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When and How to Borrow

Posted: March 17, 2011, 1:40 p.m., EDT

Getting a loan to start or expand a pet business, while not easy, can still be doable in today’s economy.

By Alison Bour

Years ago, bankers lent money on a handshake. Small business owners with a solid reputation raised by families with a reliable history walked away from their community bank with money in their pockets.

While a borrower’s reputation still plays a role in small business lending, getting a loan to start or expand a pet business represents no easy task, and remains laden with paperwork and submission of private operating information.

Flourishing Without Borrowing

Although Chip Sammons, owner of Holistic Pet Center in Clackamas, Ore., borrowed money when restructuring his business not long after its inception, as a rule he avoids business loans.

“I just don’t like debt,” he said.

Sammons knows friends in business that borrowed from a lender with a plan to pay it back, but they haven’t been able to, he said.

Other pet retailers also expressed reservations about taking out small business loans.

“We worked for years without getting any money,” said Julie Pilas, co-owner of Elephant Nose Pet Center in Morristown, N.J.

The Experts Weigh in on Small Business Lending

“Overall, in the best of circumstances, the process of submission of a business plan to having the money in hand will take a minimum of 30 days, in most cases 60,” said Rich Rose, president of The RM Group, a business advisory company. “In this tight market the business owner should be aware they will probably be asked for additional collateral unless the business has had good, positive cash flow for at least two years.”

Prudent management is likely to put retailers in a position to take out a business loan.

“Small business owners wear a lot of hats,” Wise said. “They’re good at some things, but maybe not all. The bank will look at your abilities. Prudent management is how you fill those holes.”

Prudence is the name of the game in lending and borrowing these days.
“Debt is a useful tool, but it’s not always the best answer,” Marranca said. “You can’t borrow your way out of problems or you’ll just be back in six months or a year.”

Retailers who seek to borrow money to support an ailing business or to make up for other problems may find loans problematic.

“Since things are tight now, stores might buy less inventory, but have a loan to cover rent,” Garrou said. “That’s a slippery slope.”

A bad experience during an attempt to get a small business loan left Pilas with plenty of incentive to fund the family-owned venture with personal assets, even though she retained her former job and worked around the clock until the business realized a profit.

Prudent Borrowing

While retailers consistently recommended caution in taking out loans, not all felt the need for strict prohibition when it comes to borrowing. Donna Garrou, owner of BirdStuff in Orange, Calif., echoed others’ sentiments regarding careful consideration of loans, though she said she does think business loans offer retailers opportunities to expand that would otherwise remain out of reach.

“Don’t be afraid or avoid [a loan],” Garrou said. “Just make sure you have a plan to pay it off.”

She recommended reserving six months of cash flow as part of that plan.
There are necessary steps to take and benchmarks to reach before even applying for a loan.

“Some people want to have a perfect-[looking] store, but have no business plan,” said Garrou. “Get customers and cash flow first, then get a loan to expand. [Stores should] expand only if they can’t handle sales in the space they have.”

BirdStuff boasts 25 years of business success. Garrou said she believes in avoiding loans to upgrade store fixtures, but said she would consider a loan for the purpose of increasing inventory. If items are priced right, she said, a store can at least double its investment.

Additional investment opportunities exist that may justify taking out a laon. Evan Wise, managing director of Management One in Tucson, Ariz., said loans for staff training pay off as attendees learn ways to increase profit through up-selling, skilled forecasting, financial management, improving processes and avoiding inventory mishaps.

“There’s cash in all of these things,” Wise said.

However, Wise said he thinks deals with suppliers that offer inventory on hand—also called stuff on wheels—that can be returned if not sold represents a risky situation.

“It’s still a loan, and a dangerous one,” he said. “You put money out [in operating costs] and may get nothing in return.”

Sometimes, innovation requires fresh capital that may only be available through a loan. Pilas said she retains a patent for a waste collection product, and hopes to soon launch it on a mass scale. She did work with her personal banker when wiring money to China for sample production.
“I’m not anti-bank,” she said. “I was a real estate agent. I know the advantages of using someone else’s money.”

Risk Management Guides Lending

When Jackie Oakes, owner of Coastal K-9 and Tippy’s Treats & More, in Wilmington, N.C., asked for a start-up loan, she met opposition.

“They were not eager at all to even begin to help me,” she said.

The bank just didn’t see the potential of her pet business idea, Oakes said. Her banker suggested funding her start-up with a credit card, a plan most bankers would warn against. Because her interest rate was so low the move paid off, and since the inception of her dog bakery business in 2004, Oakes has secured a line of credit.

“You have to have some skin in the game,” said Sal Marranca, president and CEO of Cattaraugus Community Bank in rural western New York. “You have to personally guarantee the loan. The reason we got into the housing crisis is that people had no skin in the game, no history of willingness to pay back.”
Banks lend small businesses some else’s money, said Marranca, and banks face more regulations now.

“It’s just a fact of life,” he said.

Marranca added most small business owners come to a bank ill prepared for loan requests. He and Wise tally up everything bankers usually require: financial history including balance sheets and tax returns; income-to-debt ratio; an accurate merchandise plan including forecasts, possibly for each inventory classification; cash flow projections; pro forma documents, which represent future forecasts of the business; information about staff skills and education; details about balance and flow of inventory; and personal collateral.

Finding Help

These industry professionals stress that help abounds for pet retailers considering bank loans.

Various options exist for retailers seeking aid. Garrou recommended SCORE, a small business mentoring organization that offers free advice to new and existing business owners. She also advised pet retailers who are experienced business owners to serve as mentors.

Direct support of loans is also available through other organizations. Wise said the U.S. Small Business Association (SBA), guarantees loans but requires an abundance of paperwork.

Community banks are another source of loan funding. Marranca, upcoming chairman of the Independent Community Bankers Association (ICBA), said community banks offer not only high-quality free advice, but also the best option for a business loan even during the tight lending market.
“All I can say is, we never stopped lending,” he added.

Face Time

With a 36-year history in the brokerage business, Bill Kaiser, who now owns Pampered Pup’z in Libertyville, Ill., said he remembers the days when banks would have loaned money to his dog. But he was recently denied a loan even though he has impeccable credit.

“It’s just their current regulations,” he said.

Ways to increase one’s chances of qualifying for a small business loan include getting involved in the community as a volunteer, chamber member or commissioner advisory board, Kaiser said. He does all three; it shows he has good intentions of growing his business locally.

“It’s important to build a good, ongoing relationship with your banker,” Kaiser said. “Ask for a personal banker. You may already have one and just don’t know it.”


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