Loan Options Limited For StartUps

November 22, 2004
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GRAND RAPIDS — Many would-be entrepreneurs know very little about the business world when they begin their quest to launch a firm of their own.

Luckily, an abundance of local organizations exists for the sole purpose of helping such people learn what is required to start a business.

None of these, however, can do much more than provide guidance in what can prove to be the most difficult part of starting a new business: obtaining capital.

“We have a ton of resources here for folks looking to start up their own business, or improve how they run a small business,” said Pat Lonergan, vice president of community affairs for Fifth Third Bank. “With conventional small business loans, we’ll first look at their business plan, and if they need help, we’ll refer them to one of those organizations.”

For most, a stop at one of the area’s many small business-counseling centers should be a priority. At least four of these, the Small Business and Technology Development Center (SBTDC), the Service Corps of Retired Executives (SCORE), Grand Rapids Opportunities for Women (GROW), and the Business Information Center (BIC) also serve as SBA administrators, an organization that many entrepreneurs will become familiar with before their launch is complete.

“The first thing anyone is going to ask is to see your business plan,” said Pamela Bayes, GROW’s director of development. “The business plan is such a key component, it first of all shows that you’ve already looked at the idea and are not going in on a whim.”

GROW shares a facility with the BIC and Kent Area Microbusiness Loan Services (KAMLS). The mission of the nonprofit economic development organization is to help women develop skills and acquire knowledge needed to achieve economic independence through self-employment.

While one of the largest components of GROW’s program is training and education, BIC partners with Grand Valley State University’s Seidman College of Business and Fifth Third Bank to provide high-tech hardware, software and telecommunications to new and expanding businesses.

GROW has long used BIC’s resources in its programs and BIC clients have long been referred to GROW classes.

“What we’ve found is that many of the clients that come to the BIC are really in the beginning stages of forming a business,” Bayes said.

The Grand Rapids Area Chamber of Commerce houses the Grand Rapids chapter of SCORE, which also provides one-on-one counseling and assistance building a business plan.

“Probably only about 20 percent of the people that come in here with an idea end up at the stage of going through funding and starting a business,” said Joe Sietz, SCORE workshop committee chair.

“We have found that when people learn what it really takes to run a business, that scares most of them off. It’s a lot of effort and time, and not many people are willing to put in 80 hours a week to try and get a business going.”

The SBTDC provides counseling and classes similar to GROW and SCORE, with the addition of market research and access to GVSU classes.

“All of these programs are designed to help people to learn everything they need to know to start a business,” said Nancy Boese, SBTDC Region 7 director.

“People just don’t understand how complicated it is. Everything from legal entities to insurance to payroll and withholding taxes — those things don’t just happen.”

For those that survive the due diligence process, the next step can be just as discouraging.

“I think there is a definite strengthening of our small business base,” said Carol Lopucki, state director of the SBTDC. “But a start-up is still hard to get conventional funding. There is almost always a collateral need and that sometimes shocks people looking to start up businesses.

“They say, ‘But that’s my personal life.’ Well, your personal life and your business are now one,” she added.

“The bank is looking for a commitment on the part of the individual. It’s not just having this great idea and putting it on the shelf. You have to put your own bottom line on the line as well.”

According to Bayes, the best place to start is the financial institution most familiar to the entrepreneur. It will know the entrepreneur and his banking history. There may even be a friendly relationship with the bank’s decision-makers. But no matter how strong the relationship with the lender, it likely won’t erase the risk a bank sees in such an investment.

“As bankers we want to spend some time and figure out a customer’s needs and find the product that fits them best,” Lonergan said. “But that has to fit the underwriting standards we maintain.”

Banks almost always will ask for personal assets as collateral — commonly a second mortgage or a similar equity line taken on the home.

A second option is a Small Business Administration loan. In these cases, the bank will look to the SBA to guarantee a loan in lieu of the necessary collateral.

This is most common when a prospective entrepreneur straddles the border of what the lender would normally approve.

“Many times SBA guarantees are people that are close, but don’t have enough equity,” Sietz said.

“It reduces the risk to the lender, but the SBA works just like a lender,” he added. “If someone has poor credit history and is a bad risk, the SBA is not going to take it, either.”

A few nontraditional options also are available.

KAMLS provides small business loans and technical assistance to what are termed “pre-bankable” companies.

“Pre-bankable” refers to companies that — due to either a lack of assets, credit or otherwise — have been denied funding through traditional means. Usually these are either small start-up businesses or fledgling companies that have yet to make enough revenue to convince a lender they are a solid investment.

KAMLS provides capital funding to these companies of up to $30,000 for eligible Kent County firms with 10 or fewer employees through the SBA, and $15,000 for eligible Grand Rapids-based firms with five or fewer employees through the Grand Rapids Community Development Block Grant program.

GROW has a similar asset development program of its own.

For eligible applicants, Individual Development Accounts provide a means of savings and subsidy for capital purchases. Clients save toward an asset goal, with the IDA matching the client’s savings at a ratio of 1:1 or 1:2.

Once the client reaches that goal, GROW will write the check to the asset vendor. Not only does the program provide needed business equipment to under-funded businesses, but it also fosters lending qualifications by establishing credit and collateral assets.

Yet another option is venture capital.

“Venture capital is wrong for about 95 percent of companies,” explained Pete Farmer, manager of TGap Venture Capital.

First, most venture capitalists only look for companies with potential for immense and immediate growth. They want companies that bring new and unique products to the market to meet an instant demand.

Even then, most early-stage companies would be better suited to seek out corporate partners before venture capital.

“If you’ve got the right product and you actually want to sell them on the product, go to someone in that field,” Farmer said. “If you can’t sell it to them, how do you expect to sell it to me? And once you do have them on board, venture capital will be lining up to sign you on.”

Farmer explained that as an entrepreneur, he has started five companies in this way. Although seldom did the initial corporate partner turn out to be as large a customer as originally indicated, it did provide the commercial traction necessary to get off the ground. 

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