Austin Business Journal - August 11, 2003

Where's the money?

Businesses turn to wide variety of venues to find loans
Stacey Higginbotham
Austin Business Journal Staff

Austin businessman Andrew Johnson spent his entire life taking care of trees. So in 2001, it was only logical that he would want to form his own tree care business with his associate Javier Robles.

With $10,000 from his savings, Johnson started up Central Texas Tree Care, a DBA for CTTC Enterprises LLC, and purchased most of the equipment he needed to prune, repair and plant trees for homeowners.

Yet, after one year in business, he needed more funding to stay afloat.

Johnson went to banks, but he says the bankers were "aghast" at the idea of lending money to a fledgling tree service. So, he chose a different route. He turned to Business Investment Growth Austin, known as BiG Austin, a micro-lender supported by the Small B usiness Administration and the U.S. Department of the Treasury.

BiG Austin came through for Johnson and loaned him $18,000 for new equipment and working capital. Johnson used the money to buy a critical -- and one of the most expensive -- pieces of equipment for tree care specialists: a stump grinder for tree stump removals.

"When you are starting out and you need a loan for initial equipment and you don't want to be screwed by high interest rates and leases, a micro loan, as they call it, can be great," Johnson says, "especially for a company like mine that is extremely front loaded with high-cost equipment. Without that equipment we cannot do the work."

Central Texas Tree now employs between five to six people, depending on the season and time of year. It reported $250,000 in revenue for 2002, which reimbursed Johnson's initial $10,000 investment. He hopes that the BiG loan will help his business expand even more.

Jeanette Peten, president of BiG Austin, says the lender can issue loans up to $35,000 and the average loan is about $20,000. Yet BiG's portfolio has about $1.5 million in loans as part of a revolving fund. Peten can point directly to 107 jobs created in 2002 from BiG loans, totaling $389,000 for that time period.

"If it were not for a micro-enterprise organization, entrepreneurs would not be able to keep their businesses afloat or start their businesses," Peten says. "If you think about it, a lot of businesses that get started, they have other resources they can go to, like their families and friends. They can borrow on their credit cards. But people who don't have those resources and support still can create a business with enough capital."

Other sources for funding

BiG Austin is not the only resource out there that will help entrepreneurs find capital. A variety of options exist, ranging from asking family and friends to asking American Express for help.

Tim Klitch, senior vice president of the Austin office of Detroit-based bank, Comerica Inc., says Comerica loans money to a variety of startups backed by venture firms, as well as to existing small businesses needing a little financial push.

Klitch says when loaning money to a company, he looks for a strong history of financial self-sufficiency; the history could be a few quarters of strong numbers if the company is really performing well or a longer history of marginal performance. He says he doesn't want to see losses or an entrepreneur drawing capital from other sources, like credit cards.

Friends and family are by far the most recommended way of finding capital for a startup, says Gary Valdez, president of Focus Strategies LLC, an Austin financial advisory firm and merchant bank.

"Today it is difficult for a bank to do a startup loan without liquid collateral, because the failure rate for startups is so high and [banks] are not able to take those kinds of risks," Valdez says. "Initially, an entrepreneur should try to find someone close to them to finance their business until they have enough capital to go to a traditional lender."

He says he also has known entrepreneurs who start companies with credit cards, but he doesn't recommend that route. Valdez explains that entrepreneurs already have enough on their minds when launching a new business, and they shouldn't place their personal savings on the line as well.

Additionally, he points out that managing credit card debt doesn't add to the stability of the startup's balance sheet, making it more prohibitive for a bank or other lender to loan the startup additional capital.

The only advantage to credit card funding, according to Valdez, is that it's easy to call and increase the credit limit and take out another "loan."

If entrepreneurs want to avoid credit card debt and their friends and family can't foot the bill, they always can pursue vendor financing. Valdez says that turning to a customer or supplier for financing is increasing as today's entrepreneurs become more creative in seeking financial support.

Fred Beck, co-founder and vice president of Austin-based health care software firm Opus Healthcare Solutions Inc., used a $3 million infusion from one of his largest customers when he wanted to develop a new product.

After raising a few hundred thousand from friends and family during the first nine years of his software business, Beck decided to venture into clinical documentation software and grow his company.

According to Beck, the banks didn't want to lend him money for working capital while his product was still in its developmental stages, and venture firms wanted too big of a stake in his company for their investments.

That's when he decided to approach his customer, Universal Health Services Inc., a hospital management company that reported $3.3 billion in revenue for 2002.

Beck asked Universal, which already used his laboratory management software application, to help him find capital to create the clinical documentation software. Universal responded by saying it would provide the funding, but only if Beck alloted for a discount on the documentation software and some equity in Opus.

Beck says the deal not only helped Opus grow, but it also benefited Universal because it received first access to the new software.

"Basically they had a nine-year relationship with us and confidence that we were a company that would do what we said we would do," Beck says. "[Because] we had immediate success with the first product, they put more and more on our plate. We are continuing to grow on the revenue they are putting on the table, and they benefit from our software."

Calling on Uncle Sam

Entrepreneurs also can tap another "relative" for assistance in establishing new companies. The Small Business Administration offers the widely sought-after SBA loan program.

Business Loan Express, a New York-based SBA lender, says it issued $9.3 million in SBA loans in the Austin metro area for the year ending June 2003 -- a huge increase from $3.2 million in loans for the area one year earlier.

The SBA will guarantee loans made by financial institutions, which, in turn, issue loans to SBA applicants. SBA-backed loans can be more creative than traditional bank loans. For example, Beverly Schirmacher, owner of Little Red School House day care center in South Austin, says she applied for a $150,000 life insurance policy, which served as collateral for the $300,000 loan backed by the SBA. She named the lender as the beneficiary.

She pursued the loan after working at the day care center for almost 35 years. The owners needed to sell it, and Schirmacher decided to buy it.

She says her lengthy work history with the school and the school property itself served as collateral for the almost $300,000 loan.

"I never thought I would get through the paperwork and then I never thought they would give me a loan, but another day care owner told me about the SBA program and I went after it," she says.

Now she owns the center, where several of her students are the children of her day care students from years ago. Such longevity is rare in the business, but Schirmacher cannot imagine doing anything else.

"I'm just your average, hard-working day care provider," Schirmacher says. "I can't believe I got a loan to buy this place."

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