 Ready,
Set, Loan!
By Jeannine Jacokes, Executive Director,
Partners for the Common Good
You have a great earned income idea. You’ve done the market and
feasibility analyses. You have a solid business plan. But . . . you
need money to make it a go. This is the age-old dilemma for
nonprofits and any entrepreneur who has ever tried to start a
business.
“Too many dreams die in the parking lot of a bank,” is an often
quoted saying. Do those with money believe in the entrepreneurial
sprit? Do they believe in hard market analysis? In many cases, the
answer is “yes.” So, what’s the problem?
The problem may be capital mismatch. Knowing what type of capital to
look for based on the stage of your business is very important.
Borrowing money at the wrong time may create debt that hurts your
business more than helping it. On the other hand, as a lender to
nonprofit organizations, I have seen many growing nonprofits that
are so averse to having debt that they lose out on realizing earned
income.
Finding the right mix at the right time is key …
Starting Out: Your business is an idea and must be built from the
ground up. You need capital to buy equipment, create marketing and
delivery systems, cover delays in customer payments, and pay for
supplies and operating expenses. Debt payments can eat up thin cash
flow that needs to be invested in the business. Only sources that
can afford to lose it all can provide capital at this stage. What
you need is “equity capital"—money from investors who want to share
in the profits—the most difficult money to find. Look to venture
capitalists and grantmakers.
Surviving to Break Even: Your business is breaking even or just
starting to generate revenue. You need to solidify your market
position and strengthen and build your customer base. Customers want
you to refine your product, but you've exhausted your seed capital.
As your enterprise gains momentum and moves toward profitability,
you will need to build internal systems to manage your growth, but
the demands for capital will outstrip resources available from
internal sources. Look for grants and socially motivated lenders but
be aware that you will need to provide a guarantee or strong
collateral.
Growing: Your enterprise has a foothold in the market, grown more
efficient and even managed a tiny profit. To capitalize on your
progress, you need to grow, but your cash reserves, net worth and
cash flow are thin. This is also a good time to explore socially
motivated debt capital.
Reaching Maturity: Your enterprise has stabilized, and you are
building brand identity, customer loyalty, and solid production and
distribution systems. Your business now needs substantial permanent
working capital. At this point, you may be able to access new
financing opportunities—including traditional debt such as a
commercial loan or line of credit. Borrowing money is the best
financing at this stage because it is easy to do and offers
flexibility.
Finding the right mix at the right time is a perennial problem for
all organizations—both for-profit and nonprofit. It is not
insurmountable, however, if your business plan recognizes what you
need—and when you need it—at each stage of growth.
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