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Finding the Right Source of Money to Grow Your Business

Cynthia Pharr Lee, TWVF co-founder

If you're starting a business and expect that your great idea alone will attract investors, get ready for disappointment.

And with the constant buzz about venture capital, you might think finding money for your business is easier than ever. Not so.

The harsh reality is that you're unlikely to attract third-party investors unless you're a successful serial entrepreneur with a track record of making money for investors.

But help is available if you know where to look.

Most startups are funded from an owner's personal resources or a little seed money from friends and family. Indeed, close acquaintances are your most likely angel investors.

If you're convinced your stellar management team offers the potential for the high returns required by angel investors, contact local organizations and learn how to pitch your business. For tech-centric businesses, contact StarTech. While Dallas Angels and North Dallas Investment Group prefer technology, they may allow certain non-tech businesses to present to potential investors.

Look for angels close by
Also check out www.capitalpulse.com, a new online marketplace that allows registered investors to anonymously review business plans.

It's never too early to develop a banking relationship, especially getting acquainted with a small business lending group or bank officer interested in knowing you.

Learn which independent or regional banks focus on entrepreneurs and small businesses. You're much more likely to find a suitable capital partner here than among global financial institutions.

Compass Bank Vice President Roberta Mikula notes that her bank offers lines of credit for small businesses once they have several years of successful operation and revenues of more than $1 million.

"The owner must have good personal credit and stand behind her business to be considered," Mikula says, explaining that Compass Bank will help business owners outline a path toward creditworthiness.

"Some type of collateral -- such as receivables or inventory -- is also required for working capital lines of credit," Mikula adds. Entrepreneurs who build a successful banking relationship often learn that their bank line can grow alongside as their business expands to $5 to $10 million or more.

At this point, you may become a better candidate for more sizable SBA loans that are frequently used to fund situations which can be collateralized, such as real estate or large equipment purchases. While some entrepreneurs avoid the time-intensive SBA funding process, others find it the right match for their needs.

In most cases, they don't. VCs usually require an explosive growth company centered on a unique, disruptive technology or idea. They also expect a 50%-plus return on invested capital and a clear, achievable exit strategy. On the average, VC's fund 2% to 4% of the deals they review.

"For a retail business to attract our venture funding, it must be a great concept that changes the way consumers like to shop," says Cece Smith, managing general partner of Phillips-Smith-Machens Venture Partners. "It must also have an outstanding management team that we believe can deliver the plan plus an economic model that will generate appropriate returns to the company and our fund."

If your business fits this rarefied model, turn to past quarterly listings of VC funding in the Dallas Business Journal. Evaluate which firms funded what type of deals to identify your most likely prospects. Then visit their Web sites to see how they accept and review business plans.

Explore the options
Funding by angels and VCs sound sexy, yet traditional sources of money are more realistic for most. Sit down with your CPA and explore all the potential financing options.

For instance, leasing instead of buying equipment may be one way to partially meet financial needs.

Looking for more
Some business models might accommodate other creative financing, such as offering incentives for extended payment terms from manufacturing partners or prepayment from large customers. Or perhaps individual parts of your business -- such as individual stores -- might be shaped into separate limited partnerships, each with its own set of investors.

While many businesses level off at $3 to $5 million in revenue, you may aspire to revenues above $20 million. "Bridge capital" may be needed to help accelerate your growth when expansion opportunities create financial needs that outpace your ability to meet bank credit criteria.

Government contracting or bonding, expanding into new markets, launching a new product line, acquiring a competitor -- all are examples of opportunities that can quickly accelerate a company's growth and create a need for more financing.

Funds can be found
Texas Women Ventures L.P. provides just such funding to women-led businesses in Texas. Typically, funding of $250,000 to $1 million may be available to help you capitalize on a defined growth opportunity. As mezzanine funding -- debt instead of equity -- the money to fund growth may also be provided without a requirement that you sell part of your company.

Be assured, if you're professional, focused and successfully driving a growing business, funding is available commensurate with your businesses' success.

Knowing where and when to look is your key to a productive search.