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Need Capital? Remember, It Comes in Many Forms

If you're thinking 'bank loan,' reread your business plan and balance sheet. In those you should get clues as to where else you could be looking.


Next time you head out the door to ask your banker for a business loan, sit down and read your business plan instead. Take a look at your balance sheet too.

You may find hidden in these documents some important signposts about your capital needs that point not to your banker's door but to sources of capital that may surprise you. And by showing you what kind of capital you need--either debt or equity--the exercise shows you where to look for it--and should cut into the time you spend getting it.

All too often, business owners think only of banks and conventional borrowing when they seek capital; they don't stop to think that other financing sources abound in a vibrant economy. Business owners struggle to grow their businesses in some measure because they forget that capital comes in many forms. So they frustrate themselves looking for it in the wrong places.

The business plan and balance sheet point in the right direction. On the surface, your balance sheet gives you only a snapshot of your financial position today. Your business plan outlines where you want to go and how you intend to get there, and sets out a timetable.

But hidden in that snapshot and in your plan are clues to the kind of capital you need. Your balance sheet, for example, may show that your business carries a heavy debt load--or none at all. It may show lots of equity in receivables and inventory, or in plant and equipment. Your financials may show a big cash flow or lots of stockholder equity.

Put another way, these documents may show that your business is top-heavy with debt or bottom-heavy with equity, or some combination of both. They reveal where your business shows elasticity--the capacity to raise a specific kind of capital.

If your balance sheet shows lots of debt, for example, don't waste time asking your banker for more. Banks lend money when they see that you can pay it back, with interest. They like to see cash flow, but at a certain point, they become wary of lending money to a business already burdened with debt.

But that doesn't mean you don't have options. Even if you already carry lots of bank debt, you can still raise capital through mezzanine financing. The technique combines borrowing and equity financing and works well for companies embarking on acquisition campaigns.

On the other hand, if your balance sheet shows lots of high-quality receivables and inventory, you may find it fruitful to talk to an asset-based lender, who takes security in the value of such assets. And if you show yourself stock rich and cash poor--that is, with lots of stockholder equity but only one stockholder, yourself--you might want to find a private investment group and take some cash out of your business for yourself and your family.

What you use capital for, of course, depends on your goals. Your business plan may envision a marketing campaign in new territory, an acquisition, or a heavy investment in research and development to support a new product line.

Whatever the specifics, your business plan sets out where you want to go, so it shows what kind of capital you need to get you there--because the goal determines the means. The act of defining where you want to go has everything to do with the kind of money you need to get there.

Jan Hanssen, vice president for business lender Finova Capital, with offices in downtown Los Angeles, sees a balance sheet as a kind of road map to capital financing. Senior debt financing--that is, secured bank lending--appears at the top of the balance sheet, equity at the bottom. The many financing techniques that combine both appear near the top or bottom depending on the mix.

"You see senior debt at the top and equity at the bottom and all the other financial vehicles in between," Hanssen says.

"And the farther down the balance sheet you go, the further into the future you see. So a business plan becomes more important the farther down the balance sheet you move."

Hanssen focuses on asset-based lending to small and mid-sized businesses--that is, loans secured by assets of the borrowing company. His loan packages run from $2 million to $20 million for companies showing revenue of $2 million and up.

"As a lender, I look at current and historical performance," Hanssen says. "I want to know whether my borrower has the capacity to service the debt. The loan won't be repaid by projections, so I want to see current performance."


On the other hand, he says, an equity investor, or a lender offering subordinated debt with equity "kickers"--for example, mezzanine financing deals--looks to a company's prospects as outlined in its business plan.

"For senior lenders, the past is important," Hanssen says. "For equity investors, the future is important.

'Most of the time, whether you go for debt or equity financing is a matter of what the market is willing to give you. Many business owners want debt financing because they don't want to dilute their ownership. But if you can't get more debt and you still need more capital, you go for equity."

Wherever you end up, Hanssen says, you start with your business plan and balance sheet--because they hold the keys to the financing puzzle.

Juan Hovey columns on small business financing and insurance appear regularly in Wednesday's Business Section. He can be reached at (805) 492-7909 or by e-mail at How to get financing will be a topic of The Times' Small Business Strategies Conference this weekend at the Los Angeles Convention Center.

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