Money from Angels and Other Sources
By Deborah Rechnitz CMA CMC

Now I know that most of you don’t need any money, right? After all, you are mostly profitable and the business generates enough cash to be able to continue to reinvest in the business as well as provide you with a good paycheck. Over the years you’ve probably paid for new signs, remodeling the front areas or changing the layout in the back all with your cash on hand. In addition, you may have used leasing as a means of financing new equipment or your trucks. In a few cases, you might have even used the banks or a combination of bank loans along with a guarantee from the Small Business Administration to finance businesses from scratch or major expansion projects. These common methods of financing have some advantages, but as with anything else, they also have some serious drawbacks to them.

Cash. Using cash to finance your needs is a very safe method of financing. You have the cash. There is no doubt that you can pay for what you are buying. The problem arises in that you don’t have cash available for other opportunities as they arise once you’ve used the cash for your first activity. For this reason, you must be very careful with your purchases. In addition, sometimes you buy something with cash, but it may take 3 years or longer to reap the rewards from this purchase and begin to generate new cash. In this case you are without much cash for those unexpected and sometimes unpleasant surprises.

Leasing is also a common form of financing for this industry. It’s easy to get. The payments are more closely tied to the returns the assets might provide you as compared to cash. However, the interest rates are frequently much higher than a financial institution would charge.

Debt. Bank financing, for this industry, is frequently seen as the last resort. There is a certain amount of difficulty involved in obtaining this financing since banks are concerned with getting repaid. In addition, you are nearly always required to personally guarantee the loan with all of your personal and business assets. However, once the bank has established the terms and you’ve agreed to them, the interest rate is much less than leasing and the timing of the debt repayment can be tied to the anticipated cash inflows of the investment leaving your existing cash available for those unforeseen situations.

Each of these historical options, or a combination of them, can provide you working capital and investment funds that allow you to increase your rate of growth or maintain your market share in an increasingly competitive environment. These financing arrangements represent the historically standard ways of financing your plans, but times are changing.

New methods of financing. The last ten years has seen a growth in alternative forms of financing. Only now is it beginning to be applied in the drycleaning industry. The growth of equity financing is partially a result of the astronomical growth in the prices of public stocks. Even with the recent downturns of the general market, investors have significantly increased their personal fortunes. These investors are beginning to look for alternative investments, frequently investments outside of the public arena, to spread their risk and maintain their wealth.

To give you an idea of the size of this industry, private money from just one type of these private investors, referred to as venture capitalists, invested $6.8 billion in 661 transactions in the second quarter of 1999 alone. There are a variety of groups and individuals participating in these types of transactions. . Venture capital firms historically raised money from institutional investors – corporations, insurance companies, pension funds, university endowments – and invested it on behalf of those institutions. Today venture capital firms may represent private investors as well. There are individual investors who don’t necessarily seek a controlling interest and are referred to as angel investors. There are corporate equity investors representing specific companies looking for investment opportunities. These days, all sorts of funding structures exist.

None of this is particularly new. Historically, venture capital firms have been the main source of money for entrepreneurs. Is this far fetched for the drycleaning industry? Keep in mind that Prudential Insurance owns a percentage of one of the largest private drycleaning firm in the United States.

There are corporations looking to invest along their own business needs and at the same time add value to the companies in which they are investing. Is this far fetched for the drycleaning industry? Isn’t it true that General Electric has taken an ownership position in one of the newest solvent products for this industry?

In addition to corporations investing, there’s another powerful new source of venture capital – angels – wealthy individuals who invest their own money in start-ups. Although angels have always been around, the number of them and the amount of money they have has changed. According to Forbes Magazine, angels invested over $50 billion in 1997 alone. Is this far fetched for the drycleaning industry? We’ve seen a wealthy investor contribute $400,000 to a drycleaner after presentation of a business plan showing strong growth and earnings potential, but requiring additional capital to reach these goals.

What does this mean for the average drycleaning owner? Nothing if you are satisfied with your efforts. On the other hand it may mean everything to you. It means that if you have felt constrained and unable to grow to your full potential, there are ways to obtain your goals that you may not have previously considered. It means that if you plan to remain an active player in this industry, it is also important to understand how others’, who are in this industry, are playing the game. Only then can you compete effectively. Good luck.

Article which appeared in American Drycleaner, January 2000

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