The SBA 7(a) loan program, in contrast, is tailored specifically to long-term capital needs, offering borrowers lower monthly payments due to an extended repayment term; the funds can be used for most business purposes, including real estate, construction, inventory and working capital. But while the federal program has been around for 50 years, it's one of the most misunderstood financing resources. Despite what many entrepreneurs think, their credit history is critical because SBA loans are less collateralized than conventional credit. Many view SBA loans as a bailout program for distressed companies, and lots of start-ups consider the SBA a likely funding source. Neither belief is really accurate. "Most banks have credit policies that require two to three years in business, even for their SBA program," says Heather Endresen, director of SBA lending for Citibank's Western division.
Citibank has bucked the trend by offering up to $50,000 in SBA financing to qualified start-ups. Borrowers must have a three-year financial plan and a net worth equivalent to the amount they want to borrow. However, the bank doesn't take personal assets as collateral, only business property. "Maybe they'll use the equity in the house for another source of borrowing," Endresen says. "In most cases, $50,000 is not enough to do the whole start-up. We're generally dealing with companies that have some other source of capital."
While Medell's SBA loan helped her get started, she has relied on credit lines with several vendors to keep store shelves stocked. Most are limited to $5,000, which restricts the amount of merchandise she can buy.
Her ongoing financial challenges underscore a truth of start-up financing: Seed money can take a new company only so far. Nearly two years after her launch, Medell isn't living large. But she's still in business. "If you start a business without having deep pockets, even after you've gotten your loan, they really sock it to you," says Medell. "It's not easy at all. You have to be cautious."
|Paving the Way|
|How one entrepreneur braced herself financially when launching a new business|
Before launching a mail order clothing business, Jamila Payne was paying off credit card debt and scaling back living expenses in anticipation of her entrepreneurial plunge. The 26-year-old even sold an expensive car to purchase a cheaper one. "I think that's something the loan officers and venture capitalists evaluate. 'How are you living? You just bought a new car but don't have any money to put in your business?'" says the founder of Milla by Mail Direct. "People underestimate how much [investors] look at your personal spending habits."
Along with wanting to send the right message to potential financiers, Payne knew being able to skip a salary was crucial to her survival. "I've talked to other entrepreneurs who have to go back to work because they don't have enough money for their personal expenses," she says. "It's important not just to save for start-up capital for your business, but to save so you can sustain yourself until the business is generating revenue."
Crystal Detamore-Rodman is a Charlottesville, Virginia, writer who covers the small-business finance market.