Financing Alternatives

With interest rates at all-time lows, every financial institution seems to want to lend money. So why are so many gift and decorative accessories businesses finding it difficult to obtain affordable financing? It may be that they're not looking in the right places, or aren't seeking the right type of financing.

The funds needed to start or expand a business come from two basic sources: debt and equity. Debt capital represents funds obtained through borrowing. Equity capital consists of funds provided by owners through the sale of stock.

Short-term loans are satisfactory for financing current needs, but major purchases such as land, equipment, and fixtures require funds for a much longer period of time. Long-term loans generally have maturities of between five and 12 years, and are made by commercial banks, insurance companies, or pension funds. Some are also made or guaranteed by the U.S. Small Business Administration (SBA). The cost of long-term loans is generally higher than short-term financing.

Although debt financing is necessary for most retail operations, there's more to it than conventional business loans. A line of credit is a specific sum earmarked by the bank for the business to draw on as needed over a predetermined period. Interest is charged only on the amount withdrawn, though a commitment fee of 0.5 to 1 percent is usually imposed. Some banks waive this fee if a minimum balance is maintained. Lines of credit include:

• Nonbinding line of credit. The least expensive form of readily available credit, it offers no guarantees. If a retailer's financial position deteriorates, credit will be curtailed.
• Committed line of credit. May entail paying a fee of about 2 percent, but assures the funds will be there when needed.
• Revolving line of credit. Often requires an annual review and renewal, and accrues interest only on the funds that are actually borrowed.

Many retailers obtain operating funds either by selling stock in the business or by reinvesting earnings. These sources of financing differ from debt financing because there's rarely a repayment. However, sale of ownership shares is a difficult decision, requiring the owner to give up a piece of the business. These so-called "equity investments" can, however, provide badly needed cash.

A good rule of thumb is to tap the resources of the owner first. It's the easiest and quickest form of capital to acquire; there's no interest to be paid and it is not necessary to surrender equity in the business.

Banks are the most visible source of financing, specializing in short-term loans. By tying services such as savings accounts, payroll processing, and even portfolio management into the arrangement, many business owners have obtained a one-time, short-term loan (less than a year) to finance temporary working capital needs. A business that has established a good banking relationship might be able to benefit from a short-term loan to finance a new line, a specific order, or for seasonal inventory buildup.

Banks, however, may be a better choice when the U.S. Small Business Administration is involved. The U.S. government's Small Business Administration (SBA) rarely lends money, preferring instead to guarantee loans. But the SBA has a number of programs aimed especially at a gift business's seasonal needs for working capital, as well as financing for brick-and-mortar projects that result in job creation and preservation.

• The most popular SBA loan program is the basic SBA 7(A), whereby the SBA guarantees loans to small businesses.
• The SBA's MicroLoan Program makes funds available to nonprofit intermediaries, who in turn make small loans to eligible borrowers in amounts from under $100 to a maximum of $25,000.
• The SBA 502/504 Development Company Loans use local public and private partnerships to finance fixed assets for small businesses. These loans can be used to buy or construct a building or to purchase machinery and equipment. The program requires that one job must be created or retained for each $35,000 of Federal money involved in the loan.

Although the SBA has been called the "lender of last resort," many businesses just don't have the kind of balance sheet that appeals to traditional lenders. Fortunately, there are still other types of financing for those situations that bankers deem too risky.

Many retailers find it worthwhile to pay vendors a little bit more for goods if the vendor is willing to wait until the retailer receives payment for the goods sold. Such an arrangement improves cash flow, but the vendor gets a larger payment for delaying receipt of his money.

A business seeking equipment financing for a computerized inventory system, point-of-sale cash register system, or other equipment, should consider any financing options offered by the system's manufacturer or distributor. It might also be prudent to consider short-term leasing rather than the outright purchase of equipment.

Finally, the financing route most businesses take usually involves a credit or loan application. However, many experienced retailers, distributors, and even manufacturers often ignore the loan or credit application, the "loan package." A loan package is quite similar to a business plan. In fact, a business plan with all of the details and projections for the gifts operation it contains is easily adapted to serve as a comprehensive loan proposal.

With today's low interest rates and willing lenders, startup and expansion capital is more available than ever before. It's important to obtain that financing from the most advantageous place.