Finding Post-Pandemic Financing Success

Editor’s note: Some names have been altered to maintain client confidentiality.

While borrowing to keep the doors open was the primary financing activity during the pandemic, small businesses are growing again, new businesses are launching, and stalwart businesses are positioning themselves for a sale.

For business owners ready to start, expand or sell, but daunted by the challenges of today’s lending climate, there are examples of others who have successfully navigated financing to achieve their goals. These NH businesses are clients of the NH Small Business Development Center, guided through the financing process by an expert business advisor, at no charge.

Financing a Business Purchase
Allan started his career as an auto mechanic working at a successful six-bay shop. His boss was a great mentor who taught him technical skills, gave him experience, and showed Allan how to manage a business. After seven years, Allan decided it was time to strike out on his own; he opened a single bay garage in a nearby town.

After 40 years of ownership, Allan’s mentor decided it was time to sell his business, and he thought Allan would be the perfect successor. Allan would need $900,000 to purchase the business and the real estate, but he had limited resources for a down payment. Financing options included requesting assistance from family members, a loan from the seller, tapping into the offerings of his local Regional Development Corporation, and the city’s loan program for job creation. Allan also looked into pursuing an SBA 504 loan or a traditional bank loan. The 504 Loan Program, which offers long-term, fixed rate financing for major fixed assets like a commercial garage, was his best bet.

Allan and the seller connected with a business advisor, attorney and CPA, and Allan got help developing a business plan and creating three-year financial projections (which were required by the lender). He was able to obtain funds from a few different sources, so ended up only needing to self-fund a small portion of the 10% down payment required. Allan obtained $15,000 from his parents, used $45,000 of his own savings, and borrowed $30,000 from the local Regional Development Corp. For the rest of the purchase price, he obtained an SBA 504 loan for $360,000 and borrowed the remaining $450,000 from a local bank. Allan has been profitable since day one.

Financing a Startup
Finding the money to start a business can be a major stumbling block. With limited investment funds available, startups must have a strong financing plan.

Jen had wanted to operate a small convenience store for as long as she could remember, and when a local store went up for sale, she was tempted to jump in. But after doing a careful financial analysis, she concluded that the seller’s asking price was too high and would have required her to take on a large loan. In addition, the pandemic had changed people’s behaviors as exhibited by the store’s declining sales. She decided not to move forward.

However, it wasn’t long before she spotted a vacant corner store for rent. She contacted the landlord. He immediately was taken by her knowledge of the neighborhood and the community and decided she would be a perfect proprietor. He agreed to rent the location to her. This allowed Jen to start her business with much less debt than had she purchased a building. The capital investment she planned to make, along with her high credit score (680+), made her an attractive borrower to a bank. With cash flow projections and a business plan in hand she showed the bank how she planned to use the loan and open her new corner store. Within a few weeks Jen had the loan and began to renovate the space.

Financing Growth
How can you grow your company in a time of high interest rates and unpredictable inflation? There are different approaches to consider, including royalty funding, or angel and equity investors.

Slow and steady growth may be the path to take. For example, a NH manufacturer, which had been in business for many decades and was profitable, heard about an opportunity to acquire a hobby business at a competitive price and went for it. The company was able to grow its sales, assets, and profits in one fell swoop.

Realistically, many companies do not have the profile described above, yet can still work toward funding growth. A health products company was cash-strapped but had a strong gross margin. In this case, royalty funding—basically financing against future sales—worked, because payments matched to sales were easily covered. The  company was able to obtain royalty funding from the NH Community Loan Fund. Other sources of royalty can be found in some private funds or venture funds.

Equity funding is a different source of growth funding. Angel groups and venture funds look for high growth firms, and matching the type of group or fund to the company is important. A tiny percentage of equity fund seekers find funding this way. It is important to be realistic about the chances of funding, but each year many NH companies land equity funding.
Business owners may also want to consider seeking a line of credit prior to looking for growth funding. The cost of securing the line is minimal, and it provides a good safety net during lean cash times.