Finding financing Featured

11:11am EDT September 3, 2002
Your company has a hot new product to develop and launch.

Or you've landed a huge contract and need additional facilities and equipment to complete the deal.

Or you are acquiring a competitor.

These are good news scenarios with a common result: the need for large amounts of capital. Today, businesses have more options than ever when it comes to raising capital, whether it's through traditional term loans, private investors or a public offering. Determining which option works best for your situation depends on many factors.

"At some point, the company should be working with a team of advisers," says Melissa Ingwersen, president of Bank One, Ohio. "This team would be composed of the company's public accountant, attorney and banker."

Jane Bittcher, vice president and manager of Fifth Third's business development group, says one common mistake companies make is trying to find one lump sum for everything they need.

"Don't look at the total dollar figure," says Bittcher. "Look at the pieces. There is short-term and long-term debt, and the company will probably need both."

Raising money the traditional way

If you need money to buy real estate or large pieces of equipment, you'll most likely want to repay the funds over a long period of time. That means you'll need some form of long-term debt.

"The best source for money is a bank, especially if your company has a proven track record," says Todd Fulton, senior vice president of Key Bank's Business Banking group. "Bank financing is the cheapest option."

Term loans are repaid over an agreed period of time. If you are building new facilities, you can repay the loan over 20 to 40 years.

Leasing equipment may also be an option, depending on your company's tax situation. And if you own a smaller firm, loans through the government's Small Business Administration (SBA) offer attractive terms to companies that qualify.

"The SBA guarantees or participates in the debt, and the SBA's 504 programs offer special benefits and are very inexpensive," says Fulton.

Another lending program available through banks is the Ohio Mezzanine Fund, which matches companies with investors who do not want ownership in the company but who are repaid at a higher interest rate.

"The Mezzanine Fund is more expensive, but it is a good way to raise money without an investor taking any piece of the company," says Fulton.

Ingwersen says the Mezzanine Fund can also help bridge funding gaps.

"Maybe the bank can loan $3 million but you need $5 (million)," she says. "You can often get the difference with the Mezzanine Fund."

And don't forget about short-term funding. Finding the right combination of loans is all part of a well-thought-out business plan.

"You have to look beyond what you need now," Bittcher says. "You have to look at what's going to happen next year. If you're expanding and increase sales, will you have the people to service the accounts?"

Revolving credit can help meet additional payroll and receivables needs, say Bittcher.

Public and private investors

Companies needing larger amounts of capital than traditional short-and long-term loans can supply face the question of going public. Whether that's the right choice for your business depends on many factors, says Ingwersen.

"Going public is a fast way to raise the largest amount of capital, but whether a company should go public depends on the business's life cycle," she says.

If a company is financially stable and needs a very large amount of money, going public may be the answer. But whether you're doing a secondary or first offering, shareholders are concerned about the return on their investment.

"There are many subtleties when going public," says Ingwersen. "And you should definitely consult with your team of advisers before making the decision."

Fulton says going public helps a company raise more money than any other option, but the drawback may be the dilution of the company's value.

"With these options, a highly qualified CPA is needed," he says.

And a public offering can be costly and time consuming.

"Whether it's a viable option really depends on the amount you are raising," Fulton says.

Private investors may be a faster, less costly option.

"Banks have departments that can help companies find private investors," says Bittcher. "Ask your banker for nontraditional and more creative ways to raise money."

And don't overlook equity investors such as friends and family or other personal stakeholders, Ingwersen says.

"Sometimes there is a vendor that the company works with that is willing to invest," she says. "You give up some ownership, but often through strategic partnerships, both companies benefit."

The nontraditional option

For public companies that need to raise large dollar amounts, the logical choice may be an additional public offering. But another option is becoming increasingly popular.

"In the past, the questions were, 'Can we get a public offering or borrow from friends and family?'" says E. Kurt Kim, CEO of PrivateRaise.com. "Today there is another viable financing option."

Private Investment in Public Entities (PIPE) can provide liquidity when a company needs it. PIPE financing is cheaper than going public, and it takes less time.

"Plus when you go public, you have to put together quite a dog and pony show," says Kim, referring to SEC public offering requirements.

PIPE money can be raised in two to six weeks. Common stock is offered to a limited number of investors -- usually between three and five -- and provides a greater degree of flexibility.

"Because the deal is negotiated, it can be more flexible in structure and terms," says Kim. "You can tailor the structure to meet both parties' needs."

The company benefits by raising capital, while investors receive stock at a discount.

Prime candidates for PIPE investors are typically companies that have a research and development ramp-up, like biotech firms.

"The stock prices are low today but the investor can receive returns when the company hits milestones, like FDA approval," says Kim.

But because of the potential complexity of PIPE deals, they can be intimidating to companies not familiar with them.

"The CFO needs to be comfortable with this kind of financing, or a banking intermediary can help," says Kim.

The potential downside of PIPE investing is that you are overconcentrating ownership of the company by having a few very large investors. Again, when deciding what's best for your company, Kim advises speaking with your banker. How to reach: Melissa Ingwersen, Bank One, Ohio, (800) 404-4111 or www.bankone.com; Jane Bittcher, Fifth Third Bank, (614) 233-4562 or www.53.com; Todd Fulton, Key Bank, (888) 539-4249 or www.keybank.com; E. Kurt Kim, PrivateRaise.com, (212) 688-4519 or www.privateraise.com