This article was published in U.S. 1 Newspaper on January 1, 1998. You have contracts to perform or products to manufacture, but the money isn't arriving in time for payroll Friday. Your company does not qualify for a line of credit, but you have credit-worthy accounts receivable. How can your growing company can pile money back into your business if you have to wait 90 days for your payments?
You can get help from a factor, or from an institution or bank that works similarly to a factor.
In factoring, a lender buys your accounts receivable, gives you almost all the money up front, then collects the accounts and takes a commission (termed a discount). Ted Kompa at Business Alliance Capital Corporation at 300 Alexander Park does factoring, as well as other kinds of asset-based lending. With credit support from a major regional bank it does accounts receivable and inventory financing, term lending, recourse and non-recourse factoring, and export financing. Call 609-514-1140.
Carnegie Bank, like many commercial banks, has a hybrid program that bases loans on accounts receivable. Carnegie's Business/Manager program comes with a sophisticated software package that provides the loan client with up to 50 useful reports.
"The traditional factor buys the receivable and owns it. He bought it at a discount and that's his whole deal. With the Business/Manager program, the bank has an ongoing relationship with the customer," says Carnegie's president Thomas L. Gray Jr. Carnegie Bank will be subsumed into Sovereign Bank this year, but the Business Manager program is expected to continue, and other banks offer similar programs. Call 609-520-0601.
Are you going to employ low-income workers? Those with a disability? Welfare recipients? Displaced workers? Senior citizens? The New Jersey Community Loan Fund loans money to emerging and existing businesses with this commitment to New Jersey's population. Both "not for profit" and "for profit" enterprises are encouraged to apply for a "fill the gap loan" from the state's only statewide, private nonprofit community development financial institution. The NJCLF offers flexible terms, affordable rates, and technical assistance.
Civic-minded individuals and firms donate money to the fund or lend it at low interest. Such a loan is sustaining 8 to 10 jobs for clients of the First Occupational Center of New Jersey Inc., a 45-year-old nonprofit that owns Java Natural Foods Inc. This company packages, labels, and sells health snack packets such as nuts and dried fruits at such retail outlets as Acme Markets and Edwards Supermarkets. Call Herb Caesar at 609-989-7766 or fax 609-393-9016.
You're too risky for the banks and not even big enough for the traditional venture capitalists -- but you'll never grow unless you get cash, from $50,000 to $1.5 million. But you don't have collateral or even any promise of cash flow any time soon. What's a young high tech company to do?
A nontraditional private venture capital firm, Early Stage Enterprises at 221 Nassau Street, may be able to help. It has seed money from the New Jersey Commission on Science and Technology. Taking your case to a seed-stage venture capitalist gives you a better shot at getting your seed-stage company seriously considered for an investment.
"The small technology companies are, by definition, working in unusual areas in which the bankers have little experience," says Ron Hahn, who co-founded Early Stage Enterprises with Jim Millar.
"One of the worst things you can do is walk in and tell a banker you have a unique product," says Tim Losch, COO of Yardville National Bank. "When a bank doesn't have something to compare it to, you are flying with one eye."
Early Stage Enterprises has organized under Small Business Administration rules as a Small Business Investment Company. It can leverage money on a two for one basis and pay no interest until its investments mature (http://www.sba.com/inv). Counting this two-to-one match, ESE has up to $30 million for 1998.
Though SBICs are new to Central New Jersey, they are not a new concept. The traditional kind of SBIC instrument, the debenture, required the young firm to have current revenues. In contrast, the new kind of SBIC sounds almost like one of those shopping specials that promises no payments until spring. Under the new rules for these "participating security" SBICs, all payments are indeed deferred until the investment matures.
Under the new style, the participating securities, the SBA pays the interest in the early period. Then when the company being invested in goes public, that establishes the market value of the stock that the SBIC holds. The SBIC can cash in its stock to pay the principal, interest, and a percentage of capital to the SBA. The SBA keeps its profit percentage plus the interest it has already paid. The institutional investor gets paid back on a schedule that is not related to the IPO; later payments come from the SBIC.
For its initial investments of $50,000 to $500,000 Early Stage Enterprises typically wants an equity position, 20 to 40 percent, and a seat on the board of directors. ESE also aims at start-ups capable of generating a minimum of $10 million in sales after the first five years.
ESE also seeks to invest in businesses within a two hour drive of Princeton and in businesses with a proprietary technology, not commodity-based businesses that would be vulnerable to competition.
ESE says a strong executive summary is more important than a full business plan, but the summary should give "a brief and punchy description of market needs, a description of the planned product(s), and how they will address the need of the market." Also background and relevant experience of the principals and a "clearly stated plan of action describing how the new business will enter the market and succeed in selling to its customers."
Negotiating an ESE deal involves reviewing a business plan summary, a three-month due diligence evaluation, and negotiation of a "term sheet" between ESE and the start-up's experienced legal counsel.
After all this? Your chances aren't all that good: "ESE expects that only one percent of the approximately 1,000 deals they expect to review during a year will actually be done."
In contrast to ESE, a more traditional SBIC at 1 Palmer Square is looking for companies that are older and larger. Penny Lane Partners aims to invest in firms that are looking for $1 million to just over $2 million -- firms that are smaller than $18 million in net worth and that have not exceeded $6 million in net income on average for the most recent two years. The fund will focus on later stage venture deals and management buyouts.
If you want your business to be considered by Penny Lane, send a full-blown business plan and three years of history. "We would prefer to see some operating history in a business, and some revenues," says Penny Lane's Stephen Shaffer. "If not profitability, the near term potential for profitability."
New Jersey ranked seventh in the nation in terms of total dollars invested in the third quarter of last year, and it tied for fifth place in the rankings of the number of companies which received venture capital funding. "New Jersey's momentum in capturing investment dollars is continuing," says Bob Roche, regional director of the Price Waterhouse survey that tracks these investments (http://www.pw.com/.
Businesses that need $250,000 to $5 million in equity financing can list their offerings on an interactive software systems, the Angel Capital Electronic Network (ACE-Net) at the NJIT Enterprise Development Center. NJIT is one of eight national sites for this nationwide Internet-based listing service that helps angel investors and entrepreneurs find each other. Each entering company must pay a $450 fee. Potential "angels" must register for access. Call Stash Lisowski at 973-643-5740.
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