Feature Stories - August 2001

Smart Ways to Finance Your Business

In the 21st Century

by Jennifer Rachel Baumer

At some point, most businesses need financing — for startup costs or during expansion, for purchases of facilities or equipment. There are traditional avenues of financing, tried and un-true methods — being financed by Mom and Dad or running up credit card debt — and new, high-tech methods. Financial experts suggest business owners start close to home for resources to finance their companies. Personal assets from checking and savings accounts to credit cards, from stocks and bonds to retirement funds and life insurance policies, may be converted to cash if necessary. They may also be used as collateral in finding sources that are a little less personal.

Tried and True – Banks and Traditional Lenders

Commercial banks and traditional lenders are usually among the lowest-cost providers for loan capital, but they are cautious with their funds, and financing some start-up companies might be considered too risky. Evaluations take into account the business’s income statement, balance sheet and cash flow statement, years in business, experience and expertise in the particular field, as well as ability to repay the loan.

Revolving lines of credit are one option available to businesses to gap ongoing cash needs. A company waiting on receivables with ongoing obligations like payroll can use a revolving line of credit which functions a lot like a huge MasterCard, according to Mark Phillips, executive vice president and chief credit officer for Business Bank of Nevada. Revolving lines of credit enable you to draw what you need and pay interest only on the amount you draw. It’s a better option than financing through credit cards or stretching deals with vendors, both of which entail paying higher interest rates.

With interest rates dropping and the prime at 6.5 percent in June, firms should be looking to move forward, grow their business and expand, said Paul Stowell, senior vice president of Business Bank of Nevada. For small and medium-sized businesses, the time is right to make smart moves. Businesses that are leasing or renting and think they can’t own their own building, need to think again. Programs are available to help them do just that.

Small Business Administration (SBA) Programs

Two particularly attractive financing options for lenders and borrowers alike are the 504 program and the SBA 7(A) Loan Guarantee Program. The 7(A), SBA’s primary lending program, finances businesses that aren’t as seasoned as those applying for the 504. Seasoned, to a bank, means up and running for at least three years, with three years of operating results available. Newer businesses look to the 7(A), a loan program with incentives encouraging lenders to make deals they might not want to do with a conventional loan. The proceeds of SBA 7(A) loans can be used for most business purchases, from real estate to operations, office furniture to equipment and machinery, inventory to working capital.

The 7(A) program guarantees part of the loan. For example, on a $100,000 loan, SBA guarantees $85,000. In a worst-case scenario, if the company defaults without making a payment, the bank still gets $85,000 back. Even with such guarantees, some proposals are harder to fund than others. The veteran truck driver who wants to open a restaurant but knows nothing about the business — that’s a tough deal to put through, said Phillips, especially if he has no collateral. In addition, some businesses are ineligible for SBA programs by their nature — academic schools, illegal operations and non-profit institutions will not be funded. Businesses face a limit on the amount of income they can generate and still qualify as a small business for SBA purposes.

Collateral is critical to SBA programs. SBA will not fund 100 percent of a startup — the company has to show some equity. No bank wants to go through the process of foreclosing on a loan, even with a guarantee — it means time, money and grief for everyone involved, especially the borrowers. In addition, SBA wants reassurance the borrower will work to make the business successful. Collateral, especially in the form of a personal residence, demonstrates the borrower’s commitment.

Under the 504 loan program, growing businesses are provided with long-term, fixed-rate financing for major fixed assets, such as purchasing a facility they are currently leasing. Funds cannot be used as working capital or inventory, for consolidating or repaying debt or refinancing, but they may be used for land, purchasing or renovating existing facilities, or purchasing long-term equipment.

With the 504 program, a business can finance up to 90 percent of the purchase price of the building they are leasing. A conventional bank loan would only allow 75 percent financing. The program enables businesses to leverage another 15 percent in financing. They do not need to inject as much money into the down payment or equity, leaving those funds to support ongoing business needs instead.

Nevada MicroEnterprise Initiative

Nevada MicroEnterprise Initiative (NMEI) is a non-profit, micro-enterprise development corporation working to enhance the economic self-sufficiency and quality of life for low and moderate income individuals through entrepreneurial training, business technical assistance and loan programs for both start-up and existing or expanding companies in Nevada. NMEI is the intermediary lender for the SBA’s micro loan program. Before going to NMEI, businesses must have been turned down by a traditional lending source.

Often a micro business with a handful of employees gets stuck — the economy is good, business opportunities exist, but they don’t have the cash flow to move forward. When they go to a traditional lender, they don’t have the cash flow or the track record to obtain the capital. "We call ourselves a character lender," said Anna Siefert, director of NMEI in Las Vegas. While financial history is taken into account, it’s not the entire basis for a decision on a loan. Blots on the financial record are looked at, but how the business has handled problems such as bankruptcy and collections are considered too.

Sometimes the loan amount is just too small for a conventional lender to consider. A business may only need $5,000 or $10,000. NMEI loan amounts can be as low as $100 or as high as $25,000. Monies cannot be used to repay existing debt, but can be used as working capital, leasehold improvements and financing for accounts receivable. Interest is determined on a case-by-case basis, and some form of collateral is required.

Angel Investors

Angel investors are individuals who wish to purchase equity in growing businesses to sell after a designated period of profit. Angels are apt to want some involvement with the company, because they are looking to make a profit and have an interest in the success of the business. SBA’s recently-launched ACE-Net is the Angel Capital Electronic Network, an Internet listing service designed to bring together angel investors with businesses in a password-controlled system. More information is available at sba.gov/ADVO/acenet.html

Ask Uncle Sam

There are a number of federal grants available, through SBA and other avenues. While SBA does not offer grants to start or expand small businesses, government grant programs are available to expand and enhance small business technical assistance. An informational site is located at sba.gov/expanding/grants.html and links to the Catalog of Federal Domestic Assistance: cfda.gov/public/cat-howtouse.htm

Nevada Government Loans

Nevada government loan sources administered by the Nevada Commission on Economic Development (NCED) include the Nevada Revolving Loan Fund (NRLF), created to assist businesses with short-term financing needed to complete business projects. Available only to those businesses declined by traditional funding sources, the program partners with banks to provide the loan. Funds are only available, however, to businesses outside Reno, Sparks and Clark County, because populations there top 50,000. The primary objective of this financing source is to create jobs for low to moderate-income households. Maximum loans top out at $100,000 and the repayment period is a maximum of seven years.

NCED also administers the Rural Nevada Development Corporation (RNDC), which can fund loans between $5,000 and $150,000 with financing available for land, buildings, equipment and working capital. The business seeking the loan must have already been turned down by a traditional lender and must be located in a community with a population of less than 25,000. Further information is available on NCED’s Web site, expand2nevada.com.

Whether looking for capital for an existing business or following a dream of starting one, there are avenues of financing available, and the time is right for pursuing them.

Online Resources

A wealth of information is available online, covering everything from venture capitalists to angel investors and helpful articles in between. Inc.com contains links to articles on financing businesses, including articles on financing for women (the so-called "new girl network" in "For Women Mostly") and another on finding angel investors ("Investors: Angel Hunting Tips".)

Looking for more online options in financing? Merchantgoldmine.com lists financial resources that e-commerce entrepreneurs may wish to pursue. Links include BusinessFinance.com, helping businesses locate business capital, and the National Venture Capital Association, a trade association representing the venture capital industry and managing pools of risk equity capital designed to be invested in young, emerging companies. Vcapital.com is an exchange for private capital and professional business services offering entrepreneurs, investors and service providers access to targeted, pre-qualified investment opportunities. Another site, 1st SPOT Venture Capital http://1st-spot.net/topic_vcapital.html links to sites offering venture capital basics and information, including Garage.com, a venture capital investment bank whose services are tailored for start-ups looking to raise initial financing between $500,000 and $10 million (must be high-tech companies.) Seventy percent of financing through Garage.com comes from professional venture capitalists.