Behind the Scenes

Financing for Small Businesses

I sat in on a session yesterday afternoon entitled "Financing Strategies for Your Small Business," led by Joseph DeLaGarza, director of the Center for Urban Business, Illinois Small Business Development Center at the University of Illinois at Chicago. DeLaGarza had several valuable suggestions about what club owners need to do to be more attractive to banks and investors, and where small club owners can turn to get financing for a new facility or renovations.

He first started, though, with some interesting numbers about where most people get their capital when they start their businesses. Most of them, 79 percent, get capital from their personal savings. The next most popular source of capital is from family members (16 percent). Another 14 percent get it from partners while 10 percent go to their credit cards (yikes!). Seven percent get money from friends. What about bank loans? Well only 7 percent get their capital from banks. Another 5 percent get it from private investor, 4 percent from mortgaged property, 3 percent from venture capital and 8 percent from other sources. Of course, many people get their capital from a combination of these sources.

To be eligible for a loan from a bank or investors, club owners have to remember that their personal credit counts, DeLaGarza says. Do you have a good personal credit history? Have you filed your personal and business income taxes--and paid them? Does your business have excessive debt? Can you demonstrate that the business will have the cash flow to repay the loan? Do you or your business have net worth? One of the most important questions is whether you have enough collateral to secure a loan. And, of course, lenders will want to know whether you have exerience in the industry and with small business management.

He suggests reviewing your credit score and ensuring you can get it to 720 or higher. Prior to the credit crunch, you only needed it at 680 or higher. As you probably already know, you can get your credit scores from Equifax, Experian and TransUnion by going to their Web sites or by going to www.annualcreditreport.com. There is a small fee to get the actual score.

What do lenders look for? The five C's, says DeLaGarza. Those are credit, capacity/cash flow, capital, collateral and conditions of the market that you are in.

So where can you look for financial help? Besides banks and investors, you can look at family and friends, but DeLaGarza cautioned that this could cause a strain on those relationships. If you do get a loan from a family or friend, make sure you get all the conditions in writing, especially how long it will be before you pay them back and how much interest you will pay them for the loan. They may want a condition placed on the loan that if you don't pay them back in the time required, they can take possession of your car or home to get their money back. Again, a situation that can get very sticky.

Another option is grants. You can go to www.grants.gov to find federal grants. You can also contact your local Chamber of Commerce to find out if there are grant competitions that you can enter. Other places to go include www.skollfoundation.org, www.echoinggreen.org and www.ashoka.org.

Another option is home equity loans or lines of credit, but then the bank has a lien on your personal property. Credit unions also do these types of loans, and their interest rates can sometimes be lower than that of banks.

As the study showed, some people also turn to their credit cards, but the interest rate can be very high.

DeLaGarza also spoke about debt financing, such as working capital lines of credit, short-term commercial mortgages, equipment leasing and letters of credit.

One last suggestion is to check out the Small Business Administration (SBA) at www.sba.gov. They do not loan money directly; they just guarantee loans. So you may want to look at going through a lender that does some loans through the SBA.

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