In the best of times, small businesses have difficulty finding capital. In times of economic precariousness, such as today, the task is especially trying. Making matters worse for catalogers is a lack of understanding among most investors about the dynamics of direct marketing. Still, with perseverance, small catalogers can tap the right resources.
Your options for obtaining capital will differ based on how quickly you hope to grow. Many catalogers seeking steady growth rely on bank loans, such as home equity, and revolving lines of credit for additional capital.
Ron Kordalski, co-owner/executive vice president/creative director of specialty-size women’s apparel cataloger Long Elegant Legs, takes out home equity loans to finance production and expansion projects. Kordalski and his wife started the Belle Mead, NJ-based business in 1991 with their personal savings. Three years later they decided they needed an additional $20,000-$30,000 line of credit to meet their 20% annual growth goals. Recently, Kordalski took out a loan to finance a near-doubling of his warehouse capacity to meet increased demand fueled by the company’s recent 25% sales growth.
A Small Business Administration (SBA) loan, which serves as a guarantor on a bank loan — or “credit enhancement,” as the SBA terms it — is another option for catalogers. Joan Trudell, the public affairs officer for the Massachusetts branch of the SBA loan government agency, says SBA loans offer extended terms of up to10 years, whereas the typical bank loan must be repaid in as little as three years.
Another perk with SBA loans: You need less collateral than with a bank loan, “and you can separate your personal finances from your business,” Trudell says. With some loans, such as home equity, she says you do have to tie your personal finances to the business.
To qualify for an SBA loan, you have to back your business plan with some of your own money. The SBA is also more apt to approve loans for businesses led by people who have experience specific to their industry or business type. What’s more, size matters. You need to have annual revenue of less than $5 million to qualify as “small” by SBA standards.
You should also inquire with local nonprofit business organizations, which take on high-risk clients who have promising business plans but little or no collateral. Mary Going founded her Freeport, ME-based catalog/Internet hot sauce business, Firegirl.com, by obtaining two loans of approximately $15,000 each from two such groups, the Kennebec Valley Council and Coastal Enterprises. Such groups expect you to make a detailed presentation: Going, for instance, had to present an in-depth business plan, compiled with the help of an accountant, to each organization.
Looking for an angel
Private investors, often referred to as “angel investors,” are another option for capital. These investors can be family, friends, or acquaintances with financial resources. But while it may be easier to secure a loan from family or friends, in exchange they may want input in your business. Cynthia Riggs, owner of Cotati, CA-based Making It Big, a catalog of natural-fiber plus-size apparel, used money of her own as well as from family and friends to start her business in 1984; she bought the others out four years later.
You can also attract private investors by selling shares of your company to individuals without officially taking the company public. Catalog consultant Jack Schmid, president of Shawnee Mission, KS-based J. Schmid and Associates, suggests that you put together a miniprospectus for potential inventors and approach key vendors with it: “If you have a majority supplier, it’s in his best interest to invest, because if your business takes off, he benefits.” You would pay stockholders based on the company’s sales performance.
If you plan aggressive growth, you may be a candidate for venture capital (VC), typically a source for large-scale funds. Larry West of New York investment banking firm West Cos. suggests you attend one of the national meetings held by VC firms. Most venture capitalists look for a company that will eventually go public. Also, investors in start-ups typically look for a 40% return each year, and those investing in companies that have been established for a year expect a 20%-30% return, claims Clinton Richardson, in his book Growth Company Guide.
But while the amount most small mailers need — typically less than $1 million — may seem modest to investors, West warns that venture capitalists seldom waste time on small deals. And if you don’t meet the requirements for a VC deal, you still have to pay fees for intermediaries’ time, he adds.
How do you keep the need for capital to a minimum?
SI CHEN, co-owner of tabletop cataloger Gracious Style: “We do all the work ourselves. This way, we need to use capital only for necessities such as buying merchandise, printing, and mailing.”
MICHAEL SCHWARTZ, owner of gifts cataloger Babyshoe.com: “Instead of obtaining more money and buying a new embroidery machine to expand my custom-order business, I leased it.”
CYNTHIA RIGGS, owner of plus-size apparel book Making It Big: “I use a revolving line of credit for normal production and operational costs and seek additional loans for projects like buying a new building only when sales are extremely strong.”