
If you have been on the path to larger revenue from the beginning, then you do not have the credibility gap with an equity source. However, you must clearly understand and clearly communicate how you are different and how you will achieve revenues of tens of millions when the vast majority of your peers will never come close. This is not to discourage you but to simply help you understand what the investors’ point of view will be.
Wednesday, March 25, 2009
Market Research on the Cheap: How to Do It
If you are not in touch with your customer base, then you need to start anew. If you have traditionally pursued the “low hanging fruit” – any prospect who is relatively easy to obtain -, you may not know who your real target customer is. Nor will you know how to access that customer. If this sounds like your company, then you have probably been garnering business based predominantly on price. Now is the time to conduct the research to find out who your real customer (the best customer for your product or service offering and your strength in that area) is and craft a strong value proposition that will help you weather the construction industry downturn and position your business for serious growth when the economy recovers.
Here are some recommendations for conducting that market research affordably:
1) Get back to basics. A lot of the most valuable market research comes directly from prospective customers, not from a 50-page industry research report. Identify who your target customers are, build a list of people or businesses to call, craft a questionnaire to get the answers you seek and dial for dollars. Enlist the help of employees, temporary staff, or use a virtual assistant if the list is lengthy.
2) Use Hoovers.com or similar website to determine who the larger companies in your industry providing a similar good or service are. Many of those companies are public which means they must publish detailed quarterly (10-Q) and annual (10-K) financial reports. You will find these in the investor information section of the companies' respective websites or on the SEC website at www.sec.gov/edgar.shmtl. These reports are filled with significant current industry and market information that is often directly applicable to your company.
3) Some of the best research involves competitors. Obviously, no direct competitors in your area of operation (i.e., construction companies in Georgia) will freely share information with you but often direct and indirect competitors in completely different regions of the country will willingly answer questions that could help you assess the market, identify prospects, and avoid pitfalls. Find out who they are and call (preferred) or write.
In an economic or industry downturn, many times business as usual doesn’t work. So many industries - the construction industry, the automotive industry, the real estate industry, the heavy goods industry - are cyclical. During a down cycle those companies that focus on good fundamentals - which includes identifying and keying in on the most appropriate customers and ensuring your company has an excellent value proposition for them – continue to do well relative to their peers and ultimately position themselves to excel when the market shifts.
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