Financing Your Small Business in a Tough Economy
Small businesses are still struggling to get financing, and that has many entrepreneurs wondering how to go about getting the cash they need to either start or maintain their business.
“These days you’re more likely to win at roulette than to secure a business loan,” said Mike Michalowicz, entrepreneurial advocate and author of “The Toilet Paper Entrepreneur.”
Nearly two-thirds of privately held businesses said they were denied by banks when they applied for a loan, according to a recent Pepperdine University survey.
So, many entrepreneurs are having to get creative when it comes to raising money.
When Andy and Rachel Berliner started their frozen food business, Amy’s Kitchen, they had no choice but to get creative.
”We didn’t have any money. We borrowed on Rachel’s car,” Andy Berliner said. “I sold a gold watch someone had given me years before, and borrowed a little bit from family.”
After they got things started, the Berliners went to a bank for a loan and brought along their product for a tasting. The bankers were hooked. Now, Amy’s Kitchen is an established business that makes over 150 products and expects its sales to top $300 million for 2011.
Here are a few tips from the pros when it comes to raising money.
Before you fill out that bank loan application, do some homework.
First, business owners should run a credit check and talk to local bankers about the criteria needed to get a loan, said Raj Tumber, a business mentor and counselor at SCORE, a nonprofit association that helps entrepreneurs and small businesses.
Then, he said, make sure you have a solid business plan that includes details such as a competitive analysis, the management process, a marketing analysis and financial projections.
Entrepreneurs are also expected to lay out more of their own cash.
According to Tumber, the banks used to settle for anywhere from 10 percent to 20 percent in cash or assets put up by those seeking a loan. Now they are looking for a good 50-50 split.
“The more money that comes out of your pocket the better…or the more assets you have the better,” he said.
If you are looking for a loan under $50,000, a microloan may be the way to go.
The Small Business Administration’s Microloan Programprovides small, short-term loans through specially designated intermediary lenders, which are usually nonprofit community-based organizations.
While the maximum amount is $50,000, the typical loan is for $13,000.
“The requirement to obtain a microloan is more lenient as far as credit [score] goes,” Tumbler said.
Plus, he said, many big banks are generally hesitant to approve loans for under $50,000.
One of Michalowicz’s favorite approaches is reaching out to the competition. He thinks a big competitor may provide an annuity investment or a loan if you position yourself as a growing company that may be able to provide things it wants down the road.
Offering a piece of the pie or a first right of refusal to buy the company at a predetermined price are two ways to entice your competition to invest, he said.
Once the investor has an interest in seeing you succeed, you may get guidance on business decisions.
Friends and Family
Instead of going to the rich uncle, Michalowicz suggests doing what is called “crowd funding”—getting pieces of money from everyone in the group.
“It’s a lot lower risk for everyone involved,” he said. “The other upside is now you have a lot of people with interest in the business and they may be more likely to give you referrals and opportunities.”
But if your business fails, you could be disowned by your entire family. So makes sure you make it clear the risks involved when accepting family loans.
With many people sidelining their money and taking it out of the stock market, targeting those wealthy individuals, or “angel investors,” is another way to try to raise capital.
“Do research and identify the people who have been successful in the business,” Michalowicz said. “Find a way to meet these people. Call them. Tell them about what you have going on. That’s how you find these investors—you have to seek them out and approach them.”
Michalowicz said that’s how he raised money for his business, Obsidian Launch, the last time he needed funding.
What Not to Do
Michalowicz said the “don’ts” can be just as important as the “dos” when it comes to financing a business. He has three pieces of advice.
First, don’t invest all your time in trying to raise money.
“I’ve seen so many good business concepts go sour because the person has committed everything to raising money and puts the concept on hold,” he said.
Second, ideas are great but execution is everything. Don’t pursue financing if you don’t have a working concept.
Lastly, don't get hung up on the interest rate. If someone is offering you $50,000 at 12 percent and someone else is offering you $30,000 at 8 percent, the loan with the higher interest rate may be the way to go if that is the capital you need.