Brooklyn's Progress
August/September 2008

BY ELIZAVETA EFUNI

What does it take to obtain business financing? The question is simpler than the answer. Whenever seeking financing, whether you are an expanding business or a start up, you have to be creative and leverage all the resources you have.

Where can you find financing?
Banks work primarily with established businesses (older than two years) or occasionally with start-ups through the SBA 7 a program.

Micro-lenders will work with your business if it was established less than two years ago and are more flexible than banks in regards to an applicant’s credit history.

Credit unions are non-profit membership organizations that provide a variety of consumer and business financial services equivalent to the ones offered by banks. Credit unions typically work with start-up businesses and have some flexibility with credit history.

Specialized financing organizations offer accounts receivable financing such as factoring, purchase order financing and more. These organizations provide short term financing solutions.

Terms you will hear
Lines of credit – this is a type of revolving credit. With lines of credit you pay interest on the balance that you owe to the lender.

Home equity lines of credit – this is financing secured by the borrower’s equity in their property.

Term loans – are something you get requested up-front and pay interest on the full amount owed. Term loans are usually extended for no longer than seven years.

Accounts receivable financing – means you can borrow against a contract or purchase order from your customer or you can borrow against expected in-coming credit card volumes. Accounts receivable financing is more expensive than traditional forms of lending.
 
Want to make the leap?
If you’ve been established for at least two years, you will need to show two years worth of your business tax returns. Make sure the tax returns show at least some sort of profit: that is why underreporting your income is not a good idea if you are planning to seek financing. You will also be asked to present personal financial statements, as well as the most recent business financial statements.

If you have been in business for less than two years, prepare to present extensive documentation such as your business plan with financial projections, lease agreement, personal tax returns, bank statements and more.

You should always have plans B and C when it comes to financing, the same as with every vital aspect of your business. If business loan through the bank is not working out, consider applying for financing through alternative lenders such as credit unions or micro-lenders. Consider such options as a home equity line of credit if you own property or leasing equipment if you cannot afford to buy it at the moment or don’t have sufficient credit. If you are starting a second business, you can possibly borrow against your established business to finance the start-up. And last but not the least – never, never underestimate your relationship with the banker.

Success stories
Anatoly Zavul is the owner of RANET Jewelry, a retail jewelry store that recently moved to a new location and needed additional funds for their working capital and inventory stock. In April 2008, Mr. Zavul contacted the Brooklyn Business Solutions Center (BBSC), a walk-in center for business development sponsored by the New York City Department of Small Business Services, as he was interested in applying to the Hebrew Free Loan Society – a micro-lending program available to Russian-speaking refugees who are starting or operating a small business.

BBSC helped RANET Jewelry create their financial expansion plan. RANET Jewelry received assistance with their historical cash flow analysis, cash flow projections, income statements projections and break-even analysis. After the plan was complete, it was sent to the Hebrew Free Loan Society for their review. RANET Jewelry was awarded a $25,000 interest-free loan before the end of May 2008 and the company is now on its way to expansion.

Christine Deegan and Courtney White have come a long way in obtaining financing for their start-up bar, called Sweet Revenge, located in Bedford-Stuyvesant. They first approached the Brooklyn Business Solutions Center asking for assistance with finding funds for their start-up project after receiving multiple rejections from banks.

Both operators have excellent industry and business experience and the attractive idea of creating a bar that will offer a safe and comfortable atmosphere that will appeal to women – as they say, “Where women go, men will follow.” In addition, Sweet Revenge aims to be a primary destination for promoting local music, art shows, and events, both in the bar itself and in the community.

BBSC helped Ms. Deegan and Ms. White prepare their business plan and financing projections before they applied for a loan. They provided all necessary documentation and were approved for the business loan of $100,000. However, the closing never happened due to contradictions with the landlord. Leveraging the fact that their families own property, Ms. Deegan and Ms. White had to take out a home equity line of credit of $100,000 in order to finance the business project.

Sweet Revenge's grand opening is planned for this month, and the owners have no choice but to make it a success.

Common Loan Financing Myths

Yes, your personal credit will be evaluated, even if you are applying as an owner of a corporation. Actually, all owners with more than a 20% stake in the business will have to be included in the loan application.

Yes, you need a business plan if you are a start-up or if you are purchasing an established business that does not show sufficient net profits. The business plan is often required when applying through a micro-lender as well.

Yes, you need a co-signer if your credit is not that great and you are going with a micro-lender option.

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No, most banks do not accept a co-signer for a business loan if your credit score is low. Instead they would like you to have liquid collateral (Real Estate, CDs, cash in your savings accounts or certain types of equipment).

No, being a woman or minority-owned business will not increase your chances of getting approved for a loan. Financial soundness is what will increase the chances of your loan application to get approved.

No, grant programs for profit-making businesses are not available. There are very few small programs that are extremely competitive and need-based and cannot be relied on as a prime source of business funding.

No, lenders will not finance the project 100%. You will have to come up with at least 25% personal (friends, family or business partners) investment. What you may have already spent towards your start-up business or an expansion project can be counted as your investment, so keep track of those expenses.

Looking to make your own success story? Contact Elizaveta Efuni, director of financial services at the Brooklyn Business Solutions Center, if you have any questions and need assistance with a business loan application. Call her at 718-246-5219 ext. 2024, or e-mail eefuni@brooklynchamber.com.