Raising the money a small company needs to compete isn't easy-but there are ways to make the process simpler.

By Jay Garcia and Carlos Gaitan

How much? What for? What type? Where from? These are just some of the key questions that all companies-small, medium, and large-need to answer as they embark on a capital-raising effort.

The larger the company, the more likely that it has a team of people answering these questions, with the expertise, the contacts, and probably around-the-clock external consultants. This is not typically the case for smaller companies, particularly the 4 million minority-owned companies identified in the 2002 Census, of which about 1.5 million were Hispanic firms. Today, we estimate that the number of Hispanic companies has grown to 2.5 million and could be up to 3.4 million in 2010.

Discovery Capital Investment (DCI) focuses on the Hispanic market, and the companies we service are typically early-stage or growth businesses in inner-city locations with an average of $30 million in annual revenues. We have found that the owners usually run the day-to-day operations as well as the overall strategy, and most of the time find themselves not knowing how to start the process and in a Catch-22 situation-trying to prioritize between generating revenue and preparing a thorough business plan to present to elusive investors.

Hispanic companies have demonstrated a tremendous growth potential given their captive consumer base, growing at more than three times the national average. Therefore, they offer very attractive investment opportunities. Most businesses are financed by savings and bank loans, and only an estimated 5 percent actually obtain equity capital for long-term projects. One of the main constraints is that a large number of small companies seek up to $5 million in capital, while the majority of funds are prepared to invest upward of $15 million.

Challenges faced by small companies and entrepreneurs typically arise from lack of social and professional networks; the preconception of minorities having bad credit; certain lenders finding small-size loans expensive; and the lack of non-bank options for these kind of businesses in an environment where capital market-based finance is increasingly replacing bank-based finance.

Despite the constraints and challenges, there are various sources of capital chasing after a large pool of entrepreneurs. Most have good ideas and need the capital to implement them; others have an already-proven concept funded by friends and family but need to grow further. Still others are successful business owners who have made it on their own without debt or partners, but don't know how to grow from there. Different types of businesses and the stages they are at require different strategies for raising capital. While there are some key common denominators, there is no "one size fits all" strategy.

Business owners will most definitely know their business. However, it is not surprising to find that they do not know how to present their companies in a professional manner, giving capital providers all the relevant information they need to assess the opportunity. Lenders, venture capital firms, and private equity funds all have hundreds of business plans and applications to sift through daily. Individual or angel investors might not always have strict evaluation procedures, but they still want to see a well-prepared business plan. The bottom line for any investor is whether he or she believes you can execute the business plan and the potential return on investment. The same applies for strategic investors or joint venture partners.

A capital-raising exercise often takes companies back to basics, particularly when a business has already been running and day-to-day issues pull you away from planning. A good business plan is key. It sets out the idea behind the business and provides background research or statistics that support why there is a market for your product or service. A good plan identifies the target market and how you are going to penetrate it, why the plan will work, what you need for it to work, and why you are the right person to execute the plan. It should have a thorough description and analysis of the company's operations, main areas of growth, and competitive advantages.

A "good story" will get the attention of most investors, but will it make money? At the end of the day, most investors are numbers people, and they want to see the story in numbers-past and future. This is when it might become tricky and time-consuming, and when you wish you had, or are thankful you have, a strong financial background. In many cases, you do have the financial background but lack the time to dedicate to the exercise.

Creating a financial model for your business will allow you to understand what you need in order to create the business you envision and will establish whether it can be profitable. The financial projections will show how much capital you need and how you are going to use it-the first question an investor will ask. It also allows you to play with different scenarios of market conditions and levels of capital available. Investors will likely invest if even under a pessimistic scenario the return on investment is attractive.

Once you have established the need for capital, you must determine what type of capital you require and from what sources you will seek it. Working capital may provide the necessary funds for the day-to-day operations of the company until it becomes profitable. It is often short term and easily found through revolving lines of credit. Expansion and growth capital will be longer term in nature and may require mezzanine or institutional loans or even equity. It is therefore very important to match the length of projects with the length of capital to avoid having to seek additional funds halfway through or an equally bad situation of paying interest on idle funds. Capital always has a cost; even your own funds have an opportunity cost that should not be ignored.

Business owners are often faced with the option of debt versus equity and can easily lose sleep over this. Debt will carry an inevitable cash flow cost through interest and amortization and will most probably require security and guarantees, either personal or from the business. Equity capital, on the other hand, requires reducing your ownership in the business, but it also means sharing the risk.

Whatever your choice may be, it is important to bear in mind that the cost of capital should not be the determining factor in your decision. The right partner, be it an equity or debt investor or a bank, is key to the future success of your business. You want to consider the added value that such a partner brings to the table apart from the much needed cash. Considerations such as the expertise of a particular investor in your sector or the additional services for small businesses that a bank may offer always play a key role.

If you have a business and want to grow it, or an idea you would like to execute, you might be asking yourselves what to do and how to do it. The "what to do" might be clear by now: Understand your business, put it on paper, put it in numbers, decide how much you need, and go ask for it. Easier said than done. So, how do you do it? One of the main concerns for business owners is the diversion from the business caused by the capital-raising process. It is generally the case that small businesses rely on the owner/manager for the day-to-day operations, in which case drawing that person away can seriously hurt the business. Whether having attempted it themselves already or venturing for the first time, we find business owners decide to hire a professional advisor to help them through the process.

The added value of strategic and financial advisors lies in not only taking the burden off company owners, advising on financing strategies, and introducing them to the right capital providers, but also in looking at the company's business plan from an investor's perspective and ensuring that the correct approach is used depending on the specific investor. Investors usually receive large numbers of business plans from companies, but advisors will usually have an existing relationship with certain investors and act as a first screen for opportunities. It never hurts to have your business plan placed at the top of the pile.

Companies should use any contacts or networks available for this purpose, and lawyers or accountants can prove very helpful. Organizations within the community, such as the ICIC, can also provide valuable guidance and often conduct seminars and conferences that are not only informative but practical but allow for new contacts to be made.

The most important thing for company owners and managers to realize is that investors are ultimately interested in your ability to run the business. No matter how polished your business plan is or how impressive your advisors' network may be, the final decision will lie in your ability to convince the investors face to face that you are capable of executing the business plan and generating an attractive return.

The authors are co-founders of Discovery Capital Investment, a merchant bank specializing in the Hispanic market.