More on TAVA's lender, Sirrom Capital, dba Tandem Capital:
Copyright 1998 U.S. Chamber of Commerce
Nation's Business
February, 1998
SECTION: FINANCE; Finding Capital
HEADLINE: A Lending Niche Helps Small Firms
SERIES: This story is part of a continuing series on ways for small companies to locate the financing they need to run their businesses.
BYLINE: By Joon Pryde
HIGHLIGHT:
Small-business-investment companies offer firms an alternative to banks and venture capitalists when expansion money is needed.
BODY:
When Tom Stumb's company, the Potomac Group Inc. in Nashville, Tenn., started feeling growing pains in 1993, he knew the cure was an infusion of capital. He just wasn't sure where to turn.
The company had carved out a niche selling its computerized information service, MediFAX, to health-care providers. MediFAX is delivered through a desktop device that gives clients a quick, easy way to verify patients' health-insurance eligibility, among other things.
But after about eight years of selling the service, Potomac determined that it needed more money for marketing and for engineering MediFAX to include additional patient information.
Finding enough growth capital wouldn't be easy, however. Although the firm had annual revenues of about $ 7 million and was operating at the break-even point, banks were unwilling to lend to Potomac because it could not show a history of profitability.
Money was trickling in from individual investors, but no investor was in a position to provide the amount of capital Potomac was seeking. Stumb wanted to steer clear of venture capitalists because he knew they would demand at least a 30 percent ownership interest in the company.
Stumb needed another source. He found it after an acquaintance suggested that he contact Sirrom Capital Corp. of Nashville, one of about 300 small-business-investment companies in the United States. SBICs are private companies licensed by the U.S. Small Business Administration to provide debt and equity financing to start or expand small companies.
Sirrom Capital lent Stumb the $ 1 million he needed to expand Potomac and its MediFAX service. From 1993 through 1997, Potomac's annual revenues tripled to $ 21.7 million and its employment rose to 180 from 36. The firm's MediFAX customers now total 7,000.
"This was a cash-starved company until Sirrom came in," Stumb says. "With the funds from Sirrom, we were able to focus on growing the business."
Creating Household Names
Congress authorized creation of SBICs in 1958. Since then, SBICs have invested approximately $ 13 billion in about 80,000 small businesses in nearly every state. Some of those businesses -- such as America Online, Inc.; Federal Express Corp.; Outback Steakhouse Inc.; and Apple Computer, Inc. -- have gone on to become household names.
The idea behind SBICs is to "bring venture capital down to what we would call the smaller end of small business," says Lee Mercer, president of the National Association of Small Business Investment Companies (NASBIC), an industry organization based in Washington, D.C.
SBICs help small firms through long-term loans, ownership investment, or a combination of the two. SBICs are barred by federal law from buying a controlling interest in a firm.
SBICs usually favor investing close to home. Their average single-business investment was $ 770,000 in 1996, and 75 percent of their investments that year were $ 500,000 or less, according to NASBIC.
SBICs get their money from their owners and from individual investors. The keys to becoming an owner, the SBA says, are to show "a real interest in serving small-business concerns" and to have expertise in investing in companies. Owners must put up at least $ 5 million of their own capital.
A business is eligible to obtain financing from an SBIC if its net worth is less than $ 18 million and it has had average after-tax earnings of less than $6 million for the previous two years. Although SBICs invest in start-up companies, they generally focus on providing expansion capital to firms that, like Potomac, have had success but need more money to achieve growth.
About 85 SBICs are "specialized," meaning they target "socially or
economically disadvantaged" small businesses, typically minority-owned firms, the SBA says.
Making A Match
Stumb learned of Sirrom through investors who earlier had provided financing for Potomac and were investing in the Nashville SBIC. Stumb contacted Sirrom, and the result was a $ 1 million, five-year loan from Sirrom with a 12 percent interest rate.
Potomac was the type of investment that Sirrom was looking for: It was not a start-up; it had annual revenues above $ 3 million; its financial needs were in Sirrom's range of $ 500,000 to $ 4 million; and it was in health care -- one of Sirrom's two preferred industries (the other is telecommunications).
"They had been successful. They had grown the business from nothing to $ 7 million in revenue," says George Miller, Sirrom's president.
With the loan, Potomac plans to expand MediFAX to give health-care providers additional types of patient information, such as the status of pending insurance claims or the documentation for authorizations of physician referrals. The company also plans to expand the number of insurance carriers linked to the MediFAX service.
Finding An SBIC
Stumb's discovery of Sirrom through word of mouth was not unusual, says NASBIC's Mercer. Small-business owners typically hear about SBICs from their lawyers or accountants. In fact, it's difficult for a small-business owner to learn about an SBIC in any other way. Like Sirrom Capital, most SBICs don't carry the designation in their names, so it's not immediately apparent that they are SBICs.
The SBA and various industry organizations provide lists of SBICs. The lists provide not only addresses and phone numbers but also information such as the size of loans or investments that an SBIC prefers to make and whether it limits its investments to certain industries. (See "For More Information," below.)
Because most SBICs prefer to invest locally, small-business owners should start their search with those in their area before calling SBICs elsewhere.
To obtain capital from an SBIC -- as with any financing -- a company owner must have a detailed business plan to convince the lender that he or she is a good credit risk and has a worthy business concept.
Citing the opportunity for growth that Sirrom gave his company, Stumb says SBICs "have proven there's a viable niche in the capital business between venture-capital firms and commercial banks."
GRAPHIC: Photo, The cure for the growing pains at Tom Stumb's health-information firm, the Potomac Group Inc. in Nashville, Tenn., was a transfusion of capital obtained from a small-business-investment company.
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Business Wire
April 15, 1998, Wednesday
HEADLINE: Sirrom Capital Corporation Reports First Quarter Pre-Tax Operating Income of $ 0.31 Per Share
DATELINE: NASHVILLE, Tenn.
BODY:
April 15, 1998-- Sirrom Capital Corporation ("SCC" or the "Company") (NYSE: SIR) today announced financial results for the first quarter ended March 31, 1998. Pre-tax operating income per share increased 41% to $ 0.31 for the first quarter of 1998 from $ 0.22 for the same prior year period on a 21% increase in the weighted average number of shares outstanding as a result of the public
offering consummated in March 1998. Pre-tax operating income for the quarter rose 74% to $ 10,826,000 from $ 6,226,000 for the same quarter last year. Total revenues for the quarter were $ 16,085,000, an increase of 65% compared with $ 9,740,000 for the first quarter of 1997. The net increase in shareholders' equity resulting from operations for the quarter was $ 0.31 per share.(1)
SCC will pay a dividend of $ 0.25 (twenty-five cents) per share on June 16, 1998, based on a record date of May 29, 1998. SCC intends to distribute to shareholders on a quarterly basis at least 90% of its net investment income and net short-term capital gains.
SCC's loan portfolio increased 72% to $ 465.2 million at March 31, 1998, compared with $ 270.2 million at March 31, 1997. Loan originations for the first quarter of 1998 were $ 94.6 million, up 41% compared with $ 67.2 million for the same period last year. "The results this quarter reflect the continued expansion of our core business and Tandem Capital and a strong performance from Harris
Williams & Co.," stated George M. Miller, II, President and Chief Executive Officer of SCC. During the quarter, the Company experienced loan repayments totaling $ 28.6 million. See Exhibit 1 for details of loan repayments that occurred in the first quarter.
The Company's $ 10,863,000 net increase in shareholders' equity resulting from operations for the quarter was composed of pre-tax operating income of $ formerly served as Senior Vice President and Division Manager of First American National Bank. In addition, SCC hired Kristin Hill Bennett to serve as Vice President - Marketing and Jerry Christenson to serve as a portfolio manager for Tandem Capital, Inc. Ms. Bennett formerly served as Associate Marketing
Manager of Fruit of the Loom, Inc. and Mr. Christenson formerly served as Vice President of Finance and Administration at Rand McNally Media Services/McQueen, Inc.
Sirrom Capital Corporation is a specialty finance company that makes loans to small private businesses located in the United States and Canada that generally have revenues between $ 5 million and $ 50 million. SCC typically makes loans in the form of senior or subordinated secured debt with relatively high fixed interest rates and with warrants to purchase equity securities of the borrower. SCC also invests in micro-cap public companies under the name Tandem
Capital, Inc. In addition, SCC provides merger and acquisition advisory services to small and medium-sized companies through its wholly-owned subsidiary, Harris Williams & Co. SCC is also a business development company regulated under the Investment Company Act of 1940.
Headquartered in Nashville, Tenn., Tandem Capital provides growth capital to small, rapidly growing public companies with market capitalizations up to $ 100 million. Tandem typically invests between $ 2 million and $ 10 million per company in transactions structured as convertible debt, convertible preferred
stock or subordinated debentures with warrants. Tandem seeks to invest in companies that have a strong management team in place, a credible business plan and a requirement for capital to fund the next phase of growth. For more information on Tandem Capital, contact www.tandemcapital.com.
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