How do you fund a startup with (virtually) no collateral?

October 8, 2009 10:51 AM

I need an SBA loan yesterday. My business is in startup mode, I'm already fielding new orders, but I need startup capital to get this thing off the ground.

To keep this simple I won't go into great depth about my business model. The short version is that this is what I've been doing for the past 5 years very successfully, I was the one driving the business where I was at previously, and all of my former clients have been calling me for assistance. But in order to make this work I need about 35k in capital and I have no collateral. I do have excellent credit, about 30k in untapped credit, and of course my 401k... but I really don't want to touch any of these things. Each time I model out my plan I anticipate (worst case scenario) that I will be out of debt by month 4. But how do I get to month 4 without cash?

I live in San Francisco and have contacted the SBA here, but it's a long process. There is one organization that had me fill out a one page form online for an "instant SBA" and I was summarily rejected (because I don't have collateral, which I thought wasn't supposed to be an issue for an SBA, but I digress).

I know SBA applications are way up and banks are more hesitant than ever about granting them... so any guidance you could give about how to proceed would be much appreciated.

And feel free to MeMail me if you'd like to know more about the specifics. Thanks in advance!

posted by ohyouknow to work & money (11 answers total)

The business world is full of stories of entrepreneurs maxing out their credit cards, borrowing against their retirement plans etc. If you need capital now and can't source it anywhere else, I think you're just going to have to bite the bullet. But if you're going to be in a position to pay any loans off in 4 months, it should be no big deal, right?

There is also prosper.com and other peer-to-peer lending services.

Good luck!
posted by Admiral Haddock at 11:08 AM on October 8, 2009 [1 favorite]

My understanding is that they usually want you to put up some of your own money too, if you have any, you might have to use $10k of your credit.

Also, can you borrow from your 401k? A lot of retirement plans allow people to borrow against them, and the interest on the loan goes back into it. You could ask your retirement company about it.
posted by delmoi at 11:18 AM on October 8, 2009 [1 favorite]

Agree with both, and adding: you can do both, as well.

1- Start the SBA process.
2- Use credit cards to fund the business on day 1.
3- Line up a 401k loan (or line of credit?) now. If you need to tap it, it's there. If the SBA loan comes through before that, (almost) nothing lost.

By the time the SBA loan goes through review (if indeed it's a long process), you'll have a few weeks (at least) of history to show them that the business will go according to your plan.

If the business is anywhere near as successful as you plan, you should be able to make it work just fine.

Good luck!
posted by gjc at 11:48 AM on October 8, 2009 [1 favorite]

Prosper.com.
posted by junger at 1:34 PM on October 8, 2009

Why bother with the aggravation of an SBA loan when the funds are at your fingertips and it'll be paid off in 4 months?

I'm sure your time is better spent running your business than being distracted by an exercise that has a very short life span.

Unless you need a 35k injection in one shot, you can probably do with less of a loan and rely increasingly on cash flow at months 2, 3 and 4.
posted by jamesalbert at 3:40 PM on October 8, 2009 [1 favorite]

Thanks all for the advice. I should clarify that in my cashflow modeling I anticipate finding myself close to 25k underwater at about month 4 and then quickly pulling out of debt (mostly due to the amount of time it takes my clients to pay their bills). I have been meeting with bankers all day to determine if I'd be able to get a business line of credit for my company. I don't want to pull the trigger on such an application until I know I'll very likely get it because I don't want the inquiry to adversely affect my credit rating. I also want to get the best deal possible...yet time really is an issue. The advantage of a business line of credit (rather than using my personal credit cards) is that I'm not co-mingling funds. Put another way, I am concerned about blurring the line between personal assets and business assets. It also appears SBA loans are not being approved for anyone right now. One gentleman at a large bank let me know that he hasn't seen a single application approved in a full year -- even though applications are through the roof. (And I had to sit through another loan officer going off on Obama for 20 minutes. Which I found strange since this *is* San Francisco. Anyhow. )

One of the banks did seem promising and not that sleazy, so I've got my fingers crossed. At least he was genuinely curious about my business plan. That's always a good sign.
posted by ohyouknow at 4:18 PM on October 8, 2009

I got to tell you, the banks are going to be rough. I got millions in collateral but, like you, I don't want to blur the lines. I think, if you want this to go fast, and you have confidence in your projections, tap the 401K, max out the credit cards and do it fast. Just yesterday I had one my cards knocked from a $35K credit line to $5K- USAA's explanation: We are doing this across the board regardless of credit ratings.

Make sure you are honest with yourself about your clients' ability to pay. Their credit lines are as tight as yours and you could find yourself behind a big eight ball if they can't pony up when the bill comes due.
posted by bkeene12 at 8:27 PM on October 8, 2009 [1 favorite]

Perhaps you have already thought of this, but when we started our business we were able to borrow $20K from our parents and $20K from an aunt.
posted by digsrus at 9:43 AM on October 9, 2009

Ah, digsrus, that is what has gotten me into this mess... A family member continuously assured me that he would fund me while I was in startup mode and that I had no need to bother with the banks. Of course a few days after I quit my job it was a different story. So now I'm back at square one -- except with a much more massive sense of urgency. This whole family drama story would definitely become a derail, but suffice to say relying on family money is not really an option.

What I may do is have a local bank roll all of my personal lines of credit (cards etc.) into a business line of credit while closing out the personal accounts. Hopefully I will get approved for this. If not, I'm getting myself emotionally prepared to max out my credit cards all at once and take out a 50-day loan on my 401k toward the tail end of my debt cycle.

And bkeene12, you raise some good points which are important to remember. I won't lose sight of how this credit landscape is affecting my clients. The thing that makes me feel a little better is that these are clients I've worked with for years, so I'm pretty familiar with how long it takes them to pay their bills. I've also built their typical lag time into my cash flow projections.

Thanks for your advice everyone. You have at least made me feel a *smidge* better about embracing credit card debt in the short term.
posted by ohyouknow at 11:25 PM on October 9, 2009

You can solve your cashflow lag due to 30-60-90 day receivables by selling your receivables using invoice factoring. Haven't used one in years but they do work. Factors buy your receivables from you less a fee (which you should covertly build into your customers invoice) and then collect receivables from your clients (professionally invoiced. Usually says something to the effect. This invoice has been sold. Please forward payment for this invoice to: Your client will verify with you that you are using factoring and that will be it.) You get paid in 24-48 hours after you invoice rather than 30-60-90 days). Pretty standard business practice. Solves cash flow problems in start ups especially.
posted by Muirwylde at 11:12 PM on October 11, 2009

UPDATE: The new business just hit profitability. Hooray! Thanks for all of your advice--it was massively helpful in helping me get over a lot of my money fears.
posted by ohyouknow at 1:40 PM on February 3, 2010 [2 favorites]