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Business Builders: Wherefore Art the Money?

Posted: February 18, 2014, 11:25 a.m. EDT


Best-bet grant, loan and lending options for small businesses.

By Mark E. Battersby

Although interest rates remain close to historical lows, financing for many independent pet businesses continues to be elusive. One problem: There are surprisingly fewer banks to borrow from.

According to many reports, the number of banking institutions in the U.S. has dwindled to its lowest level since at least the Great Depression, as a sluggish economy, stubbornly low interest rates and heightened regulation take their toll. The falloff is largely among community banks, which are more likely to make small-business loans. Big banks, however, are loosening the purse strings.

According to the Biz2Credit Small Lending Index, small business loan lending approval rates at big banks (at least $10 billion in assets) increased nearly 20 percent. Yet banks aren’t the only source of funding for pet retailers.

Do-It-Yourself Funding
For many pet retailers, borrowing means a loan from the business’s owner, partner or shareholder—a route fraught with obstacles, largely tax related. Whenever a loan is made between related entities, or when a shareholder makes a loan to his or her incorporated pet product business, the tax law requires a "fair-market” rate of interest be included. If not, the IRS will step in and make adjustments to the below-market transaction in order to properly reflect "imputed” interest. How large the tax impact depends on the effect of added interest income to the lender and the bite of an offsetting interest expense deduction felt by the borrower.

The Small Business Administration
The U.S. Small Business Administration (SBA) doesn’t do much lending. Rather, the bulk of its financing comes in the form of "guarantees.” The SBA guarantees the repayment of loans made by a bank or other financial institution, thereby lowering or reducing the lender’s risk and, in most cases, the amount of interest a borrower is charged.

7 Steps to Better Credit

With strong business credit, a business can borrow at a lower cost and with more favorable terms. Among the proven strategies that can help establish the creditworthiness of a pet retailer:
1. Form a corporation or Limited Liability Company (LLC), if not already incorporated.
2. Register with some, if not all, of the business credit bureaus, such as Dun & Bradstreet (D&B).
3. Apply for a business credit card. In business, the 5-3-2 rule is key. A business’s credit record is not considered established and solid until it has at least five trade accounts, at least three credit cards and at least two small loans fully paid off.
4. Develop a professional business plan and maintain financial statements; both are necessary and are required by many credit grantors.
5. Find companies willing to grant credit without a personal credit check or guarantee.
6. Keep a business credit profile active with monthly payments to credit grantors.
7. Develop and maintain a website. A webpage might not seem like a must in building or maintaining business credit, but D&B now shows and lists websites on credit files. Many banks also use the fact that the operation has a website as a positive factor in determining the creditworthiness of a borrower.—MEB

The SBA’s primary and most flexible 7(a) Loan Program is designed for both startup and existing small businesses, and it involves government-backed guarantees for amounts loaned for general business purposes.
 
The SBA’s CDC/504 Loan Program provides long-term, fixed-rate financing to acquire fixed assets (such as real estate and equipment) for expansion or modernization. It is ideal for small pet retailers requiring "brick-and-mortar” financing.

Rather than banks or other commercial lending institutions, 504 loans are delivered via Certified Development Companies (CDC), which are private, nonprofit corporations set up to contribute to the economic development of their communities.

The SBA also has a unique program to provide small, short-term "microloans” (up to $30,000) for working capital or for purchasing inventory, supplies, furniture, fixtures, machinery and/or equipment. Ideal for those needing small-scale financing and technical assistance, SBA microloans are available through specially designated intermediary lenders (nonprofit organizations with experience in lending and technical assistance).

Semifree Money, or Grants
Grants are like free money for small businesses: Unlike loans and other debt, grants don’t typically require payback. Of course, finding and qualifying for public or private grant funds takes some effort.

Grants from the federal government usually are funded by tax dollars and come with very stringent compliance and reporting requirements to ensure the money is well-spent.

Some grants for small businesses are available through state and local programs, nonprofit organizations and other groups. Every state, for example, has a work force development office that helps train an operation’s work force. The easiest way to find these funds: Search "work force training funds” with your state’s name.

Most of these grants are not really free money and usually require the recipient to match funds or combine the grant with other forms of financing, such as a loan. And, not too surprisingly, the amount of the grant money available varies with each business and each grantor. While the SBA does not provide grants for starting or expanding a business, it does offer guidance to help obtain a grant.

Of course, grants aren’t the only means of securing additional funds.

Funding Locally
One of the best sources of funding is often suppliers. Suppliers allow their customers a grace period before requiring payment for the goods or services they provide. This "vendor” or "trade” credit allows the business to generate at least some revenue from the sale of goods before they must pay for them.

Vendor or trade credit also usually is easier to obtain than bank credit because it doesn’t require collateral. Unfortunately, trade credit can be quite expensive.

Funding Research and Resources

SBA loan guarantees and microloan programs: www.sba.gov/category/navigation-structure/loans-grants/small-business-loans
Grants: www.sba.gov/category/navigation-structure/loans-grants/grants
Directory of economic development groups: www.ecodevdirectory.com
SBA guidance and list of organizations: www.sba.gov/content/economic-development-agencies
State Small Business Credit Initiative, U.S. Treasury Department: www.treasury.gov/resource-center/sb-programs/Pages/ssbci.aspx
Council of Development Finance Agencies (organization of state, county and municipal development agencies provides links to related state programs): www.cdfa.net
National Crowdfunding Association: www.nlcfa.org/main.html
Experian: www.experian.com/small-business/build-business-credit.jsp

When it comes to thinking outside of the box, financing from sources closer to home is often more readily available and usually less expensive than traditional financing. One of the best sources of assistance—and in many cases funding—is the many state, regional and local economic development agencies.

There are nearly 12,000 economic development groups in the U.S. whose purpose is to provide economic growth and development in the areas they serve. They generally encourage new or expanding businesses to locate to their area—or remain in the area.

State Small Business Credit Initiative
On a similar note, the Small Business Jobs Act of 2010 created the State Small Business Credit Initiative (SSBCI) and funded it with $1.5 billion to strengthen state programs that support lending to small businesses. Under SSBCI, participating states are using the federal funds for programs to leverage private lending to small businesses that are creditworthy.

"There are not many limiting criteria for the loan other than it not be for speculative investment and, unlike more traditional government loan programs, the initiative has less red tape and gets money to businesses faster,” said Scott James, senior lending officer for Cheaha Bank in Oxford, Ala.

Popular Funding by the Crowd
Long used by charities, nonprofits and even a few entrepreneurs to raise money for worthy causes and special projects, today crowdfunding is challenging venture capital and angel funding as an alternative source of financing for many retailers. Generally, individual investors combine to lend money to small business owners with good credit scores who need money to expand or to buy fixtures or equipment.

Although large-scale crowdfunding was not previously permitted under federal securities regulations, today thanks to the Jumpstart Our Business Startups Act, also known as the JOBS Act, the door has been opened for every pet retailer needing funds. Unfortunately, crowdfunding regulations don’t allow businesses to promote and sell securities through their own websites. The new legislation requires businesses to solicit prospective investors only through approved "funding portals,” which must comply with upcoming SEC regulations.

With fewer small banks to borrow from and the tougher lending requirements of larger banks and financial institutions, shopping for affordable, available funding is obviously more difficult. However, forced to seek alternative financing, many independent pet retailers are discovering a number of options to traditional funding—options that are often better suited to their short-term and long-term financing needs. 

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