EDA-Bank Loans

Creative Financing

Certification?Magic Bullet?

End of the Line

Preparing Your

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These articles by Peter J. Mladineo and Barbara Fox were published in U.S. 1 Newspaper on September 30, 1998. All rights reserved.

Financing Growth

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EDA-Bank Loans

<169>We don't expect entrepreneurs to know our programs," says Caren Franzini, executive director of the New Jersey Economic Development Authority. "We expect entrepreneurs to know their business. It's up to us to know our programs and we will help try to help their business needs."

With that, does Franzini take the worry out of getting a business loan? Not quite. Replay that part again about knowing your business. But if you have indeed done your homework, here are some options from among an impressive array of two dozen financing programs, from bond financing of up to $10 million to a $5,000 loan to renovate a storefront.

EDA bonds helped pay for a $7.7 million addition to Arcadia Retirement Community (formerly King James Care Center) on Route 33 in Hamilton.

On a smaller scale, Trenton-based Merlin Industries tapped the EDA's statewide loan pool to buy a 70,000-square-foot building and one acre to manufacture swimming pool covers and liners.

The EDA also works with the Small Business Administration to participate in loans. Under the SBA 504 program it helped arrange a $238,000 loan for Henry and Maxine Page, owners of Maxine's, an upscale dining and banquet facility in Trenton that opened last year. The EDA also had 50 percent participation in a separate $285,000 loan from CoreStates. The money was used to purchase and renovate the building. Other support was provided by the City of Trenton (loan of $230,000), the Trenton Downtown Association ($15,000 loan), and Capital City Redevelopment Corporation (a $10,000 grant).

The EDA joined First Union/CoreStates and the New Jersey Redevelopment Authority to provide half of the financing for the $1 million Urban Word Cafe and Theater, a 19,000-foot restoration project across from the Mercer County Arena. The for-profit enterprise is a partnership between architects John Hatch, David Henderson, and Roland Pott.

The EDA's Steven Szmutko will join Eleanor Szymanski, a certified financial planner, in giving a workshop on "Financing Your Venture" on Tuesday, October 6, at 10:30 a.m., at the Masonic Temple.

The EDA looks more kindly on those who have taken courses so that they understand what's involved. In fact, the EDA offers its own course, the Entrepreneurial Training Institute, which gets you started on writing your business plan with realistic projections on how you would repay a loan.

"If entrepreneurs go through a course and have a business plan, they also need to have savings for working capital. For the first couple of years you might have to have your business and a side job and rely on your family and friends to put some equity in the business," says Franzini.

"If you have a good business plan, a good idea, and some equity, then the bank or the EDA will be glad to talk to you about putting together a loan. But you have to be realistic in your expectations," she says. "It is going to take at least two months to get financing."

For a "micro business" with an entrepreneur and maybe one employee, the best loan program is through the NJDA, for small, minority-owned, and women-owned businesses. The average loan size is $40,000 to $50,000. "The entrepreneur must show they have experience in the industry," says Franzini. "If they wanted to start a hair salon, they must show that they previously worked in a hair salon."

Another opportunity, this one for firms with from 5 to 25 employees, is with the Statewide Loan Pool, the one tapped by the swimming pool liner firm. Loans can be from $50,000 to $1 million for fixed assets, up to $500,000 for working capital, and a total combination up to $1 million.

Most banks are not yet comfortable with adding debt to businesses that have less than a five-year track record. To qualify for the EDA pool, you need only to have been in business for one year.

"Those entrepreneurs can work through NJEDA," says Franzini, "and we can, with a bank, provide the financing they need. Give us financial statements and projections and realistic sales projections and how you will achieve those projections."

"If you need $100,000 for equipment, we buy a $25,000 piece of the loan, and the interest rate on our piece will be below market, say five to six percent. The bank's piece might be eight percent, so the combined rate would be in the seven percent range." This lower interest rate would save you $1,000, which you could use for buying more materials or for inventory.

Under the loan pool program the bank is satisfied because the EDA ranks second in terms of who gets paid first if the business fails.

To summarize: the bank can choose to have the EDA guarantee part of the loan (agreeing to step in in case of failure) or participate in the loan (providing up front money at a lower interest rate). Or on any given loan the EDA can do both.

For EDA information call 609-292-1800 or http://www.njeda.com. To register for the day of workshops call 609-396-7246.

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Creative Financing

<B>Al Warr is continually dreaming up new ways to raise money. And it's not because he just likes to dream. Currently he's working on expanding the Bridgewater-based Business Owners Institute into the Princeton area, and he is trying to find investors for a federally chartered bank.

He lectures on "Creative and Unusual Ways to Raise Money for Your Business" on Thursday, October 1, at 9 a.m. in the Bridgewater Office Center at 676 Route 202/206 North. Here are some of Warr's more creative money-raising moves:

Buy your competition. Warr's underlying premise here is that it can be easier to borrow $250,000 than to borrow $25,000. "If you put two together it's easier to borrow the money on the open market," he says. Here he's talking about borrowing from private investors or investor groups, not banks.

Buy your office building. If a business is trying to expand, he suggests instead of raising money just for expansion, it may be easier to get a real estate loan and use some of the money from that to expand.

Barter. There are two types of barter, direct and indirect. In a direct barter, a company would trade its widgets to its landscaper in exchange for free work on the company's grounds. "These things are subject to income tax," says Warr.

In an indirect barter, a company deals with a barter club, which issues barter credits in exchange for services or products rendered. "We are members of barter club," says Warr. "You can use those credits to give your employees benefits. It takes some accounting to do this but these are ways to barter your way without cash."

Issue gift certificates. This is way off the beaten path but it works. To solve a cash flow problem, Warr suggests issuing gift certificates in large denominations. "You have to sell a lot of them at once," he says.

"Most people don't think of these things," says Warr. "Not one of these things is a usual mechanism but the use of it this way is unusual. You have to be creative when you finance small business."

Call 908-526-1500 for more information.

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Certification?Magic Bullet?

Getting certified as a minority or small-business owner doesn't really work that well, says Don Addison. "Nothing works like knocking on doors."

That sounds discouraging, coming from Addison, who is chief of Mercer County's division of economic opportunity and affirmative action. For the Trenton Small Business Week workshops at the Masonic Temple, Addison is on a panel on Tuesday, October 6, at 3:15 p.m. entitled "Demystifying the Government Contracts Process." He will be joined by Dolcey Chaplin of the procurement center of the New Jersey Institute of Technology.

Addison worked his way up, in 15 years at Xerox, from sales to customer service manager. Then he spent eight years at Lapidus Deli, on Plainsboro Road, where he "got a flavor for what small business is about.

He works with would-be entrepreneurs to help get them ready to go to a lending institution for the start-up money they need. All too often these people think that "getting certified" will be the answer to all their problems. "Many people think that simply because you are certified as a minority and have done the SBDC thing that all doors will open for you. Wrong," says Addison. "You have to go out and be an aggressive marketer."

And with that he launches into the spiel familiar to everyone who advises new business owners. The business plan -- telling what you have to offer and why people are going to buy it -- is the first of five things an entrepreneur needs. The other four are a friendly banker, an accountant, an attorney, and personal equity in the business.

Addison says he and his cohorts are trying to have more successes than failures, but often the failures have only themselves to blame. "Most of our start-up folk don't follow through with what it is that they are supposed to do. They go see me, they see Herb Spiegel at the SBDC, they go to the EDA, and we all tell them the same thing. Most won't do it. For those who do, they end up with their loan, but it is a small percentage that do.

"Historically, our lending institutions have been very tight on lending to small businesses, and when they did, they made bad loans," says Addison. Regulating how much money is supposed to be poured into "community redevelopment" isn't necessarily useful, he believes, because small businesses are notoriously bad risks. If banks use good judgment and turn down a risky loan, they are considered not good citizens. If they sidestep the hard questions and make a loan against their better judgment, they end up doing the small business a disservice. The answer, says Addison, is for banks to partner with government (the SBA or the EDA) to help share the loan.

Says Addison: "Entrepreneurs ask for grants. But I say the grants are called loans. I bring some reality to the dream."

Addison can be reached at 609-989-6418. For Small Business Week sign-up call 609-396-7246 .

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End of the Line

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Preparing Your Company for Sale

Do things right from the beginning and when it comes time to cash out your company won't need emergency surgery. That will be the message from John Underwood at a meeting of the New Jersey Entrepreneurial Network on Wednesday, October 7, at noon at the Forrestal. Cost: $35.

Underwood is the British-born founder and president of Proteus International. He has a Harvard MBA and has held senior management positions with Pfizer, General Electric, and Becton Dickinson. His Ramsey-based venture banking company offers a full-line of services including providing and obtaining capital; it acts partly as an investment bank and partly as a venture capital firm.

Like an investment bank, it does mergers, acquisitions, and sales of companies, yet it does not take companies public; instead, it works to position a firm for going public. Like a VC firm, it provides capital in exchange for a seat on the board. "We typically like to act as principal (a venture capitalist) rather than an agent (investment banker)," says Underwood, "because we are representing our own money."

Many young companies make mistakes that will haunt them later, he reports. Here are his suggestions for upwardly mobile small businesses:

Choose a very experienced corporate accountant and attorney . Underwood stops short of saying: "Go to a big firm" and amends that to "Don't be afraid to go to a big firm." He points out that the major firms will adjust their fees for smaller clients, and that small local firms may not have the experience to help you make the choices that will be right for the business 10 years later. "It is rare that you find really talented professionals in a solo practice," says Underwood. "They have no real experience to base their guidance on."

So simple a matter as how to form the company can cause complications down the road. "We had a client formed as a limited partnership, but a large company won't invest into a partnership, so we advised them they must change to a corporate structure. But under state law, when you do that, you expose yourself to a full environmental survey." Along the way the EPA demanded that the company put up a $.5 million bond, which delayed the closing for six months. "Most big companies would have walked away," says Underwood. The situation was resolved, "but had that client had a crackerjack attorney the partnership would not have been set up in that way."

Another pothole in the path of cashing out is bad distribution of initial equity. He cites a case where the employees of the company and the initial investors, or angels, held the same class of stock. The stock was carelessly overvalued. Then when an infusion of venture capital funds was needed, the shares of the initial angels were diluted, and they were left literally holding an empty bag. "The investors got crucified, all because they worked with a local accountant and lawyer who did not ensure that they got locked into a wrong position."

Don't throw corporate officer titles around carelessly in the beginning . Be parsimonious with those titles. "Call a founding employee a sales manager or a sales director, not a vice president of sales." When you are big enough to need someone who is really qualified for that position, and you have to transfer that title to the new person, you will have a disgruntled employee. "We say, why do you need a title? Don't put one on the business card."

Don't think that selling out is your objective. "I do not recommend that any company should ever start out saying it wants to sell to a giant corporation," says Underwood. "They should focus on being a successful business." Then, when you get to the point where you have created something, the transaction could be a merger (where you end up on top), an acquisition (which cashes you partially out but you can run it), or taking the company public.

Don't wait until the transaction is imminent to pull up your socks, says Underwood.

Keep your business plan updated. Realize the importance of an audit trail for all aspects of the business, not just accounting. Know your industry -- what its gross margins, marketing and selling costs are going to be. Keep track of your competition. Know who your potential acquirers might be. Understand what value your company has. Seek tax advice early. Says Underwood: "From the very beginning, create value and realize that value."

The New Jersey Entrepreneurial Network can be reached at 609-279-0010. Underwood's company is 201-529-3636 .

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