How to Get a Business Loan : Despite Today’s Credit Crunch, It’s Still Possible to Get Financing

So the bank turned you down, and conventional venture capitalists wouldn’t touch your mundane company with a 10-foot balance sheet.

What next?

For small business, getting money has never been tougher. Commercial and industrial lending by U.S. banks has fallen 9% over the last five years. In California the decline has been even sharper--16% from 1987 to 1992.

Still, there are options out there, lending experts say. Whether we’re talking seed money or fertilizer funds, finding the cash to plant or grow a small business is possible for many, even during a credit crunch.

The experts’ advice is pretty basic:

* Exploit everyone you know or are related to. Family, friends and business contacts trust you and might be willing to sink some cash into your company.

* Take out a personal loan at the credit union or a second mortgage on the house--if you have any equity left, given real estate prices these days.

* Talk to the SBA. Bank loans guaranteed by the U.S. Small Business Administration have been a major source of long-term financing for small businesses during the last few years--though the loan-guarantee program is virtually out of money until the next fiscal year starts Oct. 1.

* Seek out specialized loan funds for small and minority-owned firms operated by nonprofit organizations, local cities or the state.

* Check out venture capital firms, which take a stake in your company in exchange for money. Venture capital financing has shrunken greatly since the 1980s, but it’s still around.

* Don’t rule out commercial finance companies just because they charge higher interest rates than banks.

If all else fails, max out the credit cards. Find the kids an agent. Find the dog an agent. Max out the kids’ credit cards.

It’s not so far-fetched. After all, comedian Robert Townsend financed a feature film, “Hollywood Shuffle,” partly with plastic.

Here’s how some other Southland entrepreneurs found their pots of gold.

Case No. 1: The Gift Center Money Source: Micro-Loan Program

Rebekah Peterkin is always on the lookout for the new and unusual for her 4-year-old shop. The same could be said of her financing.

“In a recession, you have to be creative,” Peterkin says with a shrug.

For one-of-a-kind items to be sold in the space she leases at the Montgomery Ward department store in Panorama City, that means importing merchandise from Asia and Africa. For capital to get into importing and exporting, Peterkin last year joined a “solidarity circle” operated by the Coalition for Women’s Economic Development.

CWED’s circles are peer-support groups of five entrepreneurs--primarily women, although the nonprofit group now has one circle for men--modeled on revolving credit associations pioneered in Bangladesh.

One at a time, each entrepreneur in the group gets a loan--as well as a lot of support from fellow members. They are keenly interested in the group’s success; if one person is late with a payment or defaults on her loan, the next applicant can’t get any money.

Peterkin quickly repaid her first loan of $1,500 and now is paying off a second loan of $5,000. She hopes to graduate next to CWED’s individual loan program, which promises bigger bucks.

CWED, which gets its funds from private and public sources, requires applicants for solidarity circles to have been in business at least 6 months, said Delphine Pruitt, one of the agency’s program managers. The 18-month loans carry a 15% interest rate.

“Our primary focus has always been women,” she said. “But women still don’t seek us out. They have trouble picking up the phone and calling.”

Case No. 2: Thanhlong Nguyen, dentist Money Source: SBA-Guaranteed Loan

Thanhlong Nguyen dreamed for 10 years of opening her own dental practice. As she worked her way through UC Irvine and UCLA, Nguyen and her husband, Son Kim, saved the earnings from their Fullerton carburetor shop and tapped relatives and friends.

Still, they fell short of the $350,000 they needed.

Now, Nguyen’s dream is about to come true. Paramount-based Mechanics National Bank has approved a $250,000 loan, guaranteed by the U.S. Small Business Administration. All that remains is SBA approval.

Nguyen says she knows there are lots of Vietnamese dentists in Orange County, but she isn’t worried about the competition. At their auto shop--Dr. Smith Carburetors--the Nguyens learned that quality service provides the necessary competitive edge.

Because of record demand for SBA loan guarantees, the agency is just about out of money for the current fiscal year. The SBA is trying to divert funds to the program from other areas, said Ken Nhieu, vice president and business loan development officer for Mechanics National Bank.

The loans--made by banks but guaranteed by the SBA at a cost to taxpayers of about a nickel for every dollar of loan amount--carry an interest rate of 2.75% above the prime rate. The current SBA loan rate is 8.75%. Loan terms are seven to 25 years; the maximum guarantee is $750,000.

Mechanics is one of Southern California’s largest SBA lenders; it made $45 million in guaranteed loans last year, Nhieu said. But the bank is reducing its participation in the program and closed a Westminster loan center, citing new, tougher regulatory requirements.

Even so, Mechanics is one of the few SBA lenders in Southern California that lends money to start-up businesses, Nhieu said. “Many banks are shying away from that,” he said, “because they don’t have confidence in new business.”

Case No. 3: U.S. Trading Money Source: Finance Co.

Last year was tough for U.S. Trading Corp., which makes and distributes prescription drugs. The recession hit hard, sales fell to $14 million from $18 million and the 18-year-old West Los Angeles firm was pushed into the red.

Then the firm’s bank called an existing $2-million loan, blaming regulator pressure to meet stiffened capital requirements.

“We were thinking of selling the company,” said Marvin Sugarman, who owns U.S. Trading with his son, Barry. Then the Sugarmans’ accountant suggested an asset-based lender--in this case Fremont Financial, a Santa Monica-based commercial finance company.

“I thought, ‘asset-based lender?’ That’s a guy who loans you money but he takes everything but your left you-know-what and your firstborn male child,’ ” the elder Sugarman said.

Some $2 million later, his attitude has changed.

“I’m one of their biggest rooters,” Sugarman said. “They saved this company. . . . That saved a $1-million payroll in this community, and 30 peoples’ jobs.”

Asset-based lenders such as Fremont don’t worry too much about balance sheets or a company’s record of profits and losses. They look, instead, at the assets that can be used to secure a loan. U.S. Trading owned three Westside buildings it had purchased years ago.

The loans are pricier than bank lending. An asset-based loan from a bank runs about 1% to 2% above the prime rate, while a similar loan from Fremont would cost the prime plus 3.5% to 4.5%, said Robert Tenney, president of the lender, which maintains nine offices nationwide.

Demand has been great. Fremont ended 1992 with a loan portfolio of $280 million, up 48% from a year earlier.

“We only do one thing, and that’s working capital loans to middle-market companies,” Tenney said. “We recognize that businesses had a pretty rough time during the last few years.”

Case No. 4: Garment Firm Money Source: Factor

The recent history of American Marketing Works reads like a corporate “Perils of Pauline”: Rapid growth, ownership change, management shake-up, rapid decline, management shake-up, Chapter 11 bankruptcy filing, renewed health, ownership change.

Through it all, said chief executive and company founder Marvin Winkler, the Gardena apparel maker never lost the support of its factoring company, Republic Factors Corp.

A factor is a kind of asset-based lender that buys a company’s accounts receivable and usually does the bill-collecting, too. Factors are most active in the apparel, textile, shoe and home furnishings industries.

“They advance you up to 80%, depending on the order,” Winkler said. “It’s insurance that the customer will pay your bill. If not, the factor will pay it.”

That arrangement worked well as American Marketing Works’ business mushroomed during the ‘80s, manufacturing licensed apparel for companies such as Disney, Body Glove and Gold’s Gym.

In 1988, Winkler and his wife, Sherri, sold a controlling stake in the company to an investor group that brought in its own management. Business reverses followed, and, when Winkler regained management control in late 1990, he promptly filed for Chapter 11 bankruptcy protection.

For help, he turned to Republic, and walked away with $2 million in financing. The company also was helped through bankruptcy proceedings by a $6-million loan from Berkeley International Capital Corp., the San Francisco-based investment fund that helped to finance the earlier investor group purchase.

Both loans have since been paid off, Winkler said. Berkeley still owns about 3% of the company; Republic continues as its factor, along with U.S. West Financial Services Corp.

The company emerged from Chapter 11 in 1991; last year it did $30 million in sales, with licenses to make and market apparel bearing names such as Magic Johnson, the National Basketball Assn., the National Football League and Warner Bros.

American Marketing recently arranged a $19-million private placement of company stock through Kiddkamm & Co., a Beverly Hills-based investment fund that is now a partner in the firm.

In a few years, the company may go public, Winkler said.

“There are a lot of different ways to finance a small business, and I guess we’ve tried most of them,” Winkler said.

Case No. 5: Merry Maids Money source: Credit Card

Curt and Candy Holstein wanted to buy a second Merry Maids franchise five years ago, but they had one problem: no money.

Only the year before, the Holsteins had purchased their first house-cleaning franchise in Moreno Valley with a six-month, interest-only bank loan of $15,500. To pay off the loan, the family farm back home in Washington, Neb., was up for sale--with no takers in sight.

“John Wayne was not even on the horizon,” Curt Holstein said. “I figured, which wall do they want to shoot me against?”

Luckily, an all-cash buyer appeared only days before the note was due. With that kind of brinkmanship behind them, the Holsteins became convinced they needed a second cleaning franchise covering the adjoining territory in Riverside.

So they charged it.

Credit cards generally are not considered a very good deal when it comes to long-term financing. The Holsteins borrowed on five cards at rates ranging from 16% to 20%.

“It was against every prudent financing advice possible,” Holstein said, “but when you’ve got to grow, you’ve got to do what you’ve got to do.”

The Holsteins were able to pay off the cards in about 18 months. They bought a third franchise in late 1991 through a Merry Maids financing plan and with funds generated by the business, Curt Holstein said.

Last year, the Holsteins’ franchises grossed $600,000 with “fair” profits; the Holsteins won Merry Maids’ top in-house award for outstanding franchisees.

Those credit cards aren’t idle, either. From time to time, Holstein said, he turns to plastic to make a premium payment on the firm’s workers’ compensation insurance.

Case No. 6: Juice Club Money Source: Associates

Kirk Perron has a history of finding money close to home.

When Perron hit on the idea for a healthful fast-food restaurant during a long weekend bike ride, he turned to family and friends for the financing.

The 29-year-old entrepreneur also sold a small apartment building so he could open his 2-year-old San Luis Obispo eatery, Juice Club, which specializes in “smoothie” drinks.

Perron first bought the real estate when he was in 10th grade. He scraped together most of the $12,000 down payment by borrowing from a school counselor, the librarian and his school bus driver.

“If you really believe in yourself and in what you’re doing, other people will believe in you and support you,” Perron said. But, he added: “It took years to pay them off.”

Perron avoided conventional bankers partly because he didn’t think they would understand a fast-food restaurant eschewing burgers and fries. Fresh wheat-grass juice and drinks with names such as Carrot Squeeze and Soymilk Splash are his bread and butter.

“It’s like coffeehouses were 10 years ago,” Perron said. “People would say, ‘What? You’re going to sell just coffee? You’re crazy.’ ”

But on the first weekend in May, the 700-square-foot San Luis Obispo Juice Club served 1,600 customers. Perron said: “It was wall-to-wall people all weekend long.”

The first Juice Club franchise opened last month in Irvine, using family financing; a second franchisee, for Palo Alto, is trying to get an SBA-guaranteed loan.

Case No. 7: La Salsa Money Source: Venture Capital

The idea for the restaurant chain La Salsa took root on a ranch in Mexico. But the money behind the recent flowering of the 14-year-old Los Angeles-based business came from a world away--the deep pockets of U.S. venture capitalists.

Founder Howdy Silvano Kabrins opened his first restaurant at Pico and Sepulveda with an eye to recreating the taqueria, or neighborhood food stand, that he frequented near his godfather’s ranch in the Mexican interior. The emphasis was to be on fresh, healthful foods--soft (not fried) tacos and skinless chicken, for example.

“I risked every dime I had and more to get La Salsa off the ground,” said the 44-year-old Kabrins, who grew up in his father’s California restaurant business and earned a degree in Mexican anthropology from USC.

After steady growth and franchising in the ‘80s, the company began searching for the funds to expand more dramatically.

The source: venture capitalists. In the last year, La Salsa has brought in $14 million in venture capital--$7 million just last week--from six investor groups, according to E. Ty Peabody, who joined the chain as chief executive in late 1991 after stints with Swensen’s Ice Cream and Pioneer Chicken.

La Salsa “had gone as far as (Kabrins) was able to take it financially,” explained Peabody. And bank financing was not an option. “Banks say they have money and they say they’re lending, but I defy anybody to find it,” Peabody said.

La Salsa’s investors received no monthly return, but got a majority stake in the company as well as seats on the board of directors. Kabrins remains a major shareholder and vice chairman of the board.

La Salsa, with 40 restaurants now, hopes to add 14 company-owned outlets in the next year--all in California, Peabody said.

“The Mexican food market is a huge food market in the United States and is getting bigger,” he said.

The Crunch Is Real

It’s a lot harder to get a business loan these days. While the volume of loans guaranteed by the Small Business Administration jumped sharply over the last five years, total bank loans to business--of which the SBA loans are a part--dropped dramatically. In addition, venture capital firms are not the players they were during the heady takeover years of the ‘80s.

Latest data 1987 % Change Outstanding bank loans to businesses (U.S.)* $536.3 billion $589.7 billion -9.1 Outstanding bank loans to businesses (Calif.)* $57.6 billion $68.6 billion -16 SBA loan guarantees issued (U.S.)** $5.62 billion $2.76 billion +103.6 SBA direct loans issued (U.S.)** $49.8 million $47.1 million +5.7 Venture capital loans issued (U.S.)*** $1.4 billion $4 billion -65 Outstanding finance co. loans (U.S.)*** $83.8 billion $83.6 billion +0.3

* Total commercial and industrial loans outstanding (1992)

** For 1992 fiscal year ending Sept. 30

*** For 1991. Figures for 1992 are expected to be slightly higher.

Source: U.S. Small Business Administration; Federal Deposit Insurance Corp.; Venture Economics Inc., Newark, N.J., and Commercial Finance Assn., New York.

Where to Start

Resources for businesses in search of financing:

* U.S. Small Business Administration, 330 N. Brand Blvd., Glendale, 91203. (213) 894-2956. An SBA publication, “SBA Programs and Business Resource Guide,” discusses government regulations, gives guidelines for preparing a business plan and lists services for the entrepreneur--including training, counseling and loan packaging.

* Economic Development Corp. of Los Angeles County, 6922 Hollywood Blvd., Suite 415, Los Angeles, 90028. (213) 462-5111. Offers a business resource guide similar to the SBA booklet, but bigger and with more details about local programs.

* California Department of Commerce, Office of Small Business, 1121 L St., Suite 501, Sacramento, 95814. (916) 445-6545. Administers low-interest loan programs and provides loan guarantees.

* Coalition for Women’s Economic Development, 315 W. 9th St., Suite 408, Los Angeles, 90015. (213) 489-4995. Assists primarily low-income women who want to become self-sufficient through micro-businesses.

* City of Los Angeles Economic Development Office, City Hall, Room 2008, 200 N. Spring St., Los Angeles, 90012. (213) 485-6154. Administers SBA loans and a city revolving loan fund for small businesses.

Getting Ready

Here’s what a business must have before approaching financing sources:

* A good idea. For start-ups as well as businesses looking to expand, filling a niche with your particular expertise or product is a must.

* A business plan. This is a blueprint for your business--a written explanation of what your business does, who is running it, why your business will succeed and what your goals are. Include resumes of the principals.

* A current balance sheet listing assets, liabilities and net worth.

* Profit and loss statements for the current period and the last three years, as well as projected monthly cash flow, expenses, profits and losses for one year.

* A personal financial statement for the owner, partners or any stockholder owning 20% or more of the business.

* Individual and corporate tax returns for the last three years.

* A list of collateral that will be offered as security for the loan. The list should include an estimate of each item’s market value as well as the balance of any existing liens.

* A statement of how much you want to borrow and how the funds will be used.

* For an SBA loan guarantee or direct loan, proof that the business has been turned down for a loan by a bank or other financial institution.

Source: U.S. Small Business Administration and various lenders