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Financing Your Business in Tough TimesSeptember 30, 2008 By: Susan Young Travel Agent
Just 18 months ago, home equity lines of credit were a solid source of
business expansion financing or emergency cash flow for small businesses.
Rates were advantageous, and such bank loans—using a home as
collateral—were relatively simple to secure. Today, that option has
vanished for many home-based agencies.
Why the drought? Chalk it
up to a sagging housing market. If your home’s market value was
$200,000 in 2005, and your mortgage was $130,000, a bank might have
eagerly approved a $50,000 line of credit. But now, that same home
might only be worth $120,000, far less than the mortgage amount.
Presto, the equity is gone. Lenders are increasingly pulling the plug
on existing home equity lines of credit, even when payments are made on
As a result, many small businesses are turning to SCORE, the non-profit Service Corps of Retired Executives,
for advice. In 2007, more than 10,500 SCORE volunteer business
counselors in 389 chapters expended 1.1 million hours counseling
small-business owners online, in one-on-one meetings and in
workshops—and all for free.
Amid a challenging economy, “SCORE
has provided 15 percent more services to entrepreneurs and
small-business owners so far this year over this past year, and
financing is one of the key questions we get,” says Michael L. Keaton, SCORE’s director of communications. In 2006, SCORE also experienced a 5 percent increase in requests for assistance vs. 2005.
are the options financial experts say you might consider for business
financing or to generate cash flow? Opinions vary widely as to fiscal
appropriateness, but here is a sampling to consider.
• Angel Investors:
If you’re just starting out, consider so-called “angel investors,”
people willing to venture where banks won’t. They typically invest $1
million or less, often for up to five years or more. Venture
capitalists tend to want bigger investments. Talk to SCORE about how to
find angel investors.
• Friends and Relatives:
Why pay high interest rates? Ask your friends and family if they’d like
a good deal. Offer them a fair interest rate, less than what you’d pay
for interest on a bank loan, but better than they can get elsewhere.
Put down the terms in a simple, one-page document that states what the
interest rate will be and when you’ll repay.
• Prosper.com: This online site
matches up small businesses with individuals willing to loan money. You
register, take a credit check and are assigned a credit risk—A through
F. Even those at the lower end of the scale may, at times, get
financing depending on what interest rate they’re willing to pay and
whether they have friends or relatives willing to go online and help
fund the request in small increments. You request a loan amount, select
the interest rate you’re willing to pay and put up a listing.
enough people agree to fund your request, you’ll receive paperwork and
the funds, and pay Prosper.com one monthly payment. They disburse the
funds to investors. If your listing isn’t fully funded at the end date,
the listing expires. Prosper.com collects a one-time 1 to 3 percent fee
on funded loans from borrowers.
• Commercial and SBA Loans: Businesses
seeking $100,000 or less can often find unsecured loans based on their
personal credit history. New companies, though, might find this choice
a tough go, given a lack of operating history. You might need to put up
personal assets as collateral. While not lending money directly to
businesses, the Small Business Administration
does offer SBA loan programs available through financial institutions;
in essence, the SBA puts its backing behind a certain percentage of the
loan, making banks more willing to lend. But you must show you can’t
get traditional financing at a reasonable rate, personally guarantee
the loan, and demonstrate adequate cash flow. Talk to your bank.
• Home Equity Loans:
Yes, banks are still making these if you have adequate equity in your
residence. Lived there just a few years? Then you may not have enough
equity, particularly if you carry a hefty mortgage and you live in an
area where real estate has tanked. But if you’ve been in your home 15
years and haven’t taken out additional loans against the property, you
• Credit Cards: Using a credit card is a
quick, easy way to obtain immediate cash. Borrowing on a card is fine
for the short term, but interest can be high over the long term. Shop
for a good credit card rate, but beware of teaser rates that vanish in
six months or a year, leaving you with soaring interest.
• Pawn Shops:
Need quick cash? Pawn shops now attract many small-business operators
as clients. If you have unwanted gold jewelry, electronics, copiers,
computers, electric tools and other goods, you might sell them outright
or, alternatively, pawn them. With a pawn, the shop will hold your
goods in a secure area, you’ll get cash and at a specified time
(usually within a month), you will return, pay the pawn amount plus
interest and retrieve your goods. It’s an easy way to secure quick
cash. But if you opt to simply “extend” the loan for another month,
you’ll pay high interest.
• Equipment Leasing and Vendor Financing:
For better cash flow, also consider leasing a computer, copier or other
business equipment. Ask your suppliers or local trade association about
any vendor financing options for supplies and equipment. SCORE says
several major suppliers own financing companies that may help, such as GE Small Business Solutions or IBM’s Global Financing.
Elsewhere, the American Society of Travel Agents
has a slew of online financial tools to help member travel agencies
develop the paperwork needed in the borrowing process, such as
generation of a profit-and-loss statement. Another good resource is the
Small Business Association at www.sba.gov.
SCORE’s website offers several articles on financing your business, and
60-second guides (a short grouping of how-to tips on financial
Online at the SCORE site, you may put in a specific
request for assistance from a SCORE expert and you’ll hear back in 48
hours. Or use the group’s online search to find a SCORE office near
you. Get the expert free advice that could help expand your business or
improve your cash flow.