According to the Global Entrepreneurship Monitor, U.S. start-ups and growing businesses receive over $129 billion from informal sources- this includes money that comes from family, friends and other private parties.  This accounts for more than 50% of all investment dollars for start-ups and growing businesses.  Why is it difficult for start-ups and growing businesses to access capital for growth? Because lenders typically feel that businesses in existence less than two years are a high credit risk, leaving entrepreneurs no alternative than to finance their ventures creatively.  Creative financing for start-ups and growing businesses is nothing new.  Some examples include:

·         Sam Walton received a loan from his father-in-law to start Wal Mart Stores; and

·         Spike Lee borrowed money from his friends and family, used personal savings, and credit cards to produce his first movie.

Regardless of whether you’ve been in business for two days, two months, two years or twenty years, the critical components of accessing capital for growth are the same:

Planning- Having a business or strategic plan and knowing-

1. How much you need to expand your business;
2. How the funds will be used to increase capacity, sales or market opportunities; and
3. How the funds will be repaid.

Credit- Lenders will always evaluate the owner’s previous experiences as a borrower.  Most lenders will not consider a traditional loan based on a personal credit score below 680 or a Paydex score below 70.  Review your personal credit before ever applying for a loan and/or work to establish trade credit (business) credit with vendors to build a business credit profile.

Capital- If you are a start-up, do you have a meaningful amount of personal capital (usually 20% or more of the requested loan amount) to invest?  If you’ve been in business for at least two years, has the company been profitable or is it moving towards a level of profitability that would justify investment by a lender or investors?

Collateral- Lenders will always require the owner to encumber personal or business assets to secure a loan.  If you are borrowing from friends and family, showing that you have collateral that can be liquidated if the venture fails helps to “close the sale.”

Character- In short, people do business with people they know and like, and lenders loan money to people not to businesses.  Integrity and trustworthiness are the deal makers or deal breakers when it comes to having a loan proposal approved by banks, investors or friends and family.

Capacity- Does the borrower have the qualifications, experience or capacity to repay the amount requested?  This takes us back to planning, because through the planning process and later the presentation process, you explain how you have or will have the necessary capacity to make good on repaying your loan request.

After covering the basics, you should always “pre-qualify before you apply” by…

·         researching every potential funding source and knowing their exact lending criteria for providing funding;

·         knowing your personal credit scores and business credit scores and working to remove or explain any potentially negative items to a lender/investor;

·         knowing what your request needs to have in it and what it doesn’t; and

·         knowing how to apply to multiple sources without “shot gunning” your request to lender after lender.

Non-Traditional Sources for Capital

Friends & Family- Almost 50% of all small business lending comes from friends and family.  To solicit your friends and family for a loan you should:

1. write down everyone you know who could be a potential investor and how much you believe they can invest;
2. prepare a formal business plan and loan proposal and present them in a professional manner; and
3. treat your friends and family the way a bank or lender would treat you by formalizing any loan agreement with promissory notes, payment schedules, interest rates, etc.

 Visit www.circlelending.com to learn more about borrowing from friends and family.

Factoring-  Accounts Receivable Factoring (also known as Invoice Discounting, Invoice Factoring or Accounts Receivable Financing) is a financial service that allows a business to sells its outstanding receivables to a financial institution called a Factor, and receive immediate funding for a factoring fee.  Advance rates, the amount of money provided immediately to the company factoring its Accounts Receivables, usually range from 75 to 95%.

Learn more about factoring at www.getfactored.com or www.invoicefinancial.com.

Also, talk to your business banker to see if they offer accounts receivable factoring.

Business Credit- Building a business credit profile will enable you to limit your personal guarantee and liability for business debts, as well as expand your ability to borrow money for equipment, supplies, etc.

Learn more about building business credit by calling The Capital Access Project at (504) 245-8592.

Angel Investors-  Angel investors or private individuals (or groups) that invest in high growth companies in need of financing above a level of most traditional loans (usually $250,000) and below venture capital investment ($2-$5 million).

Learn more about Angel Investors at   www.vfinance.com,   www.gatheringofangels.com or www.businesspartners.com.

Microloans-  Microloans are small business loans up to $35,000.

SOHO Loans- The SOHO loan or Small Office/Home Office loan is a SBA-backed microloan that doesn’t require a business plan or extensive documentation.  Loans are available up to $15,000. Visit the SOHO Loan page of this website to learn more or download the application.

Contract Loans-  A contract loan gives a business owner an opportunity to leverage the value of an executed contract for a percentage or loan in advance of completed the terms of the contract.

For more information on microloans or contract loans contact NEWCORP at www.newcorpbac.net. 

 Traditional Bank Sources of Capital

Single Payment Loans- A single payment loan involves two transactions. The first occurs when a bank makes a loan and the second when the loan is repaid.  Single payment loans are most often used to meet seasonal financing needs.  For example, a toy wholesaler who needs to buy inventory will obtain a loan and repay the loan after the Christmas buying season.

Installment Loans- The most common bank/business type loan, the installment loan typically has a repayment schedule of fixed payments over several years.  An SBA-backed loan is an example of an installment loan.

Line of Credit- Whenever a business foresees a demand for funds that will exhaust its cash reserves, a bank advances money through a line of credit to help the business maintain a positive cash position.  Lines of credit are often used to cover seasonal payroll expenses or purchases.

Standby Letters of Credit- A bank can provide credit consideration to a business without making a loan.  That occurs when a bank lends its financial strength and reputation with a standby letter of credit.  Bankers view a standby by letter of credit as if it were a loan because of the potential exposure that exists if a business fails to pay a supplier.

Equipment Leasing- Leasing is a way to make capital purchase over time at a lower cost than buying an item outright.

For more information on equipment leasing, visit www.businessfinance.com or www.equipleassecorp.com.

Notes:

A sensible business purpose must always accompany a loan request.

If you cannot qualify for a traditional bank loan, chances are you cannot qualify for a line of credit.

Website Resources:

www.americaonefunding.com for small business loans (start-ups and existing businesses)

www.sba.gov for information on SBA programs

www.grants.gov  or  www.cfda.gov for information of federal grants and other programs

www.capitalone.com for small business loans to $50,000

Norman D. Roussell, MBA