NEW YORK (TheStreet) -- It's no secret that capital access for smaller companies has been difficult, at the very least, for the past few years.
But as the economy works its way forward, financing for small firms will also come back, and small businesses should be educated about the opportunities. From bank loans to peer lending, options for small businesses can be confusing and overwhelming.
Ron Walker is co-founder and partner of Next Street, a Boston-based merchant bank and adviser serving small urban businesses typically 15 to 20 years old and with $5 million to $60 million in annual revenue.
Walker spoke with TheStreet last week about small-business owners choosing wisely and preparing to finance their business needs.
Where do investors and lenders typically prefer to see capital used?
Walker: They want to see the money being used to assist in executing whatever the model is for the business to generate the desired results, i.e. profitability. So if you're going for operating capital, they want to see a detailed analysis of what that capital is used for, whether it's for people, whether it's for building your operations, whether it's for executing on models, etc. ... They want to know and see pretty clearly what the capital will be used for, but ultimately today they want to see what the result is.
Secondly, if it's more senior capital/senior loan types of capital for purchasing equipment, they want to see what it's being used for, what's the value, what's the return, but most importantly they want to make sure it's being used correctly. What you see in some businesses that didn't ask for enough capital is that they start using the capital for the wrong reasons.
For example, if you had a line of credit and need to buy a piece of equipment, but you're maxed out on your term loan, some businesses may use that line to purchase that equipment, and that actually is a very bad flag on the business as they go for more capital moving forward.
How does a small business that's not used to dealing with banks and outside investors decide what type of financing is best for them?
Walker: I will always go back to the importance of doing a strategic plan. The real issue is growth capital -- what it's going to take to get that business where it needs to be in, say, the next three to five years.
Equity capital has a much different use, source and repayment terms than debt capital. So you have to have a plan on your revenue and what are the resources you're going to need to execute the plan moving forward. Then you can determine the capital. And small businesses that are not used to it, they end up going for the capital first, not the plan.