Five alternative ways to finance your business

Black Enterprise, March, 1998 by Karen Gutloff

ARE BANK LOAN OFFICERS GIVING YOU THE bum's rush to the door when you try to finance your business enterprise? If you're like most small business owners, the answer is yes. Entrepreneurs get turned down for bank loans for a variety of reasons, including lack of assets, collateral and business experience. And discrimination continues to be a persistent problem for many African American business owners.

Fortunately, a rejection stamp on your bank loan application doesn't have to derail your dream of owning a business. Alternative sources of capital are available to help you get a new company off the ground or expand an existing enterprise.

Rejections have forced business owners to become more creative when it comes to financing. "The number of small businesses that cite bank loans as the primary source of financing has fallen," says Todd McCracken, president of National Small Business United (NSBU), a lobbying group in Washington, D.C. These findings were included in the NSBU/Arthur Anderson 1997 Survey of Small and Mid-Sized Business Trends.

Five creative forms of alternative financing include "factoring," or selling accounts receivables for up-front cash; finding an "angel investor" (a wealthy investor); obtaining loans or credit from suppliers; seeking loans from venture capital firms that cater to small businesses; and joining a susu, where you pool money with friends and family.

By using these methods, thousands of businesses are getting working capital to lease property, buy equipment and supplies and pay employees. But while these sources are more willing than banks to take a risk on growing businesses, they are hardly giving money away. You still need a viable idea, a sound business plan and clear marketing strategies. You must show realistic projections for growth and earnings so investors know how and when they'll recoup their money. Note that every business eventually needs a strong relationship with a bank for lines of credit and expansion capital. Use these sources of financing to shore you up and make you more presentable to bank loan officers.

1 FACTORING ACCOUNTS

One way to get cash for operating expenses is to sell your accounts receivables to companies that will buy your invoices and collect payment from your customers. In return, you pay a finance charge or "discount fee" on the total amount of the receivables--a process called factoring. Payment from the factoring company can be as quick as a few days--as opposed to waiting 30, 60 or 90 days for customer payments.

Factors are willing to buy your accounts because they believe your clients will have a good credit history, even if you don't.

Factoring accounts helped W.C. Miles keep his executive transportation company on the road. Miles-Chicago Transportation Inc. provides limousines and sedans to clients including the University of Chicago Hospitals and the City of Chicago Special Events Department.

"The banks wouldn't touch me," Miles says. "I had a logjam of receivables and no systematic way of getting the money in a timely fashion. While money slowly rolled in, I had cars to service and drivers to pay."

Miles sold $9,000 in accounts receivables to the Caramon Group, a Maryland-based factoring company with offices in Chicago. The company charged him 7%-10% of that amount.

"Only a few days after faxing the invoices to the company, I received a check," the 52-year-old recalls. "It gave me the cash I needed to pay my employees and keep things running." Miles factored accounts for two and a half years until he got customers to pay up more quickly.

"Don't become comfortable with it," he warns. "Factoring good, ready source of cash, but if you rely on it totally, the finance charge could slowly eat into your profits."

Finance charges for factoring can range from as little as 2.5% to as high as 15%, according to Marvin Waldman, president of the Caramon Group in Fairhill, Maryland. The amount depends on the total value of the accounts you factor. Factoring companies can be found in the Yellow Pages or on the Internet. The Edwards Directory of American Factors (Edwards Research Group; $199) offers detailed information on 200 factoring companies nationwide and is updated biannually. To order, call 800-963-1993 or e-mail Macelee@aol.com.

2 ANGEL INVESTORS

Luckily, there are angels out here delivering financial miracles every day. These so-called "angel investors" are wealthy business people who flesh out their financial portfolios by investing in new businesses in hopes of getting a nice financial return.

An angel investor made it possible for Johnny Johnson to open Community Pride Plus Food stores in Richmond, Virginia (No. 42 on the BE INDUSTRIAL/SERVICE 100 list). Johnson had risen up the food chain at Farm Fresh stores from grocery bagger to store manager, when a supermarket executive approached him with an offer to open his own chain of stores.

"It turns out this businessman was literally watching over me while I rose through the ranks," says Johnson. "He knew I was a good manager and he was willing to take a chance on me."