Where to Turn for Financial Help
By Carol Frank
Debbie Thrasher, owner of Tree Tops Bird Center in Dallas, has a problem. Business is too good. On a typical weekend day, customers in various stages of bird ownership are jammed wall to wall. Cages and accessories are packed into corners like sardines. She desperately needs more space.
“Additional space for us would allow us room to expand inventory, add more services, purchase in volume to realize better discounts and possibly put our rent toward a building we would actually own,” Thrasher says. “So the age-old question prevails: Is now a good time to borrow, and where can I get access to capital?”
“It’s a great time to get financing right now,” says Tommi Homuth, business banking manager for Wells Fargo. “Interest rates are as low as they have been since 2004. The key to approaching a bank for a loan is to have a clear-cut explanation of exactly what the proceeds will be used for. In other words, what is driving the borrowing need and how do you plan to repay the loan?”
What Are the Options?
Fortunately for people with good credit histories, there are more choices than ever to expand a business. Most of the choices fall into one of these categories:
- Credit card advances: This doesn’t mean taking out cash through a business credit card, although many companies do that. It’s a loan based on the retailer’s track record and expected future business. Because credit card sales are such a good estimation of future earnings, the store should be able to get a fairly good rate on a loan against expected income. The loan is repaid using a small percentage of future credit card sales.
- Peer-to-peer lending: Websites like Lendingclub.com and Prosper.com bring individual borrowers and lenders together. Lendingclub.com bases loan rates on the borrower’s credit profile. At Prosper.com, parties on both sides negotiate the rate, though borrowers can set a maximum they are willing to pay. The companies oversee loan repayment and provide all the necessary paperwork.
- Microloans: Generally made for $35,000 or less, microloans are available to minorities, women, the poor and people with disabilities—those who often have trouble obtaining conventional financing. Click here for more information.
- Government incentives: Debbie Thrasher from Tree Tops Bird Center in Dallas has recently explored alternative ideas to traditional bank financing.
“There can be incentives with cities that are trying to bring business into their areas,” she says. “We are looking at a space that is only a few miles away from our current location, but it is in a different city and they want new business. Therefore, they are offering funding for businesses that can hire more employees or rebuild rundown areas.”
- Term loan: This is the most common general purpose loan and is used for working capital, expansion and acquisitions. Repayment is made monthly over a term based on the expected lifespan of the assets being purchased. Small Business Administration loans fall under this category. “SBA loans are typically for a longer term, usually seven to 10 years,” Homuth says. “They are easier on your cash flow and can be easier to get because they are partially guaranteed by the government.” Click here for more information.
- Line of credit: If the amount required is less than $100,000, Homuth recommends a line of credit versus a term loan. It’s a great solution for short-term fluctuations in cash requirements, such as quarterly payroll taxes, extra inventory for the holiday season or to take advantage of special promotions and discounts.
- Home equity line of credit: This line of credit uses the equity accumulated in a home as collateral. It’s a good option if a traditional bank line of credit isn’t available, but only if the owner is confident that paying it back won’t be an issue because he is betting the farm.
What Are the Chances?
While there is no doubt that the recent mortgage fiasco has made it more difficult to qualify for financing, it has also resulted in lower demand for borrowing, thus increasing the amount of money available to lend. Retailers will have the best chances if they follow these guidelines:
- Maintain a high credit score. “It is more important then ever to have a high personal credit score – higher than the mid 600s,” Homuth says.
- Establish a banking relationship. A business owner will have the most clout and get the best interest rates with a bank that knows his history, so he can always start with the place where he keeps his money. Ideally, find a banker that understands the pet industry.
- Keep business and personal credit separate. Separating business and personal credit profiles not only professionalizes and simplifies the credit picture but has many tax advantages as well.
- Show true profitability. As a small business owner, it’s certainly a good business practice to take advantage of all the tax benefits and write-offs associated with running a company. But when preparing to borrow money, keep in mind that the “tax-return profit” is a factor considered by lenders. In other words, the tax return should be an accurate reflection of a company’s real earnings. This helps secure that important loan approval and ensures a better sales price in the event the owner decides to sell the company.
“The pet industry is one of the only industries considered by banks to be recession proof,” Homuth says. “As long as you maintain a good credit score, keep an open relationship with your banker and have a successful track record, it will not be difficult to obtain financing.”
With interest rates near record lows, baby boomers feathering their empty nests with furry and feathered creatures, and more innovative products to choose from than ever before, now might be the perfect time for retailers to explore obtaining the capital needed to expand a growing business. <HOME>
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