Financing a Simple Business
Bill Warner Thursday, January 03, 2008
I have worked with a company in the consulting services business whose clients need assistance with the permitting and environmental regulation approvals necessary for building utility plants. The founder is a very well connected consulting specialist in the environmental regulatory industry who decided to start an independent consulting firm to provide these services. We worked out a process to grow the business with very little money. Since the business was all services, not much capital spending was involved and the founder could work virtually for quite awhile before ever needing office space. The firm won new business through the founder’s extensive contacts and signed contracts with payments ahead of any spending for the subcontractors who performed many of the regulatory tasks. With very little cash, all of which was acquired through a personal loan, the firm is up and running and very quickly reached the $1M mark in consulting services business.
A more complicated example is a medical device company that really had little intellectual property and was not required to go through the FDA process. However, special manufacturing equipment was required so they decided to manufacture the product themselves. In order to work with distributors, they also had to stock the distribution channel and also have a certain amount of inventory on hand themselves. Over one million was needed to get the company going including operating expense to carry the company to a cash flow positive position. The financing was accomplished using several approaches at once. All of the capital equipment for manufacturing was financed by the supplier of the equipment who also gave them attractive payment terms by providing them the opportunity to not service the debt for six months. The inventory was financed by a local bank who allowed them to use the finished goods to partially back the amount of money that it cost to manufacture it. The distributors also paid a substantial amount for their initial inventory which covered most of the cost to manufacture it. This way they could pay their components suppliers with the money they were paid by the distributors. They got a very attractive lease on the manufacturing facility which also serves as their offices, which included a six month deferral on the lease payment. The operating expenses were covered by a combination of a personal loan by the founder and several hundred thousand dollars from friends and family who bought equity in the company. As they acquired more distributors they had a line of credit that was backed by the purchase orders which were factored at an attractive rate. This company used multiple approaches to getting the company up and running.
A circuit board manufacturing company started a new business in a rural county in central NC Carolina. The business also was able to get a very attractive deal on both the manufacturing equipment as well as the terms on the building lease. This business involved very large contracts with companies who made computer based products, so payment schedules were long, but they did pay a portion of the job upon signing the contract. This company found a single investor who was an individual who had owned three different circuit board manufacturing companies in the past. He was retired and living in Wilmington and was contacted through one of the company’s suppliers. After seeing the strength of the company’s pipeline of potential customers an equity investment was made that covered the first year’s planned operations.
A company in rural eastern NC had started a company that manufactured a very specialized measuring device that is used by many different kinds of manufacturing companies. This particular county had some very attractive incentives that were offered for new businesses. The company got very inexpensive space at a local college facility. They received a grant that was used to partially cover the pay for employees that were hired for the area, therefore increasing jobs for the county. The remainder of the company was financed by their first customers who received preferential pricing for the device and a small royalty for three years.
These are just a few examples of how innovative some entrepreneurs have to be in order to finance their companies. Sometimes it is not as easy as presenting to an angel investor organization. Often, a lot more work is involved to put all the right approaches together to come up with what you need to get started.
Filed Under: Angel Investment, Financing a Company, Business Strategy and Planning
Bill Warner is the Managing Partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the Chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.
Bill Warner is the Managing Partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the Chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.
