When starting a business or expanding an existing business, the owner needs money to pay rent and utilities; acquire inventory, equipment, and fixtures; pay employees’ salaries; make payments for vehicles; market/advertise products and service; pay taxes and needed insurance; and most importantly to pay his or her own salary.

There are several options available for obtaining money to start a new business or expand an existing one.  Most businesses begin with the owner’s own capital or loans from friends and family.  Some are successful in obtaining bank financing or using a government sponsored loan program.  Regardless of the path you choose, it is wise to take time out to put together a credible business plan.

SHORT-TERM DEBT FINANCING

Short-term financing/credit sources are usually grouped into two basic categories: unsecured and secured.

Unsecured credit is obtained without the borrower’s pledge of specific assets to serve as collateral.  Examples include:

• Personal credit cards, savings, stocks and bonds, and/or cash value of life insurance policies.  Funds borrowed from family members and/or friends.
  
• A short-term, unsecured transaction loan is a direct, single payment financing arrangement with a bank.  The maturity on this type of loan is usually between one and six months, but may extend up to a year.
  
• A company’s line of credit is a commitment from a bank to its regular credit worthy business customers to provide a stated maximum amount of short-term financing for a specified time period.  The credit line is often granted with a compensating balance requirement, and the floating or variable-rate method of interest payment is used.
  
• Trade credit is credit extended by one firm to another in conjunction with the sale of goods or services that are used in the normal course of business.  For the purchasing firm, using trade credit is the equivalent of a consumer charge account at a department store – goods are purchased but payment can be delayed to the extent of the specified credit terms.
  
• Accruals are services that are provided for a business on a continuing basis but are not paid for at the time the services are rendered.  For example, employees provide services to the business each day they work, however, they are not paid until some specified future payroll date.

Secured short-term credit for new/existing businesses, businesses with a marginal credit rating, or businesses that have exhausted unsecured collateral may offer a financing opportunity that would otherwise not exist.

The primary sources of secured short-term financing for business borrowers are:

• Commercial banks
  
• Commercial finance companies
  
• Factoring accounts receivables*
  
• U.S. Small Business Administration (SBA) “guaranteed” loan obtained through a private lending institution,  (The SBA does not make direct loans.)

VENTURE CAPITAL FINANCING

Venture capital is the financing made available for investment in promising firms but with a risk of exposure greater than what is acceptable to traditional institutional lenders.  Financing is provided by sophisticated investors who seek investments that hold the prospects for large capital gains.

Such investors are referred to as venture capitalists.  Venture capitalists may be a) privately owned firms licensed and regulated by the U.S. Small Business Administration or b) non-regulated firms.  The former group is known as Small Business Investment Companies (SBICs).  SBICs provide financing in the form of equity capital, debt financing with an equity sweetener, and in some cases, straight long-term loans.  The non-regulated firms, which specialize in equity financing, are referred to as Venture Capital Companies (VCCs).

Businesses with the following investment characteristics are attractive candidates for financing by VCCs:

• Large potential.  The business has the opportunity and is capable of exploiting a clearly defined market niche, or has an advantage over competitors.  The products/services should: 1) represent a new or revolutionary idea (i.e., computer mouse); 2) be evolutionary, that is, represent the next version in a series (i.e., anti-lock breaks); or 3) be a better or lower cost substitute product (i.e., universal remote control).
• Low cost.  The business should have a product/service with low production cost.
• Large margins.  The product/service should have a large profit margin.
• Competent management.  The business should have an experienced and capable management team.
• The Venture Capital Company should be able to easily withdraw at a given future date from a business and liquidate its investment.

Venture Capital firms can be found on the web.

STATE LOAN PROGRAMS

There are a variety of financing programs available to aid Michigan businesses with growth and expansion.  These programs are generally used to provide the private sector with tools for financing and to encourage the formation of new types of private institutions to address unmet financing needs.  This “private institutions” approach makes it possible to use limited public resources to leverage large amounts of private capital.

Bank financing is usually the least expensive source of funds therefore you should begin your search for financial assistance with your local bankers.  However, you should not approach your banker or any other financing organization for assistance until you have developed a business plan.  For information about putting together a business plan – refer to “A Business Plan” section.  There are also Small Business Development Centers located throughout the state that may be of assistance in preparing a business plan.

IDRB’s are tax-exempt bonds issued on behalf of the borrower by the Michigan Strategic Fund and purchased by private investors.  These loans can be made for manufacturing and not-for-profit corporation projects and solid waste facilities.  Bond proceeds can only be used to acquire land, building and equipment.  Working capital and inventory are not eligible for this type of financing.  These bonds are generally used when financing of $1 million and higher is required.  The company for which the bond is issued must be credit worthy enough to attract a buyer for the bonds, because the state does not guarantee the bonds. 

U.S. SMALL BUSINESS ADMINISTRATION COMMONLY USED PROGRAMS

The U. S. Small Business Administration (SBA) offers a variety of loan guarantee programs to businesses when financing is unavailable on reasonable terms through normal lending channels.  The SBA does not provide direct loans or grants to start or expand a business.  For more information about SBA programs, contact a commercial lender, or call the SBA at (313) 226-6075 or (800) 827-5722.

SBA 7(A) GUARANTY PROGRAM

The 7(a) Loan Guaranty Program is one of SBA’s primary lending programs.  It provides loans to small businesses unable to secure financing on reasonable terms through normal lending channels.  The program operates through private-sector lenders that provide loans that are, in turn, guaranteed by the SBA.  The agency has no funds for direct lending or grants.  Most lenders are familiar with SBA loan programs.  Interested applicants should contact their local lender for further information and assistance in the SBA loan application process.

Loan proceeds from the 7(a) Program may be used for business start-ups, expansion, equipment purchases, working capital, inventory and real estate acquisition.  The maximum amount the SBA can guarantee is generally $1,000,000 and the maximum loan is limited to $2,000,000.  The maximum guarantee percentage is 85% for loans $150,000 or less and 75% for loans over $150,000.  Interest rates are negotiable with the lender and may be fixed or variable, but cannot exceed SBA maximums that range from 2.25% to 4.75% over the prime-lending rate.  Loan maturities range from 5 to 7 years for working capital and up to 25 years for fixed assets.  The maturity of the loan is primarily based on the life of the asset being purchased and the cash flow of the business.

LOW DOCUMENTATION LOAN (LOWDOC)

The LowDoc Program was designed to increase the availability of loans to start or grow a business.  It offers a simple, one-page application form and rapid turnaround on loans of up to $150,000.  The SBA processes completed applications within 36 hours of receipt from the lender.  The loan decision process relies heavily upon the strength of the principals’ character and credit history.  Interest rates range from 2.25% over prime for loans of less than 7 years, and 2.75% over prime for loans of 7-25 years.  Loans under $50,000 may be subject to slightly higher rates.  The SBA guarantee is 85%.

PRE-QUALIFICATION LOAN

The Pre-Qualification Loan Program uses intermediaries to assist prospective minority, women, and disabled business owners in developing viable loan application packages and securing loans.  Once the loan package is assembled, it is submitted to the SBA for consideration.  If the application is approved, the SBA issues a letter of pre-qualification stating the SBA’s intent to guarantee the loan.  The maximum amount for loans under both programs is $250,000, and the SBA will guarantee up to 85 percent for loans up to and including $150,000 and 75 percent for loans over $150,000.  The intermediary then helps the borrower locate a lender offering the most competitive rates.  Intermediaries may charge a reasonable fee for loan packaging.

WOMEN PRE-QUALIFICATION LOAN INTERMEDIARIES:

MINORITY PRE-QUALIFICATION LOAN INTERMEDIARIES:

DISABILITY PRE-QUALIFICATION LOAN INTERMEDIARY:

CAPLINES

CAPLines is the umbrella program under which the SBA helps small businesses meet their short-term and cyclical working capital needs.  There are five short-term working capital loan programs for small businesses under the CAPLines umbrella, including Seasonal Line, Contract Line, Builders Line, Standard Asset-Based Line, and Small Asset-Based Line.  CAPLines loans are subject to the same guarantee and loan amount maximums as other 7(a) loans.

Each of the five lines of credit has a maturity of up to five years, but, because each is tailored to an individual business’s needs, a shorter initial maturity may be established.  Interest rates are negotiated with the lender and can be up to 2.25% over the prime rate.

SBA EXPRESS

SBAExpress loans are designed to help small businesses start, build and grow.  This loan program provides additional incentives to lenders to make small business loans.  Participating banks use their own forms and processes to approve loans in amounts up to $150,000, and are required to submit only minimal paperwork to the SBA to obtain a 50% guarantee on each loan.  Loan maturity generally is 5-10 years and up to 25 years for fixed-asset loans.  Lenders and borrowers negotiate the interest rate.  Interest rates may be fixed or variable and range from 2.25% over prime for loans of less than 7 years and 2.75 % over prime for loans of 7 years or longer.

EXPORT WORKING CAPITAL PROGRAM (EWCP)

The Export Working Capital Program (EWCP) provides pre- or post- shipment working capital financing for export activities.  It is transaction based and can be a revolving line of credit or structured for each purchase order, shipment, or contract.  The loan funds may be used for pre-sold inventory, materials, labor, financing foreign receivables, and standby letters of credit used for performance bonds, bid bonds, or payment guarantees to foreign buyers.  The loan may not be used for refinancing, fixed assets, marketing, or setting up operations abroad.  SBA can guarantee up to 90% of the loan amount up to $1,000,000.  The maturity is typically 12 months or less.

INTERNATIONAL TRADE LOAN

This program provides short- and long-term financing to small businesses involved in exporting, as well as businesses adversely affected by import competition.  The SBA can guarantee up to $1.25 million for a combination of fixed-asset financing and working capital.  Loans for facilities or equipment can have maturities of up to 25 years.  The working capital portion of a loan has a maximum maturity of three years.  Interest rates are negotiated with the lender and can be up to 2.25% over the prime rate.

SBA 504 PROGRAM

The SBA 504 Program provides healthy small- and medium-sized businesses with long-term, fixed-rate financing for the acquisition or construction of fixed assets.  The SBA has certified the Michigan Certified Development Corporation (MCDC) to offer SBA 504 financing throughout Michigan.  Projects are financed through a unique public/private partnership that involves private lenders financing 50% of project costs, the MCDC covering up to 40% of project costs, and small businesses investing at lest 10% of project costs.  By taking a secondary collateral position on project assets, SBA provides a “collateral cushion” for the primary lender and reduces the amount of equity normally required of the borrower.

The SBA 504 Program is a “take out” financing program.  The SBA offers an up front commitment to finance a project.  The participating private lender provides interim financing, advancing the full amount of project funds during the construction/acquisition period.  After the project is completed, the SBA reimburses or “takes out” the participating lender by the amount of the original loan commitment.  504 loans are actually funded by the sale of 100% federally guaranteed debentures on the open market.

Preferred projects range from $300,000 to $3,000,000.  Generally the maximum SBA may contribute to any single project or borrower is $1,000,000, and projects must create one new job for each $35,000 of debenture.  The interest rate is fixed and is determined at the time the debentures are sold.  Loan terms are offered for 10 to 20 years, depending on the type of assets financed.

The Michigan Economic Development Corporation administers this program at the direction of the Board of Directors of the Michigan Certified Development Corporation.  For more information, call (517) 373-6378.

MICRO LOAN PROGRAM

The MicroLoan Program was developed to increase the availability of very small loans to prospective small business borrowers.  Under this program, the SBA makes funds available to nonprofit intermediaries, who in turn make loans to eligible borrowers in amounts that range from under $100 to a maximum of $35,000.  The average loan size is $10,000.  Loans may be used to finance the purchase of machinery and equipment, furniture and fixtures, inventory, supplies and working capital, but not to pay existing debts.  Start up, newly established, and growing small businesses are eligible.

Depending on the earnings of the business, the loan maturity may be as long as six years.  Interest rates may not be higher than 4% percent over the prime rate.

For more information about the program, contact one of the following approved lenders:

CENTER FOR EMPOWERMENT & ECONOMIC DEVELOPMENT
2008 Hogback Road, Suite 12
Ann Arbor, MI  48105
Phone:  (734) 677-1400
Fax:     (734) 677-1465
Service Area:  Washtenaw County, Livingston, Macomb, Oakland, and Wayne (except the City of Detroit) counties

DETROIT ECONOMIC GROWTH CORPORATION
211 West Fort Street
Detroit, MI  48226
Phone:  (313) 237-4629
Fax:      (313) 963-8839
E-mail: tgcarmody@degc.org
Service Area:  City of Detroit

COMMUNITY CAPITAL & DEVELOPMENT CORPORATION
Walter Reuther Center
316 West Water Street
Flint, MI  48503
Phone:  (810) 239-5847
Fax:      (810) 239-5575
E-mail:  ccdc@tir.com
Service Area:  Genesee County

NORTHERN INITIATIVES
228 West Washington Street
Marquette, MI  49855
Phone:  (906) 228-5571
Fax:      (906) 228-5572
E-mail:  ni@northerninits.com
Service Area:  Upper Peninsula

RURAL MICHIGAN INTERMEDIARY RELENDING PROGRAM, INC.
121 East Front Street, Suite 201
Traverse City, MI  49686
Phone:  (231) 941-5858 or (888) 778-2778 
Fax:      (231) 941-4616
E-mail:  mhaddad@timbc.com
Service Area: Emmet, Charlevoix, Antrim, Leelanau, Benzie, Grand Traverse, Kalkaska, Maninstee, Wexford, Missaukee, Cheboygan, Presque Isle, Otsego, Montmorency, Alpena, Crawford, Oscoda, Alcona, Roscommon, Ogemaw, Iosco, Osceola, Mason, Lake counties

SAGINAW ECONOMIC DEVELOPMENT CORPORATION
301 East Genesee, 3^rd Floor
Saginaw, MI  48607
Phone:  (517) 759-1395
Fax:      (517) 754-1715
Service Area:  Saginaw County

KENT AREA MICROBUSINESS LOAN SERVICES

233 East Fulton, Suite 101

Grand Rapids, MI  49503

Phone:   (616) 771-6880

Fax:        (616) 771-8021

Service Area:  Kent County

LENAWEE COUNTY MICRO LOAN FUND

400 West South Street

Adrian, MI 49221

Phone:  (517) 263-7861

Fax:  (517) 263-6531

Service Area:  Lenawee County