The Great Money Hunt

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Financing is the lifeblood for small firms. But how do you know how much you need? And where you can get it?

November 29, 2004; Page R1

While opening a running-shoe store in Oshkosh, Wis., earlier this year, some things came naturally to 23-year-old Ross McDowell. A competitive runner since sixth grade, he instinctively could pick the perfect shoe lineup for those who pronate (roll their ankles inward) as well as those who supinate (roll their ankles outward). He also knew he needed hats, shirts and energy bars to round out his merchandise mix, as well as couches for customers to contemplate purchases.

But one thing was trickier: money. More specifically: how much he needed and where he would get it.


See the complete Small Business report.,,2_1114,00.html

"I came from a middle-class family and didn’t have money myself," Mr. McDowell says. "When it came to analyzing how much I’d need to borrow, some things I did pretty good on, like utilities. But some things, I didn’t even think about how expensive they would be — like postage for mailings."

Financing is the lifeline of all commerce, and perhaps nowhere is the task of managing money more critical than among small businesses. Whether it’s funding a start-up like Mr. McDowell’s shoe store or raising capital to expand an existing enterprise, the struggle to maintain adequate cash flow is constant among entrepreneurs. In fact, a study of small businesses filing for bankruptcy showed that nearly a third listed financing woes as a catalyst, according to the Small Business Administration’s Office of Advocacy.

To survive often means getting creative in the search for money. Most business owners, after exhausting personal savings as well as resources from family and friends, automatically turn to traditional commercial lenders such as their local bank. While that can be a solution for some, others will find they can’t get such loans because their credit scores, management experience or business plans just don’t make the grade.

Fortunately, there are numerous alternative funding options out there — many of which are described in this report. They include everything from loans and grants geared toward specific demographic groups, such as female and disabled entrepreneurs, to "micro-loan" programs aimed at the smallest businesses.

Before looking for money, however, most entrepreneurs need to figure out something equally important: how much. One study put the median price tag at $6,000 for a solo start-up and $20,000 for a team-based venture, according to the SBA. But the figure obviously varies widely, and every new business must identify the specific costs it will incur, from one-time expenses — such as the fee for incorporation or cost of a sign — to continuing costs including inventory, utilities and insurance. It helps to pinpoint fixed costs first, such as rent, and then nail down variable expenses, such as shipping, sales commissions and packaging costs.
Breaking down the basics of small-business borrowing.

Loan Lineup: Among small businesses using credit, the percentage that tap these types of funding to finance their operations

Personal credit card 46%
Business credit card 34
Line of credit 28
Vehicle loan 21
Owner loan* 14
Mortgage loan 13
Lease 11
Equipment loan 10
Other 10
*Loan from the owner to the business.

Sources: Small Business Administration, Office of Advocacy; WSJ research

There are a variety of free calculators and worksheets on the Internet that offer good checklists, including some at the SBA’s Web site ( as well as many private business-plan services and software (see article on page R10). A good first step included in many plans is to conduct a break-even analysis, which determines the amount of revenue the business must take in to cover expenses before even a dime of profit is made. Such analysis can help pinpoint how much funding is needed to survive until the break-even point is reached and then surpassed.

Ask for More

One rule of thumb: It’s better to overestimate than underestimate your expenses. Many small business don’t do that because they’re afraid banks will say "no" if they want to borrow too much. But some experts suggest adding 10% extra to cover miscellaneous expenses. "The most common pitfall is that everyone thinks sales will be bigger than they are and costs will be less than they are," says Jim Hammersley, director of loan programs for the SBA.

Mr. Hammersley says entrepreneurs routinely underestimate the costs of business licenses and various taxes, as well as how long it can take for their first accounts receivable to get paid. "So they ask to borrow just enough to guarantee that they will fail," he says.

In Mr. McDowell’s case, he wanted enough starting capital for his shoe store to survive for three months without a single sale — a smart move in case there were hiccups in his opening date, revenue projections or costs. To make his tally, he did what his own business-class professors recommended: "I started with the basics," Mr. McDowell says.

First, he plotted out his monthly fixed costs, including rent for a storefront (he scouted out a specific location) and utilities. He also priced out how much it would take him to equip his store if he bought at retail — from shelving and storage racks to couches and a cash register — and also projected what he would pay a part-time employee. He budgeted in his own personal living expenses, so he wouldn’t go hungry or homeless, as well as advertising and store signage. Total: about $22,000.

That was just the start. "I needed to fill the store now," Mr. McDowell says. He decided on six major brands he wanted to carry, met with several sales reps and then picked 25 popular styles. Next he budgeted in shirts, shorts, hats and PowerBars to fill out the shelves. That added up to about $50,000, which brought his total to $72,000. After a 10% down payment, he secured a government-backed loan for the remainder from his local bank.

Here are selected resources where entrepreneurs can research small-business financing options
The Small Business Administration’s Web site provides a primer on the basics of financing, as well as calculators for estimating costs, lists of grant resources, a summary of loan requirements and information on the agency’s own loan programs.
The site of the Association for Enterprise Opportunity, a national member-based group dedicated to microenterprise development, provides a listing of microenterprise groups by state that can be tapped for financing guidance and funding itself.
This for-profit company provides an array of financial calculators as well as Web-based services and templates on writing business and marketing plans, incorporating and applying for loans.
This site is aimed at helping women-run small businesses obtain business loans, consultation and education. An online microlender, Count Me In makes loans of $500 to $10,000 available to U.S. women who have difficulty finding funding elsewhere. The site also has a help resource center with checklists, educational videos, and an online library about credit and business planning.

Sources: Small Business Administration, Office of Advocacy; WSJ research

Despite his planning, Mr. McDowell still made some common mistakes: He forgot to add in insurance costs, for instance, and vastly underestimated the marketing money a new, unknown business would need. With the latter, he budgeted around $150 a month for advertising, thinking he could go to high schools and market cheaply by giving talks about running. "It was harder than I thought because the coaches were sometimes reluctant to let me in," Mr. McDowell says. That meant relying on more traditional means such as fliers and expos, which brought his total closer to $600 a month.

Being Resourceful

Fortunately, he had wisely overestimated other expenses — such as the roughly $17,000 he had budgeted to outfit his shop, called Movin’ Shoes-Fox Valley. He cut that number down to $11,000 by taking free shelving units and stools from two companies that were either moving or going out of business. He also refurbished a thrift-store entertainment stand to serve as his checkout counter and painted an old magazine rack that belonged to his parents.

What’s more, Mr. McDowell found $4,000 in grants available through a downtown revitalization project; he put that in a rainy-day fund. And to help shave those marketing costs, he began sponsoring a local marathon runner by giving her free shoes and apparel in exchange for wearing his logo, writing press releases and talking up his store to other runners. As a result, he has dropped his monthly operating budget to $5,300, compared with the $6,500 he had planned, and he still has about $20,000 in loan money yet untouched, as well as a $10,000 line of credit. "You’ve got to be resourceful," says Mr. McDowell whose sales climbed steadily in the first few months following his July opening.

There are several areas where first-time entrepreneurs tend to trip up. Among them, forgetting fees — legal fees, accounting fees, incorporation fees. Another area ripe for error is payroll. "People don’t understand the cost of operating payroll, what the taxes will be and how much accounting work goes into maintaining it," says Tim Chamberlin, a CPA in Wheelersburg, Ohio, who has advised many entrepreneurs over the past 30 years. He also says his clients sometimes don’t know they may have to pay personal property taxes on their inventory and equipment.

"In general, I always say borrowing too much is better than borrowing too little because going back to the bank and asking for more doesn’t always go over so well," Mr. Chamberlin says.

Recently, Mr. Chamberlin advised Larry Wills as he pieced together financing to open the JW Village Market in Portsmouth, Ohio, with a partner. Having worked in the grocery business, Mr. Wills, 49, knew the ins and outs of running a store. What he was less clear on was how to arrive at a start-up cost projection that lenders would accept. He and his partner estimated they’d need around $725,000 to get going. After sitting down with Mr. Chamberlin and lenders, that figure ultimately jumped to about $1.1 million.

"They thought they’d immediately be able to use their cash flow from sales as working capital," Mr. Chamberlin says. "They were expecting to take 30 to 60 days to pay suppliers for product, when the suppliers wanted to get paid two or three times a month." What’s more, Mr. Chamberlin adds, because JW Village Market was located where another grocer used to be, his clients were too optimistic about how fast customers would return.

To qualify for the fatter package of financing, Mr. Wills ended up taking three extra liens on his home and two liens on his 2002 Ford F150 truck, and his wife also signed on with a personal guarantee. All that was in addition to putting up $112,000 with his partner as equity. "The biggest thing we learned," Mr. Wills says, "was that businesses starting out fail because they don’t have enough cash flow."

Sweet Smell of Success

It’s not just those starting out, though. Even seasoned executives face financing hurdles, though often their biggest challenge isn’t necessarily estimating financing but rather finding creative ways to obtain it. Byron Donics spent a career in beauty retailing, holding such positions as vice president of international at Elizabeth Arden and president of the Aramis men’s division for Estée Lauder. When he started up a fragrance licensing and distribution company in 1994, he landed orders from well-known retailers such as Neiman Marcus and Saks Fifth Avenue, but still needed upfront capital to buy the merchandise.

Despite his years of experience, Mr. Donics, now 55, had trouble getting banks interested in what is considered a notoriously fickle segment of the beauty market. Instead, he lined financing through a venture merchant banking firm called Capstone Business Credit LLC, which specializes in funding businesses with $20 million or less in annual sales. New York-based Capstone essentially works with clients who have pre-sold merchandise but need money to get their product to market.

In the case of Mr. Donics, Capstone bought the merchandise directly from the manufacturer at one price and then sold it to Mr. Donics for slightly more; Mr. Donics then sold it to the retailer with his own markup. Although the extra layer cost Mr. Donics slightly more, it gave him a continual source of cash to keep fulfilling new orders while he waited for payment for past ones.

The strategy worked. He sold his fragrance business in 1997 and recently started a new skin-care, hair-care, bath- and body-products firm called HTI Collection Ltd. Once again, he’s using Capstone for financing and is on track for sales of $5 million this year of both imported products and his own goods.

Joseph Ingrassia, managing member of Capstone, says that by far the biggest mistake he sees small businesses make is relying too much on "guesswork" to plan their inventory stock, which often leaves them stuck with outdated product that they then try — unsuccessfully — to use as collateral to get financing.

"Entrepreneurs are optimists, and they almost never sell what they think they will," Mr. Ingrassia says. Rather than "projecting" what they think retailers will buy, Mr. Ingrassia advises businesses to push retailers to make their orders months in advance. "They can’t be afraid to not get the order," he says.

Ms. Bounds, The Wall Street Journal’s small business news editor in New York, served as contributing editor of this report.

Write to Gwendolyn Bounds at [email protected]

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