Frank Vazquez, owner of Hudson Valley Hockey Company in Yorktown Heights, spent two years searching for a job after graduating from SUNY Plattsburgh before taking a leap of faith and opening a hockey-supply and -service store earlier this year—something he’d been contemplating for about three years. He’s played hockey since he was 5 years old, and, since he’d worked at a hockey store during college, Vazquez had a passion for the market, some experience placing orders for a similar business, and the drive to make his dream a reality.
What he didn’t have: experience running a business—or funding. “Not many companies want to lend to a 26-year-old and a 22-year-old who don’t have any business experience,” Vazquez says. Chase Bank turned down Vazquez and his partner, Dakota Carlucci, and Tompkins Mahopac Bank didn’t even give them an application.
Since 2008, many Westchester entrepreneurs like Vazquez have been turned down for traditional bank loans because of tightened lending standards after the recession, says Jared Hecht, CEO and co-founder of New York City-based Fundera, an online marketplace for small-business lending. As recently as the first quarter of this year, only 39 percent of small businesses (or those with less than $5 million in annual revenue) that applied for bank loans were approved, according to the Pepperdine Private Capital Access Index for Q1 2014, compiled by Pepperdine University’s Graziadio School of Business and Management.
That means many entrepreneurs end up in the same boat as Vazquez: rejected. But a bank rejection doesn’t have to be the end of the story. There is a growing number of alternative funding sources available to entrepreneurs, most of them specifically designed to help businesses that have been turned away by banks.
Some of these lenders can get cash in a business owner’s hands in just two days. Sites like Fundera, OnDeck, and Biz2Credit let borrowers apply for loans online. Borrowers enter their information on the site, and computers crunch the numbers automatically to return an answer within hours, instead of the weeks or months a traditional bank application process can take.
Of course, these platforms don’t find loans for every applicant. OnDeck, for example, lends only to businesses that have been operating for one year or longer and make at least $100,000 in annual revenue. For Fundera, the average business that’s approved for a loan has been operating for at least two years and makes $9,000 or more in monthly revenue. Still, Hecht says, about 50 percent of Fundera applicants will pre-qualify with at least one funding provider for some kind of business loan. The company screens each application for a range of different loan products, including some higher-fee products for entrepreneurs with bad credit.
While these online services are convenient, they’re not cheap. At OnDeck, the average 12-month term loan is $43,000, and the cost of that loan will be 24 cents for every dollar borrowed, or $10,320. That’s far more expensive than a traditional 12-month business loan charging 9 percent interest, which would cost $3,870. But for some entrepreneurs, the speed and convenience of these alternative loans is worth the premium, says Kim Jacobs, executive director of Community Capital New York, a nonprofit lender in the Hudson Valley. “Just make sure you know what the deal is you’re making,” she advises.
Entrepreneurs who can afford to wait about two months have additional options, such as the New York Business Development Corporation (NYBDC), a private, for-profit corporation owned by about 140 banks. “We’re often referred to as ‘a second-look lender,’” explains Tamara Underwood, a vice president at NYBDC, which has an office in White Plains. Member banks will often refer borrowers who almost, but don’t quite, meet their standards to the NYBDC. Borrowers can also approach NYBDC directly.
The NYBDC and its sister company, the Empire State Certified Development Corporation, administer government-guaranteed Small Business Administration (SBA) 504 loans and SBA 7(a) loans. Loans range from $25,000 to $5 million and can be used to buy equipment, land, a building, or, in the case of the 7(a) loans, to start a new business or buy an existing one. Both programs require the business owner to put in some capital, usually at least 10 percent of the total project goal.
The NYBDC has a large portfolio of food-, beverage-, and restaurant-industry loans because banks consider them riskier, Underwood says. That makes Alvin Clayton, owner of Alvin & Friends restaurant in downtown New Rochelle, a typical borrower. Clayton wanted to expand the 50-seat restaurant he’d been operating for about two years. A representative of the New Rochelle downtown development program introduced him to a lender at Chase Bank, who recommended he speak to NYBDC. He was able to borrow more than $500,000 through the NYBDC, and now operates a 140-seat restaurant.
The loan process took several months, Clayton says, partly because of the in-depth paperwork required, and partly because of his busy schedule; but the lenders he worked with were “very accommodating,” he says. “It was very forensic, the research that they do before you get the loan, so you have to be prepared for that,” he advises, but, he notes, the interest rates are comparatively low.
Online crowdfunding, in which a venture or project raises money from a variety of people, is a relatively new option—and one that’s about as far away from traditional bank-lending as you can get—that’s rapidly growing in popularity, according to Peter Mintz, founder and president of Fleetwood Research, adjunct professor at Monroe College’s New Rochelle campus, and SCORE small business mentor in White Plains. A rewards-based campaign or a crowdfunded loan can be a good way to achieve a specific, reasonable funding goal, Mintz says. Keep in mind, however, that about half of these campaigns fail, and shorter campaigns (those lasting 30 days or less) are usually more successful, so preparation is key. Identify potential donors ahead of time, starting with your personal network. These campaigns can be a great way to get friends and family to help your business out, Mintz says. “It is much easier to tell people you are hosting a campaign that they can contribute to, than actually asking them to deliver a check to you,” Mintz says.
Having an online network of people to which a borrower is comfortable promoting his or her compaign will result in more successful fundraising, says Katherine Lynch, the New York State program lead for crowdfunding platform Kiva Zip. “To do well on [funding platforms like] Kickstarter, you need to be an amazing marketer, and you need to bring your own network,” Lynch says. You also need to communicate a clear, specific plan for what you’ll do with the money you raise. “I see loans that go up saying, ‘$5,000 will help me grow my business.’ Well, of course it will,” Lynch says. Contributors want to see an itemized list of what the money will do for you, because transparency and clarity build trust, she adds.
Of course, not all crowdfunding platforms are alike. On Kiva Zip, for example, entrepreneurs can get small, interest-free loans from individuals, with the added bonus of no credit score requirements. The maximum loan size is $5,000 for a first loan. Instead of proving their financial viability, Kiva Zip asks borrowers to have people vouch for them with a “trustee” who has known them for at least six months or three peer references. Borrowers then have to recruit at least seven people to lend a minimum of $5 each to the project before they can be viewed publicly and appeal to lenders on the site. To tip the scales in your favor, Lynch says, set up an appealing profile, including a good, well-lit photograph of the entrepreneur, and a well-written, compelling story.
Margie Nugent borrowed $600 from Kiva Zip to buy a stencil maker for her Mount Kisco body- and face-painting business, Making Faces Parties. “It was a $600 loan, but it was all I needed,” Nugent says, noting that her project was fully funded in just a couple of days. The stencil maker she bought allows her to make specialty designs at home, instead of outsourcing that process. “It saves me time, it saves me effort, it saves me design fees,” she says.
Now, Nugent’s business is growing—on a recent weekend she had 10 people working for her at different events—and she’s considering going back to Kiva Zip for a second loan to finance improvements to her website. Nugent has never considered getting a bank loan, because of the high interest rates, she says, although she may need to open a line of credit as her business grows to allow for travel and hiring crews for larger events. “I’m very careful about what I borrow money for,” she explains. “I’m not borrowing for supplies because supplies are perishable. I’m borrowing for things that are going to grow my business.”
Another local option for brand-new businesses is Community Capital New York, a nonprofit lender serving six counties in the Hudson Valley, plus Fairfield, Connecticut, and the Bronx. About 54 percent of Community Capital’s loan portfolio is made up of startups. “We’re really good with the mom-and-pop businesses that are locally owned,” Community Capital’s Jacobs says. To get a loan through Community Capital, business owners need to have sound credit—a FICO score of at least 600—and a strong business plan. Loan sizes range from $1,000 to $100,000, and Community Campital reports to credit agencies, so repayment will build credit history.
Community Capital New York turned out to be the answer for Frank Vazquez, and his business, Hudson Valley Hockey Company, has been open for business in Yorktown Heights since January 2014. Vazquez says his confidence had taken a hit after being rejected by the banks he approached. “We really needed someone to believe in us,” he says. “Community Capital helped us achieve our dream.”