Five alternative ways to finance your business.

ARE BANK LOAN OFFICERS GIVING YOU THE bum's rush to the door when you try to finance your
business enterprise? If you're like most small business owners, the answer is yes. Entrepreneurs get
turned down for bank loans for a variety of reasons, including lack of assets, collateral and business
experience. And discrimination continues to be a persistent problem for many African American
business owners.
Fortunately, a rejection stamp on your bank loan application doesn't have to derail your dream of
owning a business. Alternative sources of capital are available to help you get a new company off the
ground or expand an existing enterprise.
Rejections have forced business owners to become more creative when it comes to financing. "The
number of small businesses that cite bank loans as the primary source of financing has fallen," says
Todd McCracken, president of National Small Business United (NSBU), a lobbying group in
Washington, D.C. These findings were included in the NSBU/Arthur Anderson 1997 Survey of Small
and Mid-Sized Business Trends.
Five creative forms of alternative financing include "factoring," or selling accounts receivables for
up-front cash; finding an "angel investor" (a wealthy investor); obtaining loans or credit from
suppliers; seeking loans from venture capital firms that cater to small businesses; and joining a susu,
where you pool money with friends and family.
By using these methods, thousands of businesses are getting working capital to lease property, buy
equipment and supplies and pay employees. But while these sources are more willing than banks to
take a risk on growing businesses, they are hardly giving money away. You still need a viable idea, a
sound business plan and clear marketing strategies. You must show realistic projections for growth
and earnings so investors know how and when they'll recoup their money. Note that every business
eventually needs a strong relationship with a bank for lines of credit and expansion capital. Use
these sources of financing to shore you up and make you more presentable to bank loan officers.
1 FACTORING ACCOUNTS
One way to get cash for operating expenses is to sell your accounts receivables to companies that
will buy your invoices and collect payment from your customers. In return, you pay a finance charge
or "discount fee" on the total amount of the receivables--a process called factoring. Payment from
the factoring company can be as quick as a few days--as opposed to waiting 30, 60 or 90 days for
customer payments.
Factors are willing to buy your accounts because they believe your clients will have a good credit
history, even if you don't.
Factoring accounts helped W.C. Miles keep his executive transportation company on the road. MilesChicago Transportation Inc. provides limousines and sedans to clients including the University of
Chicago Hospitals and the City of Chicago Special Events Department.
"The banks wouldn't touch me," Miles says. "I had a logjam of receivables and no systematic way of
getting the money in a timely fashion. While money slowly rolled in, I had cars to service and drivers
to pay."

Miles sold $9,000 in accounts receivables to the Caramon Group, a Maryland-based factoring
company with offices in Chicago. The company charged him 7%-10% of that amount.
"Only a few days after faxing the invoices to the company, I received a check," the 52-year-old
recalls. "It gave me the cash I needed to pay my employees and keep things running." Miles factored
accounts for two and a half years until he got customers to pay up more quickly.
"Don't become comfortable with it," he warns. "Factoring good, ready source of cash, but if you rely
on it totally, the finance charge could slowly eat into your profits."
Finance charges for factoring can range from as little as 2.5% to as high as 15%, according to
Marvin Waldman, president of the Caramon Group in Fairhill, Maryland. The amount depends on the
total value of the accounts you factor. Factoring companies can be found in the Yellow Pages or on
the Internet. The Edwards Directory of American Factors (Edwards Research Group; $199) offers
detailed information on 200 factoring companies nationwide and is updated biannually. To order,
call 800-963-1993 or e-mail Macelee@aol.com.
2 ANGEL INVESTORS
Luckily, there are angels out here delivering financial miracles every day. These so-called "angel
investors" are wealthy business people who flesh out their financial portfolios by investing in new
businesses in hopes of getting a nice financial return.
An angel investor made it possible for Johnny Johnson to open Community Pride Plus Food stores in
Richmond, Virginia (No. 42 on the BE INDUSTRIAL/SERVICE 100 list). Johnson had risen up the
food chain at Farm Fresh stores from grocery bagger to store manager, when a supermarket
executive approached him with an offer to open his own chain of stores.
"It turns out this businessman was literally watching over me while I rose through the ranks," says
Johnson. "He knew I was a good manager and he was willing to take a chance on me."
The executive loaned Johnson $700,000. Johnson raised an additional $300,000 by taking a second
mortgage on his home and cashing in profit-sharing stocks from his employer. He used the money as
collateral to get a $3 million loan and opened four grocery stores in 1992. The 34-year-old now owns
seven outlets. The chain has 466 employees and grossed $46 million in sales last year.
"I would not have been able to do it without this investor," says Johnson. "Richmond is a close-knit
town and blacks typically don't get loans."
Angel networks are popping up across the country, creating databases that connect investors with
businesses that need seed money or expansion capital. Some networks make matches based on
industry or geographic region. The networks charge access fees that vary according to the service
they provide.
The Capital Network, a nonprofit economic development organization affiliated with the University
of Texas in Austin, is the largest matching service in the country for investors and entrepreneurs.
"Well over $150 million worth of investments were made during the last three years as a result of
our services," says Bob Mathot, director of client services. "Our investors are typically looking for
fast-growth, emerging companies."
Businesses can sign up for a match by submitting an application, questionnaire, full business plan

and executive summary to the Capital Network. The group will connect entrepreneurs with
interested investors for $450 and charges $950 to investors who want to become members of the
network. For more information, contact Bob Mathot at 512-305-0831, or
www.thecapitalnetwork.com.
The Small Business Administration Office of Advocacy sponsors a computerized network called the
Angel Capital Electronic Network (ACE-Net). ACE-Net allows angel investors to view the securities'
offering of small, growing companies. Businesses listed with ACE-Net are typically seeking between
$250,000 and $5 million in equity financing.
Companies interested in having their securities offering information listed in the ACE-Net database
must complete an application and pay a yearly $450 fee. For information, contact the SBA Office of
Advocacy at 409 Third St. SW, Washington, DC 20416, or call 202-205-6532. Contact ACE-Net at
https://acenet.sr.unh.edu.
3 SUPPLIER FINANCING
Grocery chain owner Johnny Johnson used the money from his investor angel as collateral to obtain a
$3 million loan. That loan came from his main supplier, Rich Food Holdings. The Richmond, Virginia,
company is the fourth largest grocery wholesaler in the country.
"They loaned me $3 million to buy my buildings, equipment and groceries," Johnson says. "In
exchange, I agreed to purchase 60% of my inventory from them." Suppliers have a vested interest in
helping you meet your capital needs. Their flexibility with loans and credit lines translates into
successful and loyal customers.
Supplier financing arrangements vary according to your needs. For instance, a supplier can help
mitigate up-front cash shortages by agreeing to ship merchandise on consignment. This way you
only pay for goods when you make a sale. Many furniture and clothing stores take advantage of
consignment selling.
Enter lease agreements. Rather than buy equipment outright, you can hold onto your cash and get a
tax deduction to boot. Some suppliers are willing to extend credit terms over a lengthy time period.
For example, you may buy $150,000 worth of materials over the course of a few months, but stretch
the payments on the products over two years.
Keep in mind: the supplier may ask you to exclusively buy from their operation in exchange for loans
and credit. Also don't rely on oral agreements. Says Johnson, "A lot of suppliers want to make the
agreement on a handshake. I always draw up a written agreement and have it viewed by attorneys."
Before agreeing to any deal, make sure the supplier's price for goods is competitive. Add a clause
allowing you to renegotiate if prices change during the course of the agreement.
4 VENTURE CAPITAL FOR SMALL BUSINESSES
Small business investment companies (SBICs) invested $2.4 billion in small businesses last year.
SBICs operate much like venture capital firms, using money pooled from private businesses. But
they are licensed by the SBA to fill an important gap in the billion-dollar venture capital industry.
On average, 60% of the money invested by traditional venture capital firms goes toward high-tech,
software and bio-tech companies, according to the Money Tree Report published by Coopers &

Lybrand L.L.P.
"SBICs are more likely to finance main street businesses as opposed to high-tech companies," says
Lee Mercer, president of the National Association of Small Business Investment Companies
(NASBIC) in Washington, D.C. "They're good for the small business owner who needs as little as
$200,000 or as much as $4 million in financing." SBICs are also more flexible than banks when it
comes to making a decision on lending.
"Your business plan is extremely important," Mercer says. "SBICs are investing in a vision of the
future as Painted by the entrepreneur. They make a decision to lend based on reasonable projections
of growth and earnings."

There are also "specialized SBICs" that invest solely in socially or economically disadvantaged
businesses. Some 86% of the $118.3 million doled out by these specialized SBICs in 1997 went to
businesses owned by women and minorities.
SBICs are independently operated and managed by professionals with a broad range of business
expertise. They can lend technical assistance to inexperienced business operators. To ensure the
success of their investment, they may take an advisory role in your business by asking for a seat on
your board of directors. This may be a plus or minus, depending on how independently you want
your business to operate.

Each SBIC has its own lending criteria. Entrepreneurs interested in applying to any SBIC should
submit an application and full business plan that includes information on product, marketing,
competition, management and financial statements.
The SBA Office of Investments offers a free publication, Directory of Operating SBICs. To order, call
202-205-6510. NASBIC sells a directory of its members, including specialized SBICs, for $25. To
order, contact NASBIC at 202-628-5055, or at www.nasbic.org.
5 POOLING MONEY INTO SUSUS
Susus are a more grassroots approach to raising capital, popular in the Caribbean and Asian
communities. In a susu, a group of family members, friends or associates pools money, and each
person gets a turn at using the entire amount collected. "We see this approach used increasingly by
very small businesses, like the mom-and-pop stores," says Roy Hastick, CEO of the Caribbean
American Chamber of Commerce and Industry in Brooklyn, New York.
Most susus involve five to a dozen members. Weekly contributions can range from $500 to $1,000.
Payoffs can be as large as $15,000 per person, depending on the size and duration of the susu.
Delroy Wright, the 42-year-old owner of the Source Health Food Store in Brooklyn, New York, got
his start-up funds by joining a susu with a group of family members and friends. Each contributed
$400 per week to the fund over a period of several months. Wright received $10,000 from his susu,
which he used to open his health food store.
"You have to be disciplined and have patience to use a susu," says Wright, who warns that
entrepreneurs should make sure they know their susu partners well.
A few points: Deposit funds regularly in an accredited financial institution, and check the salary,
employment and credit histories of prospective members. For more information on susus, contact
the Caribbean American Chamber of Commerce and Industry at 718-834-4544 or
www.intemationalcacci.com.
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