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 time. As a result, many small businesses are turning to SCORE (www.score.org), 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. Online help
What 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.
- 1. 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.
- 2. 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.
- 3. Prosper.com: This online site (www.prosper.com|~www.prosper.com/ ) 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.
If 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.
- 1. 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 (www.sba.gov|~www.sba.gov/ ) 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.
- 2. 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 may qualify.
- 3. 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.
- 4. 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.
- 5. 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 (www.gemoney.com|~www.gemoney.com/ ) or IBM's Global Financing (www.ibm.com/financing|~www.ibm.com/financing/ ).
Elsewhere, the American Society of Travel Agents (www.asta.org) 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 (www.score.org) offers several articles on financing your business, and 60-second guides (a short grouping of how-to tips on financial subjects).
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.