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A quick tour through alternative sources of funding
by Jim Martyka Business owners often spend so much time trying to raise money through standard channels that they miss easy opportunities. Here are alternative funding you might not have considered.
Community funds
One of the largest sources of funding is community funds and neighborhood development programs. While many of these groups focus on helping minority business owners get started, officials say there is money for everyone.
“The whole point of these programs is to help you and your business grow. That’s what we’re here for,” says Mara O’Neill, chief operating officer of the Neighborhood Development Center, one of the area’s larger community groups. “We work closely with the business to get it started and help give them that extra financial push to grow.”
The NDC offers an executive training and business plan development program to entrepreneurs. NDC will provide some start-up funding, up to $10,000, as well as help along the way.
The one hitch is that interest on this money can average around 10 percent, since these groups are taking more risk.
“They’ve been a lifesaver to us, not only in terms of funding but also support,” says Jen Bresee, vice president of St. Paul-based Che Bella, a wholesaler of wedding accessories. Over the past five years, the NDC has helped Che Bella with funding and advice. “It helped so much to have a group there that was willing to work with us,” she says.
While the NDC is one of the largest, there are a handful of other major groups that work with small businesses. These include the Minneapolis Consortium of Community Developers, WomenVenture, Metropolitan Economic Development Association and a number of groups in St. Paul, including the East Side Business Loan Fund and the Riverview Economic Development Association. Plus, most suburbs throughout the metro area have their own neighborhood groups that work with businesses looking to locate there.
Government money
City development agencies consider working with small (and large) businesses as a top priority. These groups offer a wide array of financing tools, such as business development loan funds, micro-loans, revenue bonds, two-percent loans and working capital.
“There has been a great entrepreneurial spirit in the Twin Cities, especially over the past decade, and we’re trying to do everything we can to help keep that alive,” says Bob Lind, manager of business finance at the Minneapolis Community Development Agency.
The agency, which works mainly with private lenders and nonprofit groups, offers loans ranging from $1,000 to $10 million, based on a company’s needs and what it could give back to the community.
Beyond the development agencies, there is also a state commerce department that has both direct and participating loan programs that vary for each business. In the participating programs, the state will pool public funds with money from a conventional lender to meet the needs of a small business. The state also receives federal money through Housing and Urban Development block grants that can sometimes be used for small-business financing.
County and municipal governments can offer micro-loan programs with smaller investments in businesses. Also, several of the local colleges offer small-business assistance programs that sometimes provide consulting, marketing, business plan development and even financing.
“There are a lot of opportunities at all levels of government,” says Mike Ryan, director of the Small Business Development Center at the University of St. Thomas. “It’s just that many people aren’t aware of them, unless you’re talking about an SBA loan. We try and teach business owners about all of the opportunities out there.”
Loans from the Small Business Administration are probably the most popular source of government funding for small businesses.
There are also specialized loans, such as the LowDoc loan, which doesn’t require as much report filing; the SBAExpress loan, which is designed to get a company money quickly; and loans designed for minority-owned businesses. According to officials, Minnesota is one of the top 10 leaders in SBA loan disbursements.
Vendor borrowing
Many small-business owners say getting the money to start the business is the easy part. The real challenge is maintaining the business. The secret, experts say, is to look for opportunities to save in every corner.
Vendor borrowing is negotiating a longer payment plan with a vendor for its goods or equipment. While this requires the art of negotiation, it’s a good strategy for making smaller payments over a longer time. This strategy does not include simply ignoring payments (which leaves room for a credit mess), but rather working out a longer deal with vendors right from the start. And for the most part, experts say, vendors are willing.
“I think most vendors are understanding to the needs as well as the struggles of a small business and are willing to work with them and be a little more flexible than they are with more established firms,” said John Boyd, a banking and finance professor at the University of Minnesota’s Carlson School of Management.
“Plus, the vendor wants to make sure they get their money and if they have to stretch out a payment plan to do it, then they’ll do it.”
Sale/leasebacks
For companies looking for a quick cash infusion, sale/leasebacks are popular, especially when dealing with real estate.
“Sale/leasebacks are becoming more and more popular because the deal can really help out both parties,” says Matt Bogart, a partner at Minneapolis-based Faegre & Benson. “It’s a way to raise some quick cash and for other companies to keep assets off the balance sheet without appearing sneaky. That’s important with how much the corporate world is being scrutinized these days.”
Sale/leaseback deals are mainly used in real estate. An investor buys a building from a company and then leases it back to the company, at a flexible price. The buyer has an advantage because they just picked up a tangible asset that they can keep off the books. The seller gets an immediate cash infusion from the sale that can be used for further investing.
“That’s why these companies get into these types of arrangements,” says Dick Zehring, a general manager at the Bloomington office of Welsh Cos. Inc. “It’s often a way to get quite a bit of cash rather quickly.”
These deals also can work for equipment, though they are more flexible in their structure, depending upon what is being leased. The one real hitch with these deals is that they don’t apply to a lot of start-ups that are typically renting space, but rather to more established firms that own property.
Seller financing
Seller financing is also becoming a more popular way for small businesses, especially restaurant owners and small retail shop owners, to make some cash, while also forcing them to take some responsibility for their business.
“Seller financing makes it easier for the buyer to meet the seller’s price and it makes it easier for the seller to get a better price,” Ryan says. “It’s a smart way to do business.”
A seller finances part of the sale, at least at first. A buyer will pay for part of a business with the seller financing the rest. The seller than either rents the business to the buyer or sells the buyer promissory notes. Either way, the buyer eventually buys the business from the seller over a prearranged period of time.
“Usually, if a restaurant owner wants to get out of the business, they will sell it to a chef, a friend or someone else they know, and they will use this type of deal,” says D.J. Sikka, president of the Restaurant Brokers of Minnesota. “It provides the buyer with some security because the seller has put his or her own money in it and it provides the buyer with the opportunity to avoid the banks and to make a bit more cash that they can use for their next venture.”
MB*****@****re.com. John Boyd, Carlson School of Management, University of Minnesota: 612.624.1834;***@******mn.edu“> jb***@******mn.edu. Jen Bresee, Che Bella: 651.292.1668. Bob Lind, Minneapolis Community Development Agency: 612.673.5066; bo******@**da.org. Mara O’Neill, Neighborhood Development Center: 651.291.2480: wi*****@*****dc.org. Mike Ryan, Small Business Development Center, University of St. Thomas: 651.962.4500; mp****@******as.edu. D.J. Sikka, Restaurant Brokers of Minnesota: 952.929.9273; dj*****@*****le.com. Dick Zehring, Welsh Cos. Inc.: 651.665.5583; dz******@*****co.com
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