Ask SCORE: Options for new businesses when it comes to financing

COURTESY TO THE BELLINGHAM HERALDSeptember 10, 2012 

Question: Last week you discussed several alternative ways to finance a new business. I've been told that I'm probably not "bankable," so what are some other funding sources to look into?

Answer: Yes, there are lots of ways to fund a business startup. If you're short on money but have a good business plan, you should put on your thinking cap and look into some creative ideas. Let's talk about this.

Borrow against a solid asset. Something that you own, but can't part with, might be good collateral for a bank loan. A paid-for RV or some stock certificates might yield substantial cash. The longer-lived the asset, the lower the loan payments will be.

Take in a partner. The partnership agreement should spell out exactly what role the partner has in the business, from a passive investor ("silent partner") to a full active involvement. It's common to have the agreement allow you to buy out the partner's interest at a future time at agreed-upon terms.

Lease some equipment. While it's more expensive than buying in the long run, it saves precious upfront cash. This is most appropriate where you know you will need a particular vehicle or machine for several years. Read the lease agreement carefully; it could have terms and conditions you may want to negotiate.

Draw cash from a life insurance policy. This is easy to do. The cash value of a term policy will be much less than the face value. Of course the drawback is that it decreases the death benefit.

Look into microloans. In addition to the SBA's regular "7(a)" loan program, a recent SBA microloan program offers smaller business loans. The limit is $50,000 and the average loan is around $13,000. These loans are made through local intermediaries (there are four in Washington that service Whatcom County). Check sba.gov/content/microloan-program for current information and how to qualify.

Also, there are several "peer-to-peer" online microlending sites like prosper.com and lendingclub.com. These offer to match up small borrowers and lenders. Like anything else on the Internet, be careful. Several sites which appear to offer independent reviews of these P2P lenders are actually affiliated with them.

Manage your cash inflows and outflows. One of the best ways to reduce your need to borrow is to manage your cash very effectively. Your new mantra is: "Make a dollar do the work of three." Here are examples of how some sharp cash managers might do this:

• Ask a landlord for low rent in initial months, ramping up after that.

• Offer good clients a discount for paying for services promptly.

• Negotiate delayed payment terms with vendors.

• Ride herd on expenses. Depending on your margins, a dollar spent may negate five to ten dollars in sales.

• If you hold an inventory, keep it to a minimum and turning quickly.

Look into "set-asides." Many governmental units, at federal and state levels, require that some percentage of purchases go to small or minority-owned businesses. If you qualify, look into this. Google "small business set-asides" and see what you might be able to go for. There's some hassle involved, but it's a good way to get your foot in the door for government contracts.

Keep your day job. Some people can start up their business while still working, perhaps cutting back to half-time. Be aware that you are announcing to your employer that you're a "short-timer." You may also give up substantial benefits like medical insurance.

Be aware that several of the commonly-mentioned funding sources are probably not realistic for a startup or early-stage business. These include venture capital sources; formal crowd funding; angel investor groups; and "hard money" lenders.

Also, the U.S. Treasury Department's Small Business Lending Fund, begun in 2010, is now closed. It flopped. The fund was originally proposed to lend $30 billion to smaller banks. Those banks would then lend it out to small businesses. Only $4 billion was lent to 330 banks nationally, and about half of that was used by the banks to repay their government TARP loans.

And last, don't totally rule out a local bank loan. One strategy: get your credit report and FICO score at annualcreditreport.com (credit report free, FICO score around $10). Look it over for errors, and then go to the bank you use the most and ask to talk with a banker about it. This may allow you to strike up a relationship for the future. Whatcom County has about 80 branches of banks and credit unions. As the economy improves, many will be eager to book a quality business loan.


ABOUT SCORE

To learn more about managing cash flow, and other small business matters, contact SCORE, "Counselors to America's Small Business." SCORE is a nonprofit nationwide organization with more than 13,000 volunteer business counselors who provide free, confidential business counseling and low-cost training workshops to small business owners. Call the local SCORE chapter at 360-685-4259 to schedule an appointment. For details about the organization,visit SCORE.org.

Ask SCORE is prepared for The Bellingham Herald by Bob Dahms, a business counselor with the Bellingham chapter of SCORE. Submit questions for this column to newsroom@bellinghamherald.com.

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