When Lissa D'Aquanni created a gourmet chocolate business in her Albany, New York, basement in 1998, she had not only a passion for candy-making, but also a knack for spurring citizen involvement. The former nonprofit executive had worked for women's advocacy groups, most recently promoting breast cancer awareness. If there was one thing she knew, it was how to rally community support.
Her ability to leverage local resources would be invaluable as she made her business a fixture of her Albany neighborhood. And in no area were those skills as critical as in financing. Last year, when D'Aquanni wanted to move her business, The Chocolate Gecko, to an abandoned building three blocks away, she needed $25,000 in owner's equity for the $260,000 renovation project. So she mailed letters to area residents soliciting financial support for her revitalization plan. "Within a month," she recalls, "we had raised the $25,000." Volunteers also helped renovate the building, cutting project costs from an estimated $300,000.
Check out D'Aquanni's unorthodox and creative financing plan: An economic development group, the Albany Local Development Corp., loaned her $95,000 to buy the building. D'Aquanni obtained a $100,000 government-guaranteed loan from a local credit union to renovate the structure. Facade improvements were funded through a matching grant program to encourage commercial development in Albany. A local community development financial institution used a state program to fund energy-efficient upgrades, including new windows, light fixtures, furnaces and siding. Says D'Aquanni, "There were lots of different pieces of the puzzle to identify and figure out how to access."
Conventional financing wasn't an option. "I was looking at a business that did about $44,000 in sales doing a $260,000 project, and the traditional funders were apprehensive," explains D'Aquanni, 37. They urged her to rent a storefront rather than buy the rundown building. Undeterred, D'Aquanni met with a neighborhood group to develop her expansion plan. It wasn't the first time the community had helped out. In 1999, the cash-strapped chocolatier needed molds and a temperer for the Christmas rush. Recalling a strategy she had seen in a magazine, she sold discounted gift certificates to raise capital. D'Aquanni offered customers $25 in free chocolates for every $100 in gift certificates purchased. Within two weeks, she had $5,000 for the equipment purchase. "A lot of folks mailed them as gifts to friends, family and co-workers," D'Aquanni says. "And most of those people ordered chocolates. My customer base exploded."
Indeed, many entrepreneurs successfully launch a business only to encounter funding hardships as they attempt to grow. The ability to think outside the box, experts say, is critical for firms short on funding.
"There are pockets of money out there, whether it be municipalities, counties, chambers of commerce," says Bill Brigham, director of the Small Business Development Center in Albany. "Those are the loan programs that no one seems to have information about. A lot of these programs will not require the collateral and cash that is typical of traditional [loans]. They may be a little more lenient as far as credit history goes. That's one of the key roles we can play--what entrepreneur is going to think [he or she] can qualify for HUD money?"
Spinning His Wheels
For every success like D'Aquanni's, another entrepreneur is losing critical momentum because of scarce capital. Case in point: John Acosta, whose business is stalled despite early success with his product, a garage door opener that clips onto motorcycles. The roofing contractor has invested nearly $30,000 in the business since 1998, and needs more than $100,000 to fine-tune the product. Thus far, he has sold more than $50,000 of the $40 garage door opener, primarily through magazine ads, his Web site and motorcycle events. He is now focused on finding an investor despite having been told that his $100,000 funding request is too small.
Advice from the financial community has ranged from selling the company to giving control to a distributor. Neither is an option, says Acosta, 37, whose business, Jolly Technologies, is in Yorba Linda, California: "I don't want to relinquish power. I want to make this company work." Potential investors have expressed concern that he is too involved in every aspect of the business, from product development to maintaining his Web site. "They want everyone in the company to have resumes they can look at," he says. "And people like to see location."
Location does matter. Whether you have an actual business location generally factors into any funding decision. As a result, homebased firms already have a strike against them: Banks find them difficult to lend to because of their lack of assets. "[Banks] don't laugh themselves off the chair like they used to, because there are now enough successful homebased businesses that they see these are credible operations," says Oakland, Maryland, homebased-business advocate and speaker Beverley Williams. "But they are still locked into the traditional [mind-set] that it takes so much paperwork and administrative cost to process a loan that you need to have it big enough to make it worth the effort." Consequently, homebased entrepreneurs like Acosta rely on personal savings accounts or credit card debt for financing.
When business loans aren't obtainable, homebased firms often rely on home equity loans for financing. Williams' business partner recently closed two retirement accounts to fund his entrepreneurial venture. "[You need a] willingness to give up things, even to sell some assets, to obtain funding," says Tom McCabe, director of the Nebraska Business Development Center in Omaha. He preaches persistence. While the deck may seem stacked against them, entrepreneurs may ultimately find a lender willing to champion their small-business cause, he says. If that leads nowhere, creative options, such as bartering, personal loans, strategic alliances and even customer and vendor financing, may be the answer.
D'Aquanni routinely barters to pay for professional services for her business; both her accountant and Web site designer accept chocolates in exchange for their services. She even taught two event planners to make chocolates in return for assistance during peak periods. Says D'Aquanni, "We've been on a very tight budget from Day One."
Approaching friends and family is another option, but experts say you should put such deals in writing. Avoid the strategy altogether if you're uncomfortable discussing money with them. "You have to be forthright and treat it like any other professional relationship," McCabe cautions.
Customer and vendor financing also are viable options, though business owners are often uncomfortable asking customers and vendors for funding out of fear of highlighting capital problems. Brigham suggests developing a comprehensive proposal prior to making a request. "Many entrepreneurs prematurely propose a financing arrangement without developing the plan in writing," he says. They're then ill-prepared to answer questions, which can affect credibility.
A strategic alliance isn't for the weak communicator either. Both companies must thoroughly assess the other's commitment to a joint venture, as well as discuss more technical matters, such as how they'll split revenues. "[Business owners] believe that if they fail, it's because the other person didn't do their part," McCabe says. "And if they succeed, they think they could have done it without them anyway. It's not something I strongly encourage."
However, a carefully worded legal document can soften the blow of an unsuccessful pairing. When Chris Johnson sought to expand his food company, which sells private-label meats and dry goods, by purchasing a competitor in 1999, he had to devise an inventive funding scheme. Johnson, who founded Consumer's Choice Foods Inc. with $10,000 of his own money, lacked funding to buy his competitor outright. What he did have was a proposal that would pay the owner to stay on as a contractor, compensating him based on job performance and providing a second commission to pay toward the $45,000 business purchase. "I had it structured in such a way that if he didn't perform," explains Johnson, 33, "then we bought his company for zero."
Johnson, who was just 26 when he took the plunge, learned early that his $3 million Omaha, Nebraska, company would have to go it alone when it came to financing. "It's tough to borrow money without collateral," he says. While his competitor initially scoffed at his unusual buyout offer, Johnson kept emphasizing that the company would gain access to the resources of a larger, more professional organization. Johnson, in turn, would be able to increase his customer base.
"It took a lot of wining and dining to get him to turn over his company for nothing on the dream that it could be big," says Johnson. The union didn't last--the partner was terminated after 10 months for failing to abide by their legal agreement. "Although we worked four months negotiating, [the agreement] had to be in writing with the intention that we'd put it in a drawer and never look at it again," he says. "You only pull those things out when things go awry. And, unfortunately, we had to do that."
If not for a resourceful nature and a willingness to pursue an unusual financing strategy when other options were nonexistent, Johnson's company would not have reached its full potential. The reality is that a multitude of factors, including Johnson's age and lack of business experience, contributed to his funding shortfall during a critical growth period. Eager to expand his customer base anyway, he took matters into his own hands. Cash-strapped but creative entrepreneurs can learn how to stretch an operating budget; unearth little-known credit programs; and, as Johnson and chocolatier D'Aquanni have proved, make a major purchase without even a down payment. Says McCabe: "If there's a will, there's a way. There are a lot of businesses that were not founded by going in and getting a big loan."
John Acosta is in a financial rut. He needs $100,000 to upgrade his product, a garage door opener for motorcyclists, but the financing community has given him a cool response.
Washington, DC, attorney Andrew Sherman acknowledges that Acosta, who has sold $50,000 worth of his product but lacks a major distribution outlet, has his work cut out for him. But he does have options. A home equity line is a start, Sherman says, "especially at today's rates." A partnership with a garage door, motorcycle or home-products company is another option. "He has to do some digging to find out who the contact person would be at those companies," says Sherman, author of Raising Capital.
Acosta could also do a private placement memorandum to raise capital through the sale of shares in the company. "His company may be too small for a venture capitalist, but he could do a small-scale offering if he knows 10 people who might come in on a unit basis," Sherman says. Check securities laws and consult an attorney who specializes in those transactions.
One last option: angel investors. "There are angels that wouldn't view, in this market, a $100,000 investment as too small," Sherman says. "This is a very difficult market in which only talking to one or two [angels] may not be a good indication."
Crystal Detamore-Rodman is a Charlottesville, Virginia, writer who covers small-business finance.