Fall 2011

Financing 101

Cash is the grease that oils the gears of your gift shop. There are many ways you can gain access to cash. We run down the basics.

Running your gift shop has its own set of unique challenges. Consider the financing. Keeping enough capital on hand to pay a regular cycle of bills, payroll, inventory and rent might be the norm but this can you leave you in a bind when the unexpected arises.

The opportunity to purchase inventory at a huge discount from a vendor, the chance to expand your store into the space next door or even taking on a summer employee to your boost customer service are all ways to grow and develop your business—and they can come up at any time. It also helps to be prepared for eventualities like your computer system going haywire. Whether your business finds itself facing one of these great opportunities or unfortunate obstacles, having cash on hand is essential to keeping your business moving forward.

In these situations, time is of the essence. Accessing the cash you need to take advantage of both the opportunities and obstacles that pop up suddenly can be tricky.

Knowledge is power

Looking for financing can be a very time-consuming process. Understanding where you stand credit wise (both for your business and personally) and what your borrowing options are can save you significant amounts of time and frustration. Familiarizing yourself with the ins-and-outs of the small business financing landscape can really put your business ahead of the game when the unexpected arises. For example, many gift retailers aren’t aware that a bank won’t typically make a loan if your personal credit score isn’t above a certain threshold (roughly of 680).

Here are some financing options you can try for access to cash:

Bank financing

If you’re looking to spearhead a full end-to-end renovation, the opening of a new location in a neighboring town, or starting an entirely new venture, then a traditional long-term loan is your best fit. Traditional bank loans or ones from the Small Business Administration follow this model. Please note that the approval process for a standard bank loan can take a significant amount of time—often anywhere from three to six months. You will need to present your complete financial records (balance sheet, cash flow income statement); a business plan and pro forma financial statements; and complete tax forms for household and business dating back two to three years. You will also need to show consistent positive cash flow.

Short-term loans

You can also get access to short-term loans (not merchant cash advances) that enable you to extend payments over 6 – 18 months at total costs that are similar or less than long term financing. These loans are ones that you don’t want to be paying off for years. They are typically also used for short-term needs like buying inventory, launching a marketing campaign or simply infusing short-term working capital into your gift retail business. Ranging $5,000 to $150,000, this option can typically be funded quickly sometimes even in seven business days. This form of short-term financing is also unsecured; however gift shops need to have been in business for over one year on average to be approved. There are many benefits to this approach. First, the loan grant is based on your business performance and not just personal credit. Second, it requires information that is readily available from your electronic records (bank account, credit card transactions, tax filings). Also the terms are designed to allow you to spread out payments, yet you can also have it paid down before your next opportunity surfaces—after all you don’t want to take on too much debt.

Personal credit or assets

While a line of credit using a personal credit card is fast and easy, it also has its downsides. For one thing, if you’ve already drawn on your personal credit, your score may have been impacted. Second, loan programs based on personal credit are designed for household use. So while you might like to borrow $15,000 to introduce a new line of products to your customers, you might only receive a $5,000 line of credit. You could borrow against your home; however, this is a difficult and time-consuming option that poses potential risk to your household.

The Internet and associated technologies have also brought about some exciting new ways to interact with lenders. There are some great new tools out there for gift shop owners to better navigate the lending process. These will help especially if your needs don’t fit the traditional financing parameters. Here are some additional resources that every business owner should know about:

Peer-to-peer lending

Social lending connects borrowers with individuals or groups of people willing to lend at an agreed-upon rate, without using a traditional bank as an intermediary. These digital vehicles provide a forum for business owners to go online and apply for loans ranging from $1k-$35k. Individuals or interested groups can then view your credit profile, learn how you plan to use the money and if they are interested, group together with others to fund your request. In other words, a $15,000 loan for your business to purchase that $15,000 new product line could actually be funded by 100 individuals putting up $150 each. Lending Club, and Prosper are some other examples.

Another noteworthy example of peer-to-peer lending is Kiva.org. Traditionally this resource is geared towards individuals who do not have access to traditional banking systems; this microfinance enterprise is nonprofit.

Matching services

Matching sites, quite simply, match business borrowers with lenders. You can register with these sites and your profile and lending request will be shown to hundreds of lenders on their system who may be interested in funding your request. The upside is that you can get in front of significant numbers of lenders very quickly, a key benefit when expediency is key. The downside is that many of these lenders typically rely on traditional lending models that small businesses historically find difficult to work with.

As many gift shop owners know, the world of financing can often be challenging. However going forward, always remember that preparation is half the battle. Knowing exactly where you stand credit-wise, as well as what your financing options are, will help your gift shop through its next transition.

Mitch Jacobs is founder and CEO of On Deck, the leading small business lending technology platform. Through Jacobs’ work, On Deck is doing what banks have been unable to accomplish for years —effectively evaluating the credit worthiness of small businesses and providing them with access to capital. Using technology to focus on the true health of a business — rather than the personal credit score of the owner — the company sees a healthy business where historically traditional lenders are unable to. Jacobs received the Ernst & Young Entrepreneur Of The Year 2010 Award in the Emerging Business Category for the New York Metro area.