The Money Trail
By By Peter Krass
 |
Mark
Kreisel thought he had it made.
His company, Tradewinds Engine Services, was doing nicely. Since its
founding in 1996, sales for the Coconut Creek, Fla., aircraft-engine
refurbisher had ramped up smartly. By 2001, Kreisel added a handful
of employees and expanded business services, and the company outgrew
its 7,000-square-foot facility. To keep the business purring during
cash-flow gaps, he had two lines of credit from a large, nationally
recognized bank: one based on Tradewinds’ assets; the other, on
foreign receivables insured by the U.S. Export-Import Bank of the United
States.
Then came September
11. Even before the terrorist attacks, the aviation business had seemed
shaky. But in October 2001, with air traffic grinding to a standstill,
Kreisel’s bank told him to find another financial dance partner.
Easier said than done. In fact, Tradewinds’ search for a new bank
came up dry. “Everyone got skittish about aviation,” Kreisel
recalls. And without a line of credit, Tradewinds would have a hard
time coming up with cash to buy engines it could later refurbish and
resell as parts. But then Kreisel discovered that a friend from his
church worked as a banking consultant. The friend, Carl Sprague of USBX
Advisory Services in Fort Lauderdale, Fla., created a five-year business
plan for Tradewinds, then hooked them up with UPS Capital and its First
International Bank subsidiary. “We hit it off,” Kreisel
says.
The lender is essentially refinancing both of Tradewinds’ lines
of credit and in the process, has bumped up the total by $1.5 million.
Perhaps most important, the deal has allowed Kreisel to continue purchasing
used aircraft engines and avionics, grow the company, hire more employees
(now up to 22) and move into a new 25,000-square-foot facility that
he had built across the street. Sales for 2002 were approximately $21
million—up from $20 million in 2001.
Kreisel’s trip around the Wheel of Fortune is a typical one in
today’s challenging economy. Threats of terrorism and the vicissitudes
of Wall Street have dampened the enthusiasm of many traditional sources
of small-business capital—including angel investors, venture capitalists,
even some banks. Yet for business owners seeking capital, whether for
startup or expansion, now is a better time to seek funding than they
might think. Interest rates are low, government small-business agencies
remain as eager as ever to help, and opportunities exist for those willing
to do the legwork.
That’s not to say that raising capital is easy. “Today,
you need to be creative, aggressive and persistent,” says Andrew
J. Sherman, a partner at the Washington law firm of McDermott, Will
& Emery and the author of 11 books on funding and growing businesses.
One major change you’ll find is a return to business basics. Gone
are conjectural business plans with so-called hockey-stick sales projections.
You need real customers, real sales and real profits. “If a company
can show a track record of delivering sales to customers, delightful
things happen,” says Andrew Birol of Birol Growth Consulting in
Solon, Ohio. “I’d rather have $100,000 of customer money
than $1 million of venture money.”
Still, it’s possible to raise capital during these trying times,
as the following profiles of small-business owners and executives illustrate.
I
Owe Ewe
Three years
ago, Nicole Pritikin wanted to open an online yarn and knitting store
in Bennington, Vt. Pritikin, who loves to knit, had a catchy name, The
Naked Sheep (www.naked sheep.com) but no financing. “I was looking
for sources for money,” she recalls, “but the local banks
said I hadn’t been in business before and turned me down.”
Luckily, she heard about a national nonprofit organization called Count
Me In for Women’s Economic Independence (info@
count-me-in.org). Based in New York City, the organization offers
business loans of up to $10,000 to qualifying businesses. Pritikin received
initial funding, and her business took off. In addition to Internet
sales, she wanted to open a retail store. Again, she needed funding
for inventory and commercial space. This time, the banks were convinced
Pritikin knew what she was doing and provided an expansion loan of $20,000.
 |
“I was looking for sources for money, but the local banks said I hadn’t been in business before and turned me down.” —Nicole Pritikin, owner, The Naked Sheep |
Between her online
trade and her store, Pritikin generated revenue of $100,000 in year
two, shipping products as far away as Japan and New Zealand. She’s
now considering expanding again—perhaps buying her own building
and providing catalogues for national customers who prefer to shop via
the printed page rather than the Internet.
Given the state of the economy, these plans may sound overly optimistic.
But in 2002, The Naked Sheep nearly doubled its growth and brought in
$175,000. At this rate, Vermont’s sheep can count on many long,
cold winters.
Weather
Modification:
Government Seeding
Everyone complains about the weather, but a privately held company known
as Weather Modification Inc. (www.weathermod.com)
is doing something about it. As its name implies, Weather Mod provides
cloud-seeding equipment and services, cloud research, air-pollution
monitoring and aircraft modification. What’s not apparent from
either its name or its location—in Fargo, N.D.—is that Weather
Mod’s international business has been growing rapidly. Essential
to that growth has been a series of credit lines and guarantees for
small business from the Export-Import Bank of the United States
(www.exim.gov), also known as the
Ex-Im. “Our local bank doesn’t want that risk on the foreign
side,” says Randy Jenson, Weather Mod’s CFO. “That’s
where Ex-Im comes in.”
Ex-Im is the federal government’s export credit agency. It provides
guarantees of working-capital loans for U.S. exporters, guarantees loans
to foreign purchasers of U.S. exports and provides credit insurance.
It doesn’t compete with commercial lenders, but assumes the risks
they cannot accept. It’s an especially important role when shaky
economic conditions prevail.
“This is exactly the kind of time when we’re needed,”
says D. Vanessa Weaver, a member of Ex-Im’s board of directors.
“Namely, when financing is either unavailabile or expensive.”
Weather Mod, founded in 1961, has seen its international business—mainly
to agencies of foreign governments—grow to the point that the
company now receives 85 percent of its sales from other countries. Like
many small businesses, Weather Mod covers fluctuations in its accounts
receivables with a working capital loan—actually, a line of credit—from
a local bank, U.S. Bank of Minneapolis (www.usbank.com).
The only problem is that local banks don’t like covering receivables
from foreign countries. The solution: a series of loan guarantees from
the Ex-Im.
Weather Mod has been getting help from the Ex-Im since 1998, when it
received its first working-capital
| VC DAYS—LONG GONE? |
| Is
it still possible to get venture capital? Yes—but the strings
attached are fairly thick. Ask Reggie Best, founder of Netilla
Networks (www.netilla.com)
in Somerset, N.J. When his software firm asked for venture capital,
the rules had changed from a few years ago. “The key has shifted
from hopes, dreams and visions for the future to what can this business
do now,” he says. “They also ask how quickly can the
business get customers and break even.” “They don’t just want to hear about technology,” he says. “They want to hear about the applications of that technology to specific customer needs. What does the customer want? How can you quantify it? How easy is it going to be for you to get into those accounts and make your solution rise to the top?” Best got help from the Emerging Venture Network, or EVN (www.evn.org), in Washington, D.C., a coalition of several corporations and minority organizations that provides minority-led companies with education, training and access to investors. He signed up for training; classes included practice presentation sessions in front of a camera, other entrepreneurs and a group of real VCs. What else are these venture capitalists looking for? High-growth companies with an exit strategy in three to seven years that can return roughly 10 times the investment, says Michelle Garcia, EVN’s director of operations and investor outreach. “VCs want to see customers, revenue, a team and visibility in the marketplace. And not with just any customer—they’re looking for name-brand, enterprise accounts.” —P.K. |
guarantee, then
valued at $850,000. About a year later, the guarantee was bumped up
to $2 million. Currently, it stands at $1.5 million. Under the arrangement,
if one of Weather Mod’s foreign customers can’t or won’t
pay an invoice and Weather Mod defaults on its line-of-credit loan from
U.S. Bank, the Ex-Im will step in and pay the local bank, then collect
the amount from Weather Mod or its overseas customer.
Such risks are more than theoretical. Weather Mod is now struggling
to get paid by a state government agency in Argentina, where the economy
and the local currency are a mess. “We’re in wait-and-see
mode on that one,” admits Jenson.
Although the Ex-Im program has allowed Weather Mod to do business around
the globe, it’s neither free nor pain-free. For one thing, says
Jenson, there’s a lot of paperwork, and initiating a relationship
with Ex-Im can be, in his words, “cumbersome.” For another,
there are actual costs—typically, equal to .75 to 1 percent of
the loan—that are paid to Ex-Im by the lending bank, which passes
them along to Weather Mod and other customers. That led dollar-conscious
Weather Mod to seek alternatives, but ultimately without success. “We’ve
tried to write our lines with a bank and not add the Ex-Im guarantee,
because we have to pay for that,” says Jenson. “But the
local banks weren’t willing to take that risk.”
All
in the Family
“Live free or die,” the defiant-sounding state motto of
New Hampshire, might also suit local entrepreneurs and Brooke Savage
and Melissa Mabon. They’ve built their Amherst, N.H., company,
Pragmatech Software Inc. (www.pragmatech.com),
from a part-time home business to an $8.7 million sales machine. They’ve
accomplished this with their own money—and a little help from
both a local-bank credit line (to help them through accounts-receivable
despair) and a Small Business Administration-backed real-estate loan
(www.sba.com).
The entrepreneurial couple originally considered seeking venture capital
for their startup, since Savage had previously worked with two VC-funded
technology companies. “But venture capital can be very negative,”
he says. “It can force you into making decisions that can be good
from an investor point of view, but not so good for your customers.”
It didn’t help that the company’s business model was, in
Savage’s words, “out of sync” with the dot-com model.
“We had revenues and profits, and the VCs saw that as faulty,”
he says. “They said, ‘You’re a fool—go for market
share.’”
History has proved those VCs wrong. But when Savage and Mabon, who married
in 1989, launched their company in 1994, just two weeks after the birth
of their second child, success was far from certain. “Our goal
was to start a small packaged-software business we could run from our
house,” Savage recounts. They had a highly focused idea: software
that helps salespeople in any industry generate sales proposals.
| SOFT MONEY, HARD RETURNS |
Raising
capital isn’t the only way to expand your small business.
Other avenues can provide “soft dollar” help—while
also putting your tax dollars to work. Many state and city governments
offer small-business incentive programs that can make all the
difference between staying small and growing large. Your best
starting point is the Web site of your local state or city government.
To whet your appetite, here’s a brief sampling of what some
of the more entrepreneurial-minded states and cities offer: |
Their only startup
capital came from the money Savage had earned when a previous employer
went public. “It wasn’t a lot, but it was enough to gamble
for two years from our house,” says Savage. He played Mr. Mom
while Mabon developed the code (she had picked up programming skills
while working at Columbia University’s computer learning lab).
A short time later, Savage’s sister and brother-in-law moved to
New Hampshire from Washington, D.C., to help the fledgling company get
off the ground.
The first inkling of success came in late 1995, when Savage and Mabon
gave the first public demo of their software at a Boston trade show.
The response was overwhelming. “We didn’t even have the
product boxes yet,” he remembers, “but we were selling licenses
right there on the show floor.” A hit was born.
With the money gained from early sales, they hired their first employee
from outside the family, a vice president of sales named Deborah Leff,
to service large accounts. But by then, the startup money was starting
to run thin. “We were so cautious, we put money for salaries into
a special account,” Mabon says. But the gamble paid off, and Leff
(still with Pragmatech) has won sales contracts with big-name accounts
that include Fortune 500 insurance and financial institutions. Before
long, Pragmatech was big enough to lease a real office and hire additional
staff.
After some bad early experiences with a local bank, the Pragmatech co-owners
initiated a relationship with a Philadelphia-based bank to secure a
line of credit that would help them pay rent, salaries and other expenses
even if customers were slow to pay. “It’s the key to evening
out our cash flow,” says Savage. “Many big companies now
take 45 to 60 days to pay, and at one point, we had $2.5 million in
receivables. That’s great, but no one’s paying us.”
The interest rate on whatever money Pragmatech borrows against the credit
line is currently about 7.5 percent.
When the landlord of Pragmatech’s main office announced he was
selling the building, Savage and Mabon decided to buy the building themselves.
They worked with a local bank that had what’s called a 504 Provider
relationship with the SBA. The SBA agreed to guarantee the loan and
also put up roughly half the money. As another benefit, the SBA’s
backing meant that Pragmatech needed to come up with only 5 percent
of the price for the down payment, rather than the more typical 25 to
30 percent.
The strategy worked. Today Pragmatech owns one building and leases two
others in Amherst; operates one office in London, England; and is poised
to open another in Australia.
Pragmatech’s owners also have turned to an unlikely source of
working capital: their employees. Last year, when the recession put
a crimp in the company’s sales, Savage and Mabon asked employees
to take voluntary—but temporary—pay cuts. Several people
agreed, and the company was able to limp through the tough times without
additional loans. Those noble employees have since been paid back the
salary they missed. (Of course, if you’re considering this type
of solution, you’ll need to review your state’s wage and
hour laws.)
No, the sky isn’t raining money for small business. But for the
creative and driven, the sky’s the limit on financing your company’s
next big thing—including its survival.
Peter
Krass is a freelance writer based in Brooklyn, N.Y. He’s held
senior editorial positions at Inc., Planet IT and InformationWeek.
