Entrepreneurs Seeking Out Financing Alternatives

After Leslie Starus lost a national million dollar account for her organic food business, keeping the doors open was not a sure thing. The customer’s decision to stop using Foodology had been made quickly and Starus couldn’t respond fast enough to find new sales to make up for what had been taken away. After all, there was a recession on. So Starus turned to the Valley Economic Development Center for a $50,000 micro-loan that helped pay the bills as she worked to build back up sales. Going to a bank wasn’t practical as their lending standards were much tougher and Foodology’s profit margins were way down. “They (the VEDC) look at your potential and your hiring,” Starus said. “It is a different kind of experience.” That different experience may become the norm for many small businesses as long as banks maintain strict standards on their lending practices. The January survey of U.S. banks by the Federal Reserve showed that while there was some easing for companies with revenues of $50 million or more, that was not the case for businesses bringing in less than that amount. Financing alternatives do exist, such as the loans from the VEDC and the U.S. Small Business Administration, turning to private investors, or the old standby of going to family and friends. Less popular these days is maxing out a credit card as issuers jack up interest rates and cut limits. “There is certain reluctance by startups to use credit cards as capital,” said Roberto Barragan, president of the VEDC. Ideas and money A good idea is not enough for an entrepreneur to get a new business off the ground if they do not have some capital to back it up. The VEDC sees a number of clients coming who have already lined up some form of financial support. Consultants with the Small Business Development Center at College of the Canyons work with clients who get funding from banks or from private investors. One client of Ben Tenn, who does his consulting for the SBDC in the San Fernando Valley, was successful in receiving an investment from a high net worth individual, while another who bought a business had the seller carry 90 percent of the loan. Dawn Tulman started her discrete storage product business ToiBocks in 2007 with an investment from a business partner. Since then it is has been slow-going building up brand awareness because the money isn’t readily available. Tulman has large customers, like online retailer Amazon, that buy her storage boxes in bulk and others who buy just a few at a time. Sales are consistent, she said. From time to time Tulman will receive calls from other budding entrepreneurs who realize after speaking with her they are not ready to start a business regardless of how good their idea is. In those calls, Tulman explains that a prototype of the product has to be made, and that packaging, a trademark, sales and marketing, and an online presence have to carefully looked at. “If you are weak in any of those areas and you don’t have people working for you that you can trust, you better have some good working capital to start with,” Tulman said. Good story To get that loan to start off with requires showing a bank or credit union some history of how the loan will be paid back and in generating income to pay the bills. After all, borrowing money to pay off old debt does not pay off the new debt, Tenn said. “They are able to get (a loan) if they have a good story,” Tenn added. Private investors are also willing to listen to the good story. Still not willing to take a risk with the stock market or in commercial real estate, which remains in the doldrums, these investors look for other identifiable investments to put their money into. Small business is one answer. In some scenarios, the business owner keeps all the equity in the company and instead offers a certain percentage of profits or a higher interest rate to the investor. “A lot of people are hesitant to give up in the belief that the product or service will be successful,” Barragan said. The importance of these private investors has been recognized by the Obama Administration. As part of the president’s proposed budget a temporary tax cut for putting money into small business would be made permanent. Additionally, a capital gains tax break would be given to investors who keep their investment for at least five years and then sell. From Starus’s perspective lenders need to take a risk in funding small businesses that are vital to keep people working. With the loans she received she kept Foodology going until the market began to brighten. Starus was even able to hire back some of the employees she had to cut. The lesson Starus said she learned was to diversify and not be locked into one account to keep the business afloat.