For many aspiring entrepreneurs, family assistance is the most
sensible option. Lee urges loan recipients to draft a business
plan, even if a parent or sibling is writing the check. "Put
together something that everybody understands, including financial
statements, projections and payment details. Make sure you document
the loan terms." Additionally, a life insurance policy to
cover the debt will make a family member more comfortable with
repayment prospects.
Another popular funding source is customer financing. One of
Scenna's clients received a loan from a store owner interested
in selling her product. "If you've got one major customer
selling [your] product or service, [investing in the business can]
only help them," he says. Draft a proposal in advance, and be
prepared to answer questions from customers you approach.
Meanwhile, some entrepreneurs choose to stretch operating funds
by delaying payments to suppliers. "I'm not saying to
stretch payments out to 180 days," Scenna advises, "but
try to get vendors to work with you."
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The ability to respond creatively to a credit crisis is crucial
for cash-strapped entrepreneurs. "That's the secret to
small businesses--to structure loans to meet your needs," says
Lee. Indeed, communities are rich in financial resources, including
microloan funds and other programs targeting homebased
entrepreneurs. Major colleges also offer support. Dorothy
Gerstenfeld, 51, started baking Irish soda bread in 1991. She sold
the bread to local stores, eventually supplying a food chain from
her basement bakery. But it wasn't easy for the Havertown,
Pennsylvania, resident. "When I first went in for
financing," she says, "they asked me what my business
plan was. I said I was going to bake a loaf of bread, sell it for
$1, and I was going to do it a lot. They said, 'You're
going to have to be more detailed.'"
Graduate students at the University of Pennsylvania's
Wharton School helped Gerstenfeld draft a business plan. But even
aid from a premier business school couldn't break down barriers
to credit, prompting Gerstenfeld to turn to local programs geared
to businesses like hers. She learned of an economic development
initiative through a friend's husband who served on the
group's board. From that organization, she got a $25,000 loan.
Financing from two other local groups enabled her to restructure
debt by paying off credit card balances she had racked up
renovating her bakery, The Irish Bread Shoppe, now located outside her
home. Gerstenfeld credits those local loans with helping her break
bad financial habits, including her dependence on credit cards.
While not in her case, microloans often serve a dual purpose: A
homebased entrepreneur secures startup funding, and that loan, in
turn, serves as a springboard to conventional financing. "If
things go well, they're going to need a better loan," says
Frederickson of Arizona Business Bank. "What happens is, [a
bank] often pays off the microlender, and [the business] moves into
a bigger loan."
Even a home equity loan used for business funding can make a
statement regarding creditworthiness, Scenna says. "It's a
small step, but a bank can see the business is making
payments."
But don't settle for products geared to nonbusinesses.
"People make the mistake of not opening a business checking
account," Scenna says. "Go in and establish you're a
business."
Plan for Success
Whether you're looking for outside funding or relying on
your own money, you need a business plan to guide you on your path
to success. Read How to
Build a Business Plan to get started.
Crystal Detamore-Rodman is a Charlottesville, Virginia,
writer who covers the small-business finance market.
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