You should start a business; everyone tells you so. Perhaps you and a pal want to join forces and incorporate as an LLC. Or maybe you’d like to open a storefront on Main Street and sell your gadgets, products or services. You don’t anticipate million-dollar returns, and you don’t need much to get started, not even six figures. We’re flush with financing here in lower Fairfield County, it seems; surely some bank will believe in your idea enough to lend you some money, right?
Not necessarily, says at least one local business expert. “The lending environment has changed dramatically, especially for small businesses,” reports Fran Pastore, president of the Women’s Business Development Council (WBDC) in Stamford. “Since the recession, access to loans under $100,000 has decreased by 30 percent, and the number of loans approved has declined by 70 percent.”
This, in the state that ranks fourth nationwide as the “most entrepreneurial state,” according to a NerdWallet study. From 2014 to 2015, Connecticut businesses received the second largest loans from the Small Business Administration, averaging about $523,000. But access to five-figure support? That’s a different story.
“Fairfield County is a bit of a lending desert for micropreneurs,” Pastore contends, citing a report the WBDC commissioned two years ago. It found that many banks are less willing to deal with loans for small start-ups, when it costs them just as much to service more profitable loans of $100,000 and up. Similarly, most angel investors don’t want to spend endless hours with you over a $25,000 investment.
So where, then, can you turn for capital when you don’t need six figures or more and you don’t want to give away equity ownership?
First, look inward. If your idea is as great as you think it is, invest in yourself, and you will reap the rewards without having to repay a lender.
Second, turn to your friends and family. They know you, and they know your habits and work ethic. If they know you’re putting your money and your energy behind your efforts, they might be willing to do the same. Be forewarned, though—this is a risky venture for both parties. You and they must agree whether this money is a loan or a gift. If it’s a loan, make sure you both are certain of the repayment terms and consequences.
Third, look to the state of Connecticut’s Small Business Express Program, to a nonprofit lender such as the WBDC or the CTSBDC (Connecticut Small Business Development Center), or to the SBA (Small Business Administration) for a grant or microloan. Bonus: The nonprofit lenders often provide free advice to help you succeed. For example, the WBDC Capital Fund, launched in the spring, provides startups and young businesses with as little as $2,500 and up to $50,000 in capital, plus offers teleconferences, webinars, a QuickBooks expert and a lender all on staff, for free.
Local bankers can be helpful advisers to new entrepreneurs; make an appointment to meet with yours.
Be wary, though, of personal loans through alternative lenders, and use credit cards only as a last resort, due to the hefty interest rates they carry.
Lending to a micro-startup with little or no revenue is risky business. Here are four steps to take the edge off lenders’ fears:
1. Have a plan before you apply for a loan. Spell out why you want the money. Hint: If the answer is “to pay my salary,” you’re likely to leave empty-handed.
2. Know your business goals and objectives, and be prepared to show the research you’ve done to support them.
3. Make sure your financial house is in order. Do the best you can to improve your personal credit score and to demonstrate your ability to repay. The lender will want collateral to guarantee your loan. Understand what you will be signing away.
4. Know your numbers. Do not appear at the lender’s with bags of receipts or shoeboxes full of sales. Instead, have a conversation with your accountant and show up with an actual or proposed budget, complete with detailed ledgers of your payables and receivables.
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