Looking beyond loans: Where to find financing now

September 24, 2009: 3:56 PM ET

Bank vaults have been slammed shut this year to small businesses, but entrepreneurs are pulling cash from other places to get their ventures off the ground.

Victoria Pavlov
In the past year, I made two attempts to take out a loan for my startup graphic design business. All banks demand proof that our business is successful and earned money for the past two years. I tried to make them understand that our business cannot bring in any money -- we need equipment that can only be bought with a loan. If I get it, my company will create new job opportunities that will be beneficial for our economy. However, with that said, all banks remain ignorant. What is the best way to take out a loan for my business?

By Maya Payne Smart, CNNMoney.com contributing writer
Even in the best of economic times, it's not easy for startups to win bank loans. Most lenders look for a long track record of earnings, and some don't lend to new firms at all. But you can improve your odds by investing your own cash, building banking relationships, communicating a compelling business vision, and courting local investors.

Jeff Glassman (at right) relied on friends and family to raise the $250,000 needed to launch Fire Island Beer.

Jeff Glassman (at left) relied on friends and family to raise the $250,000 needed to launch Fire Island Beer.

"No one should go into a bank and expect 100% financing," says Bob Seiwert, senior vice president of the American Bankers Association, a Washington, D.C.-based trade group. "Bankers are lending shareholder and depositor money, and they want it returned on time. They get paid to take prudent risks, but they don't get paid to make equity investments."

In short, you need to invest in your enterprise before seeking others' support. Seiwert also recommends seeking out an experienced small business lender who uses the Small Business Administration's loan guarantee programs.

"While most banks will do small business loans, not all banks specialize in that," he says. "Look for a bank with experienced relationship managers who are used to working with firms in your industry. Many times the advice that a knowledgeable banker can give you is far more important than any product or service that they can sell."

Moreover, establishing a banking relationship sets you apart from other prospective borrowers. "If you look today at who is getting the money, it's people who've invested in a relationship and didn't just do a series of transactions," Seiwert says. "They have a bank or a banker that they have regular dialogue with. If you're applying for a loan over the Internet, you're just going to be a number -- and when money gets tight, you don't want to be a number."

The good news is that small business lending is picking up a bit after plummeting last year. The SBA reported in September that more than 1,000 lenders that hadn't made SBA loans since at least October 2008 began lending again this year.

But don't think that traditional banks are your only option. Alex Moazed, founder of Applico, a mobile phone software application development firm, tapped into savings and maxed out his credit card to get his company off the ground in January. "I'm young and in school and don't have much of a credit history," the Babson College student explains. "I didn't think a bank loan was an option for me."

His firm launched its first application in May: NYC Transit, which allows New York and New Jersey commuters to view train, bus and ferry schedules on BlackBerrys without network connections. Just a month before the launch, he won $2,500 in a business plan competition at school. Now he says he's paid off his credit card, and Applico is on track to reap $250,000 in revenue for its first fiscal year.

Moazed advises entrepreneurs to start small to generate cash for corporate growth. "Be relentless, and never let yourself get down about [financing your business], because there are many ways that you can be innovative to get your initial product out there," he says. "Maybe you want to spend $1 million on a full-fledged product, but scale it down to bare-bones and get that out there. Leverage the cash that you have and try to defer payment with your suppliers. Get them to buy into your vision."

When Jeff Glassman decided to launch Fire Island Beer in May with his brother and cousin, he knew their risk profile was unlikely to win traditional bank loans. Instead, he turned to friends and family to raise the $250,000 that he needed to perfect a beer recipe, purchase kegs, retool the bottling line at a brewery, and develop eye-catching creative for labels and advertisements. Glassman offered his investors convertible notes, giving them a direct stake in the potential success -- and the risk -- of his venture.

"Before you approach anyone else, sacrifice -- whether it's your own money or time," he advises. "Demonstrate that your skin's 100% in the game. Investors look for that. They want to make sure it's not a hobby that you're testing on their dime."

A well-targeted personal appeal coupled with a detailed business plan helped Kim Harmson raise more than $70,000 from local investors when she launched Kizuri, a fair-trade gift shop in Spokane, Wash. "I had never done retail before, so I thought a bank would have laughed me right out of the door," she says.

What she lacked in experience, she made up for in commitment to socially and environmentally just business practices. That, along with her sponsorship of local events and donation of 7.5% of profits to the community, appealed to investors like Denise Attwood.

"Kim really impressed people," Attwood says. "She met individually with each of the investors and she was very thorough and thoughtful in her development of the plan. She knew her audience, and knew that they wouldn't want fair trade not to be available in Spokane."

Give us your advice: Check out recent "Ask & Answer" questions.

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