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What's It Worth?

Loan guarantees cost a pretty penny, but they let you round up the capital you need -- often without surrendering equity.

Despite all the hoopla banks are making about the small-business market, in the final analysis, it's often a poor fit for them. There are many reasons for this: Banks are built to make large loans, not small ones. Because they are lending depositors' money, banks can only make loans where there is very little risk; there has to be plenty of cash flow and hard assets to back up a loan. And finally, banks almost always require monthly or quarterly payments on the loans.

All this is fine for the banks--it's just diametrically at odds with the experience of most small or early-stage businesses. Keeping the above in mind, consider that small businesses possess large amounts of risk and little cash flow, and they attract new business at a slow, if not random, pace.

There is another alternative, however--one most entrepreneurs probably haven't considered. "The needs of entrepreneurs and banks can be bridged by angel investors who are willing to provide loan guarantees," says Arthur Lipper III, chairman of Del Mar, California-based British Far East Holdings Ltd., a company that provides and arranges financing and offers advisory services.

"It's not cheap, and sometimes it's not easy," Lipper says, regarding the use of third-party guarantees, which he arranges for deals between $400,000 and $3 million. "But for companies with explosive growth opportunities, it can be the best way to go."

David R. Evanson, a writer and consultant, is a principal of Financial Communications Associates in Ardmore, Pennsylvania. Art Beroff, a principal of Beroff Associates in Howard Beach, New York, helps companies raise capital and go public.

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This article was originally published in the May 1998 print edition of Entrepreneur with the headline: What's It Worth?.

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