Financing homework is critical in a credit crisis. A book by Dileep Rao of the University of Minnesota's Carlson School of Management offers practical tips.
The midst of the worst credit crisis in decades may not seem the ideal time to publish a guidebook on financing for entrepreneurs and small-business owners.
Yet that's what Dileep Rao, who teaches entrepreneurship and venture financing at the University of Minnesota's Carlson School of Management, has done in "Finance Any Business Intelligently," a book published in October.
Times such as these, according to Rao, often are prime time for entrepreneurs, the innovative products and services they bring to the market and the jobs they create. So the current financial meltdown makes understanding how your business affects your money and how money affects your business even more relevant, he figures.
"This book is designed for all entrepreneurs at all times," Rao said. "In an environment like this, it makes it tougher to find the right financing, and there are more people seeking financing. This can help guide them into not just finding financing but finding the one that is right for their business."
Rao said that finding the right financing begins with a sound financial plan: knowing how much money you need, what you need it for, what type of financing to seek, when to seek it and at what cost. Having such a plan and approaching financiers who are right for your business can make getting the money easier.
Every company, at each stage of development, needs a customized financing structure based on the owner's goals and on market conditions, Rao said. The book contains exercises to help entrepreneurs develop such a plan.
Rao has plenty of finance experience himself.
Before he arrived at the university about 11 years ago, he financed more than 450 companies and projects in 23 years as a development-fund executive in Wisconsin. He ended up turning around some of the companies the fund financed. He also consults with governments, development advisers and businesses, and he recently expanded his scope to begin working with Fortune 1000 companies. He is a senior lecturer at the U, has a doctorate in business administration and is president of InterFinance Corp., through which he consults and publishes his books.
"I've looked at financing from practically every angle there is," Rao said. "We financed equity-type deals, we did a lot of loans, we arranged a lot of financing from other sources for our portfolio companies. We did a lot of buildings and developed them, financed them and leased them."
Rao said his book about finance is intended for current entrepreneurs and those who want to go into business for themselves.
"My goal is to try to make things easier for them, to try to give them the practical information they need, as opposed to the theoretical," he said. "It is not meant for a Ph.D in finance; it wasn't written for MBAs."
The good news, despite the credit crisis, is that money is available.
"People have money, bankers have money," said Rao, who recently interviewed people at a variety of lending institutions around the country. "That's not the problem. The uniform message I was given is: 'We have plenty of money, we're just not sure who to give it to.'''
That's where entrepreneurs with solid financial and business plans have an advantage.
"Once you understand your numbers, once you understand how to control them, you should be able to know how much money you need and you should be able to convey to your financiers how you're in total control of the situation," Rao said. "That could reduce the risk and help you get the money."
One entrepreneur familiar with Rao's approach to finance and business is Brian King, chief executive of CRI Recycling in Woodville, Wis. Rao, who is on the company's board of directors, has helped arrange financing from a variety of sources since shortly after the company was founded nearly 10 years ago, King said.
CRI Recycling is one of a few companies in the country that recycles oil that falls onto factory floors.
It has 13 employees. King cited two examples where Rao's experience has helped the company find the right financing.
In one case, King had gone to a couple of venture capital firms after several rounds of financing from family and friends. One firm offered only a third of the share price that the angel investors had paid, King said. And the offer came with lots of contingencies.
"If you don't meet your numbers, you basically give us the keys to the company," King said, summing up the firm's conditions.
Rao suggested instead offering stock to CRI's existing investors at the price the venture firm had offered, King said. "At that price, they said, 'Sign me up, I'll do more,'" King said. "We ended up not taking the venture money and raised all the money we needed from individuals."
In another case, Rao's experience working with community development corporations paid off for CRI, King said.
The company was renting a building with an option to buy it from the economic development group that had built it for $550,000, King said. Rao, pointing out that the group was a nonprofit, suggested that it should sell the building to CRI for the loan balance.
The group agreed, King said, selling the building -- then appraised at $700,000 -- for $350,000.
"As a result of picking up that extra equity in the building, we were able to borrow more money and raise more working capital," said King, himself a former corporate chief financial officer.
"That was one of the more interesting, enlightened finance options -- one that I never would have thought of."