Unconventional Financing Ideas
When the money tree looks dry, sometimes you just have to create your own branch.
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When Lissa D'Aquanni created a gourmet chocolate business inher Albany, New York, basement in 1998, she had not only a passionfor candy-making, but also a knack for spurring citizeninvolvement. The former nonprofit executive had worked forwomen's advocacy groups, most recently promoting breast cancerawareness. If there was one thing she knew, it was how to rallycommunity support.
Her ability to leverage local resources would be invaluable asshe made her business a fixture of her Albany neighborhood. And inno area were those skills as critical as in financing. Last year,when D'Aquanni wanted to move her business, The ChocolateGecko, 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 financialsupport for her revitalization plan. "Within a month,"she recalls, "we had raised the $25,000." Volunteers alsohelped renovate the building, cutting project costs from anestimated $300,000.
Check out D'Aquanni's unorthodox and creative financingplan: An economic development group, the Albany Local DevelopmentCorp., loaned her $95,000 to buy the building. D'Aquanniobtained a $100,000 government-guaranteed loan from a local creditunion to renovate the structure. Facade improvements were fundedthrough a matching grant program to encourage commercialdevelopment in Albany. A local community development financialinstitution used a state program to fund energy-efficient upgrades,including new windows, light fixtures, furnaces and siding. SaysD'Aquanni, "There were lots of different pieces of thepuzzle to identify and figure out how to access."
Conventional financing wasn't an option. "I was lookingat a business that did about $44,000 in sales doing a $260,000project, and the traditional funders were apprehensive,"explains D'Aquanni, 37. They urged her to rent a storefrontrather than buy the rundown building. Undeterred, D'Aquanni metwith a neighborhood group to develop her expansion plan. Itwasn't the first time the community had helped out. In 1999,the cash-strapped chocolatier needed molds and a temperer for theChristmas 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 themas gifts to friends, family and co-workers," D'Aquannisays. "And most of those people ordered chocolates. Mycustomer base exploded."
Indeed, many entrepreneurs successfully launch a business onlyto encounter funding hardships as they attempt to grow. The abilityto think outside the box, experts say, is critical for firms shorton funding.
"There are pockets of money out there, whether it bemunicipalities, counties, chambers of commerce," says BillBrigham, director of the Small Business Development Center inAlbany. "Those are the loan programs that no one seems to haveinformation about. A lot of these programs will not require thecollateral and cash that is typical of traditional [loans]. Theymay be a little more lenient as far as credit history goes.That's one of the key roles we can play--what entrepreneur isgoing to think [he or she] can qualify for HUD money?"
Spinning His Wheels
For every success like D'Aquanni's, another entrepreneuris losing critical momentum because of scarce capital. Case inpoint: John Acosta, whose business is stalled despite early successwith his product, a garage door opener that clips onto motorcycles.The roofing contractor has invested nearly $30,000 in the businesssince 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 dooropener, primarily through magazine ads, his Web site and motorcycleevents. He is now focused on finding an investor despite havingbeen told that his $100,000 funding request is too small.
Advice from the financial community has ranged from selling thecompany 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 tomake this company work." Potential investors have expressedconcern that he is too involved in every aspect of the business,from product development to maintaining his Web site. "Theywant everyone in the company to have resumes they can lookat," he says. "And people like to see location."
Location does matter. Whether you have an actual businesslocation generally factors into any funding decision. As a result,homebased firms already have a strike against them: Banks find themdifficult to lend to because of their lack of assets. "[Banks]don't laugh themselves off the chair like they used to, becausethere are now enough successful homebased businesses that they seethese 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 processa loan that you need to have it big enough to make it worth theeffort." Consequently, homebased entrepreneurs like Acostarely on personal savings accounts or credit card debt forfinancing.
When business loans aren't obtainable, homebased firms oftenrely on home equity loans for financing. Williams' businesspartner recently closed two retirement accounts to fund hisentrepreneurial venture. "[You need a] willingness to give upthings, even to sell some assets, to obtain funding," says TomMcCabe, director of the Nebraska Business Development Center inOmaha. He preaches persistence. While the deck may seem stackedagainst them, entrepreneurs may ultimately find a lender willing tochampion their small-business cause, he says. If that leadsnowhere, creative options, such as bartering, personal loans,strategic alliances and even customer and vendor financing, may bethe answer.
D'Aquanni routinely barters to pay for professional servicesfor her business; both her accountant and Web site designer acceptchocolates in exchange for their services. She even taught twoevent planners to make chocolates in return for assistance duringpeak periods. Says D'Aquanni, "We've been on a verytight budget from Day One."
Approaching friends and family is another option, but expertssay you should put such deals in writing. Avoid the strategyaltogether if you're uncomfortable discussing money with them."You have to be forthright and treat it like any otherprofessional relationship," McCabe cautions.
Customer and vendor financing also are viable options, thoughbusiness owners are often uncomfortable asking customers andvendors for funding out of fear of highlighting capital problems.Brigham suggests developing a comprehensive proposal prior tomaking a request. "Many entrepreneurs prematurely propose afinancing arrangement without developing the plan in writing,"he says. They're then ill-prepared to answer questions, whichcan affect credibility.
A strategic alliance isn't for the weak communicator either.Both companies must thoroughly assess the other's commitment toa joint venture, as well as discuss more technical matters, such ashow they'll split revenues. "[Business owners] believethat if they fail, it's because the other person didn't dotheir part," McCabe says. "And if they succeed, theythink they could have done it without them anyway. It's notsomething I strongly encourage."
However, a carefully worded legal document can soften the blowof an unsuccessful pairing. When Chris Johnson sought to expand hisfood company, which sells private-label meats and dry goods, bypurchasing a competitor in 1999, he had to devise an inventivefunding scheme. Johnson, who founded Consumer's Choice Foods Inc. with $10,000 ofhis own money, lacked funding to buy his competitor outright. Whathe did have was a proposal that would pay the owner to stay on as acontractor, compensating him based on job performance and providinga second commission to pay toward the $45,000 business purchase."I had it structured in such a way that if he didn'tperform," explains Johnson, 33, "then we bought hiscompany for zero."
Johnson, who was just 26 when he took the plunge, learned earlythat his $3 million Omaha, Nebraska, company would have to go italone when it came to financing. "It's tough to borrowmoney without collateral," he says. While his competitorinitially scoffed at his unusual buyout offer, Johnson keptemphasizing that the company would gain access to the resources ofa larger, more professional organization. Johnson, in turn, wouldbe able to increase his customer base.
"It took a lot of wining and dining to get him to turn overhis company for nothing on the dream that it could be big,"says Johnson. The union didn't last--the partner was terminatedafter 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 adrawer and never look at it again," he says. "You onlypull those things out when things go awry. And, unfortunately, wehad to do that."
If not for a resourceful nature and a willingness to pursue anunusual 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'sage and lack of business experience, contributed to his fundingshortfall during a critical growth period. Eager to expand hiscustomer base anyway, he took matters into his own hands.Cash-strapped but creative entrepreneurs can learn how to stretchan operating budget; unearth little-known credit programs; and, asJohnson and chocolatier D'Aquanni have proved, make a majorpurchase without even a down payment. Says McCabe: "Ifthere's a will, there's a way. There are a lot ofbusinesses that were not founded by going in and getting a bigloan."
John Acosta is in a financial rut. He needs $100,000 to upgradehis product, a garage door opener for motorcyclists, but thefinancing community has given him a cool response.
Washington, DC, attorney Andrew Sherman acknowledges thatAcosta, who has sold $50,000 worth of his product but lacks a majordistribution outlet, has his work cut out for him. But he does haveoptions. A home equity line is a start, Sherman says,"especially at today's rates." A partnership with agarage door, motorcycle or home-products company is another option."He has to do some digging to find out who the contact personwould be at those companies," says Sherman, author ofRaising Capital.
Acosta could also do a private placement memorandum to raisecapital through the sale of shares in the company. "Hiscompany may be too small for a venture capitalist, but he could doa small-scale offering if he knows 10 people who might come in on aunit basis," Sherman says. Check securities laws and consultan attorney who specializes in those transactions.
One last option: angel investors. "There are angels thatwouldn't view, in this market, a $100,000 investment as toosmall," Sherman says. "This is a very difficult market inwhich only talking to one or two [angels] may not be a goodindication."
Crystal Detamore-Rodman is a Charlottesville, Virginia,writer who covers small-business finance.