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Finding Funding

by Gretta Spendlove

5/2007

When Marilyn Tang needed money to start her business, she convinced her boyfriend, a university student, to borrow against his car and life insurance policy. Four years later she married him, made him vice president of her company, and together they turned Certified Handling Systems into a profitable company. Last fall, Tang won the Salt Lake Chamber of Commerce Athena Award for her business and community-building skills.

            While Tang may have had a unique approach to bankrolling her business, the problem she faced is universal. Finding financing is the number one challenge for many start-up companies.

            “Businesses need a good financing plan as much as they need a good business plan,” says Jim Guss, general partner of Capsource West and Next Stage Partners. Capsoure West provides financial advice to new and growing businesses; Next Stage Partners provides loans and other financing. “New businesses need to think through the types of financing available, the requirements for those types, and how they can move from one type to another as they grow.”

Personal investments, friends and relatives, angel investors, venture capital funds, mezzanine loan funds and bank loans are all possible sources of financing.

A Loan from Dad

The earliest stage of financing is usually funds from personal savings, friends or family – or from no one at all. “We are very proud of having bootstrapped McKinnon-Mulherin with no capital investment whatsoever,” says Kate Reddy, co-president of a technical writing and instructional design company that now regularly employs 18 people, as well as a large pool of occasional staffers.

            Reddy and her two partners, Regina Davis and Shauna Bona, began planning their company in the evenings and on weekends while keeping their full-time jobs. Reddy and Bona both worked at Franklin Quest Consulting Group, whom they told of their plans to leave the company and start their own business. Although the two set out on a new enterprise, the relationship they maintained with Franklin Quest remained so cordial that they were hired to do contract work after they left, which helped finance the start of McKinnon-Mulherrin.

Bank and Loan Fund Financing

“Getting a bank loan is really tough for a start-up company with no assets and no track record,” says Sharon Humphries, an owner of both Old Dutch Store, a specialty food store, and SH Management, a medical billing service.

            Humphries financed the start-up of SH Management through personal investments and then reinvesting revenue. When Humphries and her husband bought Old Dutch Store, it was a growing business, with measurable assets and cash flow. They were able to get an SBA loan for several hundred thousand dollars, which paid for both the land and business equipment.

            “SBA loans are not difficult to obtain if the individuals have a good business plan, reasonable well-prepared projections, experience in the industry, and personal or business assets they are willing to pledge as collateral,” says Jill Argyle, relationship manager with Zions Bank, the state’s largest Small Business Administration lender.

            The SBA provides a guaranty that helps the bank mitigate risks, such as insufficient collateral and low credit scores, that would typically disqualify individuals for traditional bank financing. SBA loans are usually made for seven to 20 years, depending on the collateral and the use of proceeds, and range from a low of around $30,000 to $2 million. Other bank options, Argyle notes, may provide lower interest rates than SBA loans.

            Another option for businesses needing smaller amounts of money is the Utah Microenterprise Loan Fund. “We finance people without access to traditional sources of financing,” says Executive Director Kathy Ricci, “such as people with a great idea but no track record, not enough collateral or credit history issues. Our loans range from $1,000 to $25,000. Our board hears personal presentations from applicants and is concerned about the character of the person as much as their business experience.”

            One success story for the Utah Microenterprise Loan Fund is Rico’s Mexican Market. Jorge Fierro received a $10,000 loan from the fund in 1997 to finance a food business. He had been selling cooked pinto beans at the local farmer’s market. He now makes $1.3 million per year in sales and employs 35 people.

A Stake in the Company

In addition to the more traditional financing routes explained previously, a number of other options are available to the entrepreneur at heart. Angel investors (typically wealthy individuals) provide seed money for a startup in return for equity in the company. Venture capitalists (often established funds with several investors) structure their investment in various ways, but usually look for fast-growing companies that can multiply their investment within five years. Mezzanine finance companies provide loans, often combined with “warrants” to obtain equity in the borrowing company if it does well. These types of financing are more expensive than bank loans but may come with the bonus of useful business advice from the financier.

Gretta Spendlove is a shareholder in a Salt Lake City-based law firm and frequent contributor to Utah Business.