The six best ways to raise Cash These tactics can help you find money -- one of the greatest challenges for growing firms.
By Vanessa O'Connell

(MONEY Magazine) – John Hickenlooper and his three partners thought they had a can't-miss idea. They would double the size of their popular brewery and restaurant to 36,000 square feet, thereby making their two-year-old Wynkoop Brewing Co. in Denver the country's largest brew pub, as the combo is called. They would also add an upscale pool hall to boost business. The only problem was, the partners needed about $1 million to pay for the expansion. So Hickenlooper called on his friendly neighborhood banker for a loan. "At one point, I leaned across the table and said, 'Doug, we're pioneers down here,'" Hickenlooper recalls. "He looked at me and said, 'Well, John, we bankers believe that the pioneers get the arrows and the settlers get the land.'" Stung but unfazed by the turndown, Hickenlooper tried another bank, and another. Fifteen months and nine more loan rejections later, he and his partners landed their cash. They obtained an $850,000 bank loan partially guaranteed by the Small Business Administration and squeezed $150,000 out of Wynkoop's cash flow. To buy 24 pool tables, they raised $70,000 from 33 investors -- 90% of them Wynkoop customers or employees. As repayment, the investors agreed to take half of the revenues forever from patrons who pay $3 an hour to shoot pool. "We were beating our heads against the wall at first, but in the end we were quite sly," Hickenlooper boasts. "We raised the money we needed and created an instant marketing team by giving our best customers a stake in our success." Since the expansion was completed in October 1992, the brew pub's revenues have risen 50% from the previous 12 months. The Wynkoop partners' frustrating encounters with overly buttoned-down bankers is an increasingly common experience for small-business owners. Of 5,400 owners questioned last June in an annual survey for the Arthur Andersen Enterprise Group, consultants to small businesses, and National Small Business United, a trade and lobbying group, almost 40% said they were unable to fill their capital needs during the previous 12 months, up from 33% in 1992. Furthermore, nearly 70% reported problems borrowing from banks, compared with 52% a year earlier. In all, outstanding bank loans to businesses totaled only $534 billion during the first quarter of 1993, 14% less than the $619 billion in 1989. Of course, bankers are still feeling the sting of having lost $147 billion to bad loans during the '80s. Their wariness carried through the recession and has continued during the slow recovery. As a result, only borrowers with enough assets to cover the debt can expect to qualify for loans. "With little collateral to pledge, a lot of growing small companies are having a hard time getting bank financing," says William Sahlman, a professor of entrepreneurial finance at Harvard Business School. Even informal private investors -- known as angels because the cash they bring is more or less a godsend -- have become exceedingly cautious. Badly bruised by sharply falling real estate values and rising taxes, "private investors are now more inclined to stash funds in tax-free municipal bonds than to invest in high-risk small-business deals," says Edward Roberts, a professor of technology and a venture-capital expert at Massachusetts Institute of Technology's Sloan School of Management. No wonder an estimated 80% of the capital that small businesses use for expansion does not come from traditional sources, says David Birch, founder of Cognetics, a research firm that tracks 9 million companies. Finding alternative financing, however, takes determination, ingenuity and hard work. To boost your chances of success, follow these six rules: Control your cash flow. According to the Arthur Andersen and NSBU survey, a business' own cash flow ranks second to bank loans as the most common source of capital. By concentrating on more efficient management of income and outgo, most businesses can generate at least 10% more free cash, says Harvard's Sahlman. Start by speeding up the collection of money you are owed and stalling payments of money you owe. "Anytime you get paid before you deliver your product or delay handing over money for your bills, you're financing your business," says Scott Daugherty of the University of North Carolina's Small Business and Technology Development Center. For example, in fulfilling a $200 million contract for cable manufacturing, John Corella, owner of Corella Electric in Phoenix, bills AT&T weekly instead of monthly, the construction industry standard. "It's an easy way to get cheap money," says Corella. You might also reduce costs by getting rid of excess inventory, perhaps through one of the 500 or so barter clubs that act as middlemen for the exchange of products and services among businesses. (To find a barter group in your area, write to the International Reciprocal Trade Association, 9513 Beach Mill Rd., Great Falls, Va. 22066.) Says David Thornburgh, director of the Wharton Small Business Development Center in Philadelphia: "Each dollar you save or don't spend is a dollar you won't have to raise later." Most important, draw up a cash-flow projection -- a budget chart that details your anticipated earnings and expenses for at least the next 12 months. It will help you spot possible cost savings and is essential if you seek outside financing. Among other things, the chart will show when and for what purposes you need money, how much you require and when your firm's earnings will grow to the point that you can begin to pay off the loan. For free help in creating a cash-flow projection, go to one of the 935 small- business development centers around the country. Sponsored by local and state governments in conjunction with the Small Business Administration, these offices provide assistance and training in every aspect of business management. For the location of the one nearest you, call the Small Business Administration Answer Desk (800-827-5722). Find financial allies. Because customers and suppliers understand your market and have an indirect interest in your business, they can be excellent sources of capital. They may also be able to introduce you to potential lenders, help you negotiate a reasonable rate or even guarantee a loan. But be aware that getting too entwined with vendors or customers may weaken your negotiating position with them on future deals. Learn how to impress bankers. Bank loans are generally the least expensive form of financing from outside sources. Today, however, says George Dawson, a San Antonio small-business consultant, "When you show up at the banker's door, you had better be more prepared than you have ever been in your life." To gain an edge, find a loan officer who knows either you or your type of business. If the bank where you keep your deposits turns you down, then ask your colleagues in local trade associations to introduce you to bankers who have helped them obtain loans. To make your business more attractive to a banker, prepare the cash-flow projection described above in addition to a written business plan that clearly demonstrates your ability to repay the loan. Get a government guarantee. If banks turn you down, try doing what 22,500 businesses did last year: Ask the SBA to guarantee your loan through its 7(a) loan program. Banks are usually willing to make this type of loan, mainly because the SBA insures up to 90% of their value. In fact, while all types of outstanding bank loans to businesses dropped 14% in the past five years, SBA loan guarantees rose 117%, from $3 billion to a projected $6.5 billion. To get an SBA loan guarantee, ask for an application at one of the 670 banks and nonbank lenders in your area that participate in the SBA's Certified Lender or Preferred Lender programs. (Call the SBA Answer Desk to get the name of one near you.) Because these lenders make an above-average number of guaranteed loans to small businesses, using one of them may save you time, paperwork and fees. If you need money for new facilities or major equipment, try the SBA's 504 loan program. You will pay 10% of the projected cost, a bank will lend you 50%, and you will borrow the final 40%, guaranteed by the SBA, from one of the nation's 389 certified development companies. These nonprofit, federally chartered organizations help coordinate public and private financing for small businesses. To locate one, call the National Association of Development Companies in Arlington, Va. (703-812-9000). Lease. "Leasing is one of the hottest ways to raise money," says William Dunkelberg, chief economist for the National Federation of Independent Business, a Nashville small-business lobbying group. There are two basic arrangements: An operating lease, which is a rental agreement, is generally the better choice for equipment that is likely to become obsolete within five years or less. A financial lease, the equivalent of a loan to buy the property, is best suited for businesses that cannot afford to pay the full cost of major purchases. With a financial lease, you borrow as much as 100% of the equipment's cost, and your monthly payments cover principal and interest. Usually, the interest on a financial lease is at least two percentage points higher than on bank loans. But leasing companies have more lenient credit standards than banks do and rarely require you to put up collateral other than the leased property itself. In addition, leasing allows you to finance a greater portion of the equipment's cost. A leasing company might let you have $100,000 in equipment for $10,000 down, while a bank would require 20% up front. For names of leasing companies in your area, call the Equipment Leasing Association of America, a trade group in Arlington, Va. (703-527-8655). Find an angel. Although these private investors are not as plentiful as in the past, they still put an estimated $10 billion to $15 billion into about 35,000 companies each year, usually in deals of $200,000 or less and mainly in firms that are growing rapidly. But don't be fooled by their nickname. Angels can be devils. In exchange for their money, they take an equity position in your firm and usually want to participate in key management decisions. To find an angel, ask accountants, lawyers and friends. Before bringing an angel into your firm, be sure to check his professional and educational background and try to get a sense of the type of relationship he had with the owners of other small businesses that he has financed. You don't want an angel who will hound you with irrelevant concerns. Instead of giving an angel equity in your company, you might consider offering a royalty deal, which pays him a portion of your revenues. Performance Technologies Inc., a $2.8 million software development and marketing firm in Boston, raised $245,000 in August 1990 by promising investors an initial 18.2% of gross revenues from its ACE Converter program; when the principal was paid back in March 1992, the royalty rate dropped to 6.1% of the gross. "The beauty of the deal is that it avoids the confrontational issues of control," says Peter Buchthal, PTI's president and CEO. "A lot of people don't look creatively at how to raise money. This is a great way to do it."

That same level of enthusiasm for creative fund raising is shared by Hickenlooper of the Wynkoop Brewing Co., who got turned away by 10 bankers. "It wasn't until we were forced to consider alternatives," he says, "that we realized the opportunities to raise money had been there all along."


Customers and suppliers can steer you to new sources.