Raising Capital for your Jobber Business

Believe it or not, there are investment dollars out there for jobbers. But it is only there for individuals and companies with well thought-out business plans.

The money is looking for those that have a good understanding of their business and market. Money is attracted to people who put their own net worth on the line. Smart people with some of their capital to risk make a successful business work, and not everyone is cut out to own or run a business.

Individuals who ramble on about great ideas are not heard over the roar of those willing to live or die by their own abilities and who are willing to put their own money on the line. No one is suggesting that we live in an all-or-nothing society; however, when you yourself are at risk, people stand up and take notice. Once you are ready to expose yourself financially, the search for capital becomes much more credible. After all, there are many more dreamers than real entrepreneurs in Canada.

There are three primary sources of capital, and a fourth that is a growing source of equity and importance for small to mid-market private companies.

The first source, internal equity capital, consists of the personal capital of the shareholders and the profits of the business. This is where owners put their money on the line.

Lenders are a second common source. Loans may consist of operating loans, secured by accounts receivable and inventory, or term loans, for equipment, buildings, land, etc., and are available from a variety of financial institutions. Business loans are perfectly accessible, depending of course on the state of the company’s balance sheet and income statement.

Suppliers are a third, more common source of capital. A majority of businesses find it indispensable to have trade credit as a part of financial structure.

“Investment angels” are a fourth and less publicized method of providing capital. This non-traditional source of equity consists of a private individual with the funds to inject.

The more traditional routes–internal, lenders, and suppliers–are fairly rigid in terms of financing. As a result of the recent credit crunch, lenders have few tangible assets left to use as collateral. The deciding factor becomes the willingness of the owner to further share ownership of his business. Where control is a priority, debt leveraging becomes the only outlet for financing company objectives. It should be noted, however, that in today’s economy, highly leveraged companies are often doomed from the beginning and carry a heavy burden of risk.

This burden of risk appears in two principal categories of debt: senior debt and subordinate debt.

Senior debt, generally the least restrictive of the debt categories, depends on the company having a strong asset base. Subordinate debt is a type of capital that is usually unsecured or ranks behind the security position of the senior debt lenders.

Non-traditional routes, which include equity partners, are a more conservative and risk-averse method of raising capital. There is, however, a trade-off in terms of control. The decision in the search for capital hinges on the fight between control and leverage. Equity partners may not require the leveraging of assets, but in return require a sharing of control. More often than not, those injecting significant capital from their pools of resources want a say in management decisions.

The key to success in any industry is a well-informed and well-educated entrepreneurial public. An informed business community is capable of making the necessary decisions to survive and flourish in this lean economy.

Business must arm itself with the power to control its own destiny. In this way, what is good for Canadian business becomes good for all Canadians.

Mark Borkowski is president of Toronto based Mercantile Mergers & Acquisitions Corporation, a mid market mergers & acquisitions brokerage firm. He can be contacted at mark@mercantilema.com or (416) 368-8466 ext. 232