Looking for money to launch or expand a small business?
The quickest way for a small-business owner to find new money is to hire a good adviser, said entrepreneur Beth Kljajic, past president of the Chicago chapter of the National Association of Women Business Owners and founder of The Choice for Staffing Inc., an office temporary-help service.
“Who is your lawyer and who is your accountant?” asks Kljajic of would-be entrepreneurs. “The best way to get financing is through them.”
Kljajic speaks from experience. Like many eager entrepreneurs, she started with a good idea and too little money. She struggled for years to achieve a solid financial footing. So when an accountant she had hired suggested, “Let us take you in” to apply for a bank loan, she was stunned at the offer of assistance.
But this is how it works in the real world, she said.
“Banks get their business from referrals,” she said. And the smart entrepreneur will leverage any contacts to get a foot in the door.
“Even if you are poverty-stricken, interview and find a financial adviser-an accountant or a lawyer-that will work for you,” she said. “Interview and hire based on their contacts and their track record helping small businesses such as yours get money. Let them introduce you to bankers and other resources. You ride on their shirttails.”
Leveraging the knowledge and contacts of those you already pay, and even those of the banker who won’t give you a loan, is a tactic small-business owners must employ in what is acknowledged to be a tight-money period.
“The credit crunch is real,” said Robert Wingels, partner in the entrepreneurial-services group at Ernst & Young. “Money is as unavailable as it’s been in the last 20 years.”
Robin Foote, senior vice president of specialized services at First National Bank of Chicago, suggests that “financing today is more readily available” than it was two years ago. But Foote and other experts agree that money for a small-business startup or expansion is not just lying around.
“In terms of startup, there are not a lot of sources of finances,” warned Hedy Ratner, co-director of the Women’s Business Development Center of Chicago.
As in the past, would-be entrepreneurs will have to sink personal savings as well as sweat equity into a venture to establish a track record.
“You have to prove you have a vested interest in the company before anyone will lend,” said Caroline Sanchez Crozier, Illinois’ 1993 Small Business Administration entrepreneur of the year.
Crozier is proof one can succeed with a good idea, hard work and a smart game plan in the midst of a credit crunch. In little more than four years, she has parlayed her energy, along with the labor and finances of family members, into a computer service and software company specializing in educational material with nearly $2 million in annual sales.
She also illustrates that the first, most obtainable financing is rarely a commercial or even a government small-business loan but a personal loan from a bank.
Outside of personal savings and family help, said Crozier, her first financing was a $6,000 personal loan from First National Bank of Brookfield, where she knew the banker.
Within six months, she had the opportunity for a contract that required a $30,000 to $40,000 cash infusion. Convinced of the worth of her company and her business plan, her banker helped her get the financing. They still are working together, and Crozier has a long-term note of $100,000 and a $100,000 line of credit.
Trained as an accountant, Crozier credits at least some of her success to trying to anticipate and answer the concerns of most lenders with a thoughtful, written business plan.
“I think the reason we’ve not been turned down is I understand their thinking,” Crozier said.
She drops into the bank every so often to chat, keeping her banker apprised of how the business is going.
Those visits help the banker become more comfortable with Crozier and her enterprise.
Small-business development centers, such as Ratner’s, are geared to help struggling entrepreneurs get on a firmer footing through training. They can help small-business people write a realistic business plan and are a possible source of loans of up to $15,000 for those who have established a business track record.
“There are no grants to start a business,” said Ratner. For borrowers, there is no relaxation of credit standards.
Despite his gloomy assessment about the general credit picture, Wingels said, “I see a glimmer of hope in the creative financing I see beginning to emerge, such as the mezzanine funds and sale/lease-back agreements.”
The mezzanine loan, once offered by banks, is becoming available from private sources looking for a better return than they can obtain elsewhere, he said. Not for every business or small-business owner and still not a big source of small-business funding, these funds nevertheless are growing, Wingels said.
Mezzanine sources essentially lend against the cash flow of a business, usually for a period of five to seven years. They typically charge 18 to 24 percent interest and are a financing possibility only for an established business that has an annual cash flow of $1 million or more, Wingels said.
Startup businesses and others too small to approach the mezzanine threshold are finding extra dollars by rethinking costs, Wingels said.
Leasing, which has been adopted with a vengeance by many large companies, can be a way of freeing funds and may be useful, particularly to startup operations, said Wingels.
Leasing equipment such as computers or automobiles over a period of time “is more expensive than bank debt,” admits Wingels, but cheaper than most other financing alternatives.
He sees the “sale/lease-back” of equipment-in which equipment is leased from a firm that buys it from the entrepreneur-emerging as a financing vehicle in some industries.
However, “I think it is a time to be cautious” about expansion, Wingels said.
He and others express hope that banking rule changes proposed by President Clinton, such as those aimed at cutting lenders’ paperwork, will encourage banks to lend more.
However, First Chicago’s Foote said she finds the Clinton proposals “interesting but not as important as the response of the regulators to his proposals.”
“Frankly, we’re going to be living with the loans long after Clinton is gone,” she said. “The things we are doing are the things we need to do anyway. … We need to learn how to do more small loans cheaper.”
Foote also senses “there is more differentiation among banks these days in their risk appetite” in Chicago’s competitive banking scene, so the smart entrepreneur or small-business owner might do well to shop around at several Chicago institutions.
Gary Hart, head of his own Chicago accounting firm, agrees.
“I believe banks are being smarter about the risks they are willing to take,” he notes, so “if your business is in demand, you owe it to yourself to shop to get the money. I would leave no stone unturned.
“My impression is that while we’re in a slow-growth economy, we are beyond the depths of the recession,” Hart said.
“The opportunities are out there. … We are not in the loose-money, high-flying times of the 1980s, but it is a reasonable time to start or expand a business. Interest rates are low. The economy is starting to move.”
