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Monday, March 29, 1999

Other people's money

There are all sorts of ways to finance a business, all with their benefits and drawbacks by Jake Batsell
Seattle Times staff reporter

They couldn't help it. As first-year business owners, Judy and Tony Tam would go out for a modest dinner and soon find themselves stricken with guilt.

The Tams, owners of Seattle's Wan Hua Foods, which makes Yakisoba noodles, frequently would wring their hands over how much to leave for the tip.

"You're like, 'God, with two or three dollars, how many pounds of noodles could I make?' " Judy Tam said.

About five pounds of noodles, it turns out. Which, at a wholesale price of $1.30 a pound, could net the Tams $6.50 - more than double the value of that $3 tip.

A few bucks at dinner might not seem like much, but this was a time when the Tams faced mounting start-up costs, used cash advances from their credit cards to pay their employees and had liens placed on virtually all their personal and business property. They also had just begun paying back a 10-year loan for a $150,000 noodle-making machine.

These are the kinds of things that haunt you when you're struggling to finance a small business, especially when you're starting out.

There are all sorts of ways to find money, all with their benefits and drawbacks. Bank loans are the most common form of financing, but other methods abound, such as attracting capital from outside investors, borrowing from family members or even using credit cards.

Experts say there isn't a more crucial, fundamental factor in the survival of a new business than cobbling together enough money to make it through those precarious early stages.

"I've seen so many good ideas that just didn't have the money to weather the first few years," said Michael Verchot, director of the University of Washington's Business and Economic Development Program, which assists small businesses in low-income neighborhoods.

Here are some routes to consider when choosing ways to finance your business:

  • Banks. The traditional route for funding is through banks, which have rigorous standards to evaluate whether an applicant is creditworthy. Loan officers will look at your ability to repay a loan, your management experience and credit history, as well as how much of your own money is at stake.

    Carol Wilber, vice president and district sales manager for KeyBank, said preparation is key when pitching your loan application.

    "Everyone who comes in who wants a loan has a great idea," Wilber said. "But the difference between success and failure is preparation. What I see so often is that people are unprepared for the down side."

  • SBA guarantee. Those who wouldn't otherwise qualify for a standard loan might want to consider applying for a bank loan that is backed by the U.S. Small Business Administration. The SBA helps business owners by guaranteeing to a lender up to 80 percent of a loan. With an SBA-backed loan, a bank is guaranteed at least partial repayment even if the business defaults.

    Jerry Zyskowski, a volunteer SBA counselor, said a thorough business plan is essential in applying for an SBA-backed loan. He recommends that applicants compile three forecasts for their proposed business based on high-, middle- and low-end projections.

    "It really forces the individual to think through what he or she would do in different business scenarios," Zyskowski said.

    The SBA backed 128 loans last year in Western Washington worth $33.2 million. In addition to backing standard loans of up to $750,000, the SBA offers microloans of up to $25,000, as well as export working capital, disaster loans and qualification programs for women- and minority-owned businesses.

  • Other people's money. If you're fortunate enough to have family or friends with money, it doesn't hurt to ask for help.

    When the Tams were opening their first business, a Chinese restaurant in Lake Stevens, a bank declined their application for a $5,000 loan to pay for dishes. So they went to relatives, who lent them the money.

    "You just pay them back as quickly as you can," Judy Tam said. "You don't want to drag them along."

    It's a good idea to avoid future misunderstandings by outlining the terms on paper, listing the amount borrowed, repayment terms and the interest rate. You might consider running the agreement by your lawyer or accountant, just to be safe.

    Some entrepreneurs also try to solicit money from venture capitalists, or from "angel" investors who take a chance on small businesses.

  • Credit cards. A hassle-free - but potentially dangerous - way to fund your business is by using credit cards. Advisers say it can work if you need a relatively small amount of money, or if your cash-flow prospects are particularly promising.

    But use caution with this approach. Zyskowski said he has had clients who became impatient with the rigors of the loan-application process and decided to use credit cards instead to make purchases.

    "Some of them do it, and then they come back six or 12 months later and say it didn't work out," he said. "Once they've sunk the money into it, it's gone - and that's some cost down the tube."

    Credit cards also generally carry higher interest rates. SBA-backed loans now have interest rates ranging from 10 percent to 12.5 percent; credit-card rates average about 19 percent.

  • Alternative financing. If your loan application is turned down by a bank, don't pack it in. Other lenders use different techniques to evaluate small-business proposals.

    Community Capital Development, a Seattle nonprofit group, handed out nearly $2.5 million in loans last year to Seattle businesses in disadvantaged neighborhoods.


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