When physical therapist Jodi Medell opened a running store in Santa Fe, New Mexico, she had time on her side. Her home had sold, and as a result, Medell had a critical ingredient in any start-up financing plan: collateral to secure a loan, the lack of which can ground even the most inspired idea.
She also found a supporter in a local banker, a fellow runner who thought Medell's vision was well-suited to the Southwestern town; the nearest such store was an hour away. "Everything fell into place," recalls Medell, 33. "My house was on the market for a while. Right before I desperately needed money for collateral, it sold."
Getting collateral was only half the battle. Although it took just three months from the time she drafted a business plan until she received an SBA loan from a local bank, in that short period, Medell learned the harsh reality of start-up financing. To begin with, she qualified for only two-thirds of her loan request, despite putting up the money from her home, her car and life insurance for collateral. She also had the daunting task of developing a three-year financial plan. Lacking a business background, Medell struggled with the estimates. "It was phenomenal how much paperwork I had to go through," she says. "You spend so much energy trying to get funding that you're wasted before you even open."
The rigors of the credit process didn't end with the launch of her store, The Running Hub. The $98,000 loan was mainly for inventory, and she needed approval before accessing funds. "I had to copy my invoices and send them to the bank so they had proof it was going back into the inventory," says Medell.
Despite the strings attached to her financing, Medell is one of the lucky ones. While there may seem to be a boundless supply of business credit, little is flowing to start-ups. Even SBA dollars generally fund existing companies, not start-ups like Medell's. And other programs for unbankable entrepreneurs have such strict requirements that many people don't qualify.
Complicating the credit search are misconceptions about start-up financing. One of the most common myths is that the strength of a business idea can secure a bank loan when assets are scarce. "My first question is, 'How much do you have [available] to put in?' I make it clear that I will not be their venture capital partner," says John Milbauer, chair of Minnesota's Lino Lakes State Bank, which requires an owner's equity investment of 25 percent of project costs.