Nailing Capital

Finding the right funds to fuel innovation and grow business

By Mary Louise Ray

Manufacturers must become more innovative to compete in a global economy. That fact was documented in a recent report on the state of the manufacturing sector in Pennsylvania.

“The small- and medium-sized firms that are the broad foundation of manufacturing in Pennsylvania face distinct challenges in the global economy. The Commonwealth will prosper if many more small- and medium-sized firms develop well-informed strategies that give them distinctive positions in the marketplace based on product innovation and continuous improvement of enterprise performance,” according to Deloitte Consulting’s “Manufacturing Pennsylvania’s Future: Regional Strategies That Build From Current Strengths and Address Competitive Challenges” 2004.

However, product innovation, from new product development to the addition of new product production capabilities, costs money. In fact, it can cost a lot of money. Product development can necessitate an infusion of working capital to fund research and development, and new or expanded production capabilities can require the purchase of real estate and new machinery, as well as costs associated with constructing or renovating facilities.

If you plan to add production capability to your company, where will you find the money? Banks, in general, do not frequently jump to loan money to the manufacturing sector, and manufacturers often have difficulty appealing to private investors or venture capital firms because they are competing against the often more attractive high technology and service sectors for investment dollars. Public sector loans and grants are an option, but finding the right program to support your project and applying for it can be complicated.

Even if you are able to secure a loan from a lending institution, find a private investor or obtain a government loan – it is unlikely that you will get the entire amount you need to fund your project from one source.

That is where Pennsylvania's Industrial Resource Centers (IRCs) can help. The IRCs can often bring a range of funding sources to the table and put together a mix of public and private sources of capital to fund your project.

“I think the challenge out there is that companies don't know where to go for building a financial plan and getting funding. It is a cooperative effort,” according to Robert Zaruta, Director of Business Development at the Northeast Pennsylvania IRC (NEPIRC) in Wilkes-Barre. The IRCs often are able to gather representatives from banks, venture capital firms and public agencies and “sit in a room together to jointly help the company,” says Zaruta.

Before you start looking for funding, however, you need to define your company's growth strategies.

Where are you now, and where do you want to go?
Before embarking on a major capital-intensive project, you need to get a clear picture of your company's current financial status, define your goals and develop growth strategies.

“The first thing we do is to assess their situation,” says Joe Fao, Manager, Manufacturing and Business Services, at the Industrial Modernization Center (IMC) IRC in Williamsport. “Do they need a debt restructuring plan? Are they financially secure? Do they want to grow their business? If they do want to grow their business, what are the barriers that prevent [them] from offering new products?” asks Fao.

Determining your company's financial status is a key component of building your strategic plan for growth. It is likely that you will have to contribute a portion of the project cost (either through cash or equity), so you have to know the current financial state of your business. In the case of a loan, cash flow is particularly important. “Everything is based on cash flow. Current and future cash flow must support the loan,” says Arthur Tintori, Managing Director, Financial Services at the Catalyst Connection IRC in Pittsburgh.

Many of the IRCs have professional business advisors (PBAs) who have received training in all aspects of business planning, including financial planning. Some of the IRCs refer their clients to a network of professional third-party consultants that can help them with the financial planning required for the project. Whether through PBAs or third-party consultants, these experts “can help [manufacturers] determine costing and pricing, profit margins and cash flow,” says Walt Hoffert, Director of Client Services at the Manufacturing Resource Center (MRC) IRC in Bethlehem.

Some IRCs have developed formal partnerships with other entities to develop programs that assess a client company's current situation and then help them build a strategic plan that defines their goals for growth.

The Northwest IRC (NWIRC) in Erie has recently developed such a partnership – the Entrepreneurial Assistance Program. Together with the Erie Regional Chamber and Growth Partnership (with funding from Erie County) and private consultants, it brings together resources and financial assistance for assessment, strategic plan development and implementation.

According to Mark Lechner, IT Field Agent at NWIRC, the Entrepreneurial Assistance Program takes manufacturers through the complete process – the company assessment, strategic plan development and project implementation – and can provide funding for the entire process through a combination of grants, donated services and lending.

Specifically, the costs associated with the assessment phase of the program are covered by grants; the Chamber and Growth Partnership offers 50 percent of the grant, and NWIRC offers the remaining 50 percent. In the strategic plan development phase, the Chamber and Growth Partnership offers 50 percent of the loan, while the remaining costs are donated by NWIRC. Finally, in the implementation phase, the company can get money for the expenses associated with implementing their strategic plan by way of a loan from the Chamber and Growth Partnership.

While the program is still in the pilot phase, NWIRC “hopes to expand the program throughout the Northwest region in conjunction with the Ben Franklin [Technology Partnership],” says Lechner. The Ben Franklin Technology Partner-ship of Central and Northern Pennsylvania is one of four regional offices of the Ben Franklin Technology Development Authority, which focuses on investing in economic, community and university-based innovation.

Investigating alternative paths to growth
Before you run out and start applying for grants and loans, however, be aware the adding production facilities is not the only way to grow your business.

Growth does not just hinge on new product development, according to Fao; the company also needs to examine market development (is there a market for the new product?), and sales strategies (are you able to successfully offer and sell your products to your target markets?).

The IRCs, through their PBAs and networks of third-party consultants, can help you develop all aspects of your strategic business plan, including market research to explore the viability of your new product, as well as develop sales strategies to maximize your product's market potential.

They will also help you determine if a capital expenditure to add “bricks and mortar” assets is the best way for you to meet your goals. Growth can also be achieved through merging or acquiring other companies, outsourcing new product production to another manufacturer or developing various licensing and franchise arrangements, according to Fao.

Tony Girifalco, Executive Vice President of the Delaware Valley IRC (DVIRC), concurs with Fao's assessment. “Sometimes the company ends up where they started – following their original plan for obtaining capital through loans to grow their business,” says Girifalco, but sometimes they opt for alternative means after they have worked through the strategic plan process.

If you intend to follow the alternative paths to growth, the IRCs can help match you with manufacturers for outsourcing production or connect you with third-party consultants to work out licensing and franchising agreements. Assistance with mergers and acquisitions are also becoming a popular service offered by the IRCs.

“It has become a growing part of our business,” says Girifalco – so much so that the DVIRC launched a merchant banking service in July 2004. In addition to business growth services, the merchant bank offers business succession assistance.

“Company owners are aging and they are starting to think, ‘What is next? What is my succession plan?’” according to Girifalco. The merchant bank can help manufacturers plan mergers and acquisitions that can preserve or increase the value of the enterprise and free the owner to retire.

Finding the money
The IRCs are committed to helping manufacturers find funding sources for viable growth projects. “We will help them secure capital – whether it is venture capital or a loan,” says Fao. The process involves matching the needs and goals of each manufacturer to the appropriate funding entities, whether it is a government agency, lending institution or private investor. Frequently, a single funding package can involve all of these entities.

Institutional lenders, private investors and venture capitalists.
The IRCs cultivate relationships with public and private entities that loan or invest money to be used for working capital.

For example, the Manufacturing Resource Center (MRC) IRC in Bethlehem has an alliance with a southeast regional bank, National Penn Bank, which has made the manufacturing sector a focus for their institution. The bank formed a team, The Manufacturing Group, within the corporation that is dedicated to manufacturing sector clients. To help the bank better understand the needs of small- and medium-sized manufacturers, the MRC's executive director, Edith Ritter, serves as a member of the Manufacturing Group's board of advisors. Conversely, an executive vice president of the bank serves on the MRC's advisory board.

Similarly, IRCs also have relationships with private investors and venture capitalists, but the level of interest from these sources of funding varies.

“Since the dot.coms blew up, more investors are looking for tangible products,” according to Tintori. “There is always a group of investors – but what they want to invest in changes. We’ve seen investor interest alternate between the high-tech, service and [manufacturing] sectors.” Nevertheless, the IRCs ability to identify and introduce manufacturers to potential investors with an interest in the manufacturing sector can be valuable.

State and regional governmental entities.
There are numerous loan and grant programs, both at the state and regional level (see sidebar). The IRCs can identify the various programs available for your particular situation and goals, as well as assist you with the application process. “We know the programs and we know how the programs work,” says Tintori. “I identify programs that fit their projects and objectively give companies the options.”

Some IRCs can also offer loans to partially fund projects, bridging the gap between what banks and public/private programs can lend and what the company needs to fund the project. “We are here to leverage our dollars to support [companies] in getting other resources by sharing risk in the lending programs,” says Tintori. “Certain banks have exposure limits, for example, $100,000 – they can't go over that. We can provide additional money.”

Innovate your way to growth.
Whether you choose to grow your business through merger, acquisition, outsourcing or capital investment in new production capabilities, the IRCs have the expertise to help you build a strategic plan and find the resources to make your plan a reality.