It's a Stretch

Breaking the Impasse

Tools to help you build the production you need range from private equity financing to licensing. Equity investors such as VCs were the expansion backers of choice for Internet companies in the 1990s. Today, VCs are more cautious, and, especially if you're in a less sexy field such as metal-plating, they're slow to throw wads of cash at you, says Galvin. "We're very likely to have a hard time finding an investor," he says. "It's boring manufacturing, and we don't offer the kinds of skyrocket returns some investors are used to."

Visit our Expert Center to ask our experts how you can better grow your business through financing, growth strategies, marketing and more.

A joint venture with another company that has existing production capacity or the cash to build it is a possibility for some firms. But it's important to remember that dancing with elephants gets you squashed. "A lot of guys see a big company they can partner with and then a year later decide they want out of it, and they can't [get out]," Davis warns. "Afterwards, they have this partner on their neck for the rest of their life."

Debt financing offers control-sensitive entrepreneurs a much more comfortable arrangement than taking on an equity investor or joint venture partner. But that doesn't mean it's a cinch. With a customer unwilling to order before he can pay to build the needed plant, and lenders unwilling to provide money without an order, Galvin needs to get a financing commitment contingent on a purchase commitment. So far, he hasn't been able to do that. "Banks weren't interested at all in a project like this because the company was too small and didn't have a history of operating a plant of that scale," he says.

Make sure your sales team also "looks the part." Read "Hey, Good Lookin!" for more information.

Banks and alternative lenders such as factors do, of course, provide financing for receivables. But giving a business upfront cash to fulfill a contract before a receivable has been created is viewed as far riskier than simple factoring, and few lenders will do it for young companies. When the money is to pay for expansion to meet projected demand, rather than to fill on-hand orders, the chances of making a deal fall even further.

That still leaves licensing, a powerful tool for making money off your ideas without having to invest much in facilities to turn them into products. One problem with licensing, however, is that it's expensive. Galvin estimates that if AlumiPlate licensed its patents to a firm that could build the needed plant, he would receive just 2.5 percent of the value added by the plating technology. "If we had the $10 million, we could get a 30 percent return annually on it," he says. "By licensing, we'd be giving up the lion's share of the return to the source of capital."

Like this article? Get this issue right now on iPad, Nook or Kindle Fire.

This article was originally published in the January 2002 print edition of Entrepreneur with the headline: It's a Stretch.

Loading the player ...

The 4 Most Persuasive Words in the English Language

Ads by Google

Share Your Thoughts

Connect with Entrepreneur

Most Shared Stories