Looking beyond loans: Where to find financing now
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 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.
Love a local business? Buy a share
From Anne Alexander, Pisgah Forest NC As some have mentioned above, the best time to borrow money or set up a line of credit is when you don't need it. Not very helpful, I know, but generally the reality. I have run into so many would-be entrepreneurs who think they can easily get a bank loan or even a grant (??) to start their business. Usually you have to tap your own resources (like family & friends, credit cards) deeper than you ever have before, go way out on a limb, powered by your own grit, determination, sweat equity and vision that you WILL succeed.
From Joe Phelan, Los Angeles CA Banks are not good for much these days. Funding Roadmap is a comprehensive online platform for business planning that's both easy to work with and to share via marketplace. For the moment, friends, family and angels are the most likely sources for funding. But a good planning process will allow entrepreneurs to ascertain the viability of their enterprise and adjust for sustainability and growth. Check it out at www://fundingroadmap.com
From David, Fort Lauderdale, FL Just a small business thought. After Huricane Wilma in South Florida, I tried to get a SBA loan. Recievables were wayup and I still need to pay my employees. I was not able to qualify because I do not have inventory or own a building. I ended up taking 20k out of my IRA. The IRA ended up declaring the area desaster zone and gave me 3 years to either pay it back or pay tax with out penalty.
This worked really well. The small loan was payed back and the money redeposited in the account.
Can the government make a similar program available during these tuff times?
All the best,
David
http://www.the-triton.com
From Deb and John Buckhannon WV 26201 My husband and I tried to get a loan to start up a business. The only bank that would even consider it was. United Bank in WV. The economy is so bad the banks forget how to loan money to people who have high credit scores. They want there money to stay where it is. That is what is wrong today. If the banks don't lend then how are we to get out of this slump?
From Charles & Eve Svirk, Labelle FL this is more of a comment to CNN small business writers: I wonder why there is no visibility to the disaster the banking industry is causing the small business owner? my husband a previously very successful small business, grew aggressively with the encouragement of regional banks, built up 40 employees, to now having several of his loans called (or not renewed) even though he was paying and current. Mean time, several of the banks are not even paying their TARP. I feel we were one of the lucky ones, me with a very stable job, and our ability to wait out the market. With the Banks behavior this no longer is feasible. If you would be interested in a story on this line feel free to contact us, as we would be happy to contribute our situation.
From Madeline Wade, Kennesaw GA IOU Central is a web-based, financial market that enables small businesses to apply for a loan ranging from $5,000 to $100,000 in an anonymous, secure environment. Plainly put, IOU Central is… The MARKETPLACE for BUSINESS LOANS. Please visit us at http://www.ioucentral.com.
From R. Mazerolle, Miami FL I am a veteran of a dozen mico-enterprise start-ups, and I have some advice for this particular stage in your lifecycle.
Aim to pitch larger accounts only. Find the person with the budget or the accountability for marcom or PR. This takes about 3 months. Starve in the meantime. Concentrate on relationships rather than portfolio. Shut up at meetings. Don't buy lunch. Arrive early and listen to the chatter in marcom dept. Find the pain points. Most marcom suppliers get in when the prior one screws up, or when newly appointed management change things. Find this stuff out. Your business depends on it more it depends on satisfying your suppliers or staff.
Get at least 3-4 irons in the fire. They will all close at different times, probably at the most inconvenient time.
Make sure EACH of your prospects are in GROWTH mode. That way, once you land one or two- the natural growth of those clients will multiply your business without furthur selling efforts.
Ask for 1/3 down before starting the work, 1/3 at some benchmark point and 1/3 at delivery. With 3 closed BIGISH clients, you will have most of the working capital you need, esp if you combine credit card financing and the other tactics by the other posters here. Pay suppliers in 60 days or upon you getting paid only- tell them that up front. Keep staff contractual for this to work well.
From Craig, Vancouver, BC The service http://www.lendingclub.com links borrowers who require finance to investors who want to lend money. I am not affiliated with the site, nor have I used it, but I found out about it on the cnnfn.com site, so it seems legit.
From Ben, Baton Rouge, LA There may be a couple of options in the secondary financing market. Sleepy Poet mentioned a good one for those businesses who have been accepting credit cards for at least a few months for payment for goods or services. They can often get cash now in exchange for a percentage of future credit card receipts.
Another alternative to consider would be to initially lease your equipment. There are non-bank finance companies out there that are doing a lot of business. It seems that most of these specialize in leasing hard assets, e.g. construction equipment, heavy vehicles, machine tools, etc. They often focus on the type of collateral in making their decisions and therefore are less concerned with credit history, time in business, etc.
Others, on the other hand, have different criteria, such as good personal credit history, including for start-ups, but then may be willing to finance even more types of equipment, e.g. restaurant equipment and perhaps even computer equipment, such as what I'm presuming you're looking at for the graphic design business.
If you are doing any B2B and plan on invoicing your customers, or have some business pending for which you can already invoice, accounts receivable financing (aka factoring) is an option that many companies rely on for cash flow. Rather than wait 60 to 90 days to be paid and wonder in the meantime how you'll meet payroll, buy addtional supplies, etc., factoring companies will take your accounts receivable invoices and give you a good percentage upfront, maybe 70% or more, and then send you the rest, minus fees, once they collect. Can be a bit expensive for some. For others, it is crucial to their business.
http://www.hmscf.com is one avenue into these secondary markets.
From TJB, Cleveland OH I've had a small business which started off as graphic design/interactive multimedia development in 1994. I stated with a Mac IIsi and some software and my partner kicked in an equal amount in cash. We know own our own building and have expanded into volume CD/DVD printing and duplication. I've learned the following about money over the years.
1.) Your own money is always easiest to get. Your own money can include cash you've saved or personal credit from credit cards. Graphic design businesses are very low cost of entry. Unless your credit is horrible (or non-existent) then you should be able to finance getting started on your own.
2.) Our first loan was a business credit card, followed by a credit line, followed by equipment loans. Be careful what you plan to finance. Equipment is easier then payrole because if you default there is some equity the bank may be able to recover. If you go to the bank and ask for $100,000 for equipment and business operations then you can expect to be declined even if you have an established track record. If instead you indicated you needed $50,000 for a $75,000 piece of equipment (downpayment covers the other $25,000) and worked 80 hours a week instead of hiring the employee the rest of the money was going to cover then your chances are much better.
3.) No matter what … a business loan is still a personal loan. We're incorporated as a C corp, even so all loans we've secured required a personal guarantee. So if the company defaults, it still rests on your shoulders. There's two important things to consider with that. First, make sure your personal credit is good … especially if you are operating as an LLC. Second, if you're personally guaranteeing anyways and you're owing the bank there really is no significant difference between a "business bank loan" and a personal credit card. The interest rates may be different but it boils down to the fact that you still get a bill at the end of the month and if you don't pay it then you'll have problems.
The bottom line is that you're best off financing what you can to get started. What you lack in money you'll have to make up for in sweat. If you play those properly, you'll grow and your financing issues will take care of themselves.
From John Wiesehan, St. Louis, MO Many small business startups can be done without financing. The way this is done is to start a sales and marketing organization and outsource the capital intensive portions of your product or service. This allows you to build your customer base first. You must be careful to break up the outsourcing so that no supplier has your complete unique formula. Then, as the profits roll in, invest them in reducing outsourced suppliers. This is the formula that I used to start my business 24 years ago. Some of my outsourced suppliers were so good that we still utilize them.
From LF, Grand Rapids, MI Here is a great resource:
From Wayne F. Memphis, TN Never give up on your business and your dreams. Well many will say that is easier said than done. Some will say tell us something new we have all heard that before. However, the truth is to travel the road less traveled takes a very person on a very special journey.
If you have the guts to start a business you have traveled the road less traveled more so than by most people. Stay on the road less traveled and you will find the money and any other resources you will require.
Take it from one who knows of what he speaks. http://www.kutro.com
From Neelam, Napa Getting a laon from a bank was impossible. We borrowed from friends and our pension plans and credit cards to survive, and became highly profitable within one year. Banks only lend to those who do not return the money. Ironic.
From Sleepy Poet Charlotte, NC If you have a up and running business there are cash advance companies,who will advance your company funds, and you pay them back with a small portion of your credit cards sales…Check out Merchant Cash and Capital. They have really helped my retail store.
I was a former SBA Lender that funded transactions all over the US. What the business needs to be aware of is the credit policy of the bank, not what is SBA eligible. Often, loans are SBA eligible but the bank still will not do the loan. To make matters worse, the bank will often blame the SBA for turning down the loan when in fact the SBA NEVER SAW THE LOAN REQUEST. Most banks that due SBA loans have a PLP designation which means they can unilaterally approve and fund loans without prior SBA approval.
The problem small business today is facing is not knowing how to operate with cash and treating a short term liability as though it was cash like a line of credit or worse yet, self financing with credit cards. They lever the business and themselves until they destroy their personal and business credit.
Consider non-recourse factoring. There are not many organizations out there that do this but the ones that do will provide credit protection, immediate cash to fuel growth and most importantly, no short term liability on the balance sheet of your organization.