Starting a Business: The Paradox of Borrowing

By Melissa Dylan

As I’ve mentioned in previous posts, I’m currently in the process of raising money for a startup. A little boutique fabric store, eventually to become a chain of mega-awesome fabric stores, has been swirling in my imagination for the better part of four years, and now is the time I’m making the leap.

Most entrepreneurs, which is a word I just learned I cannot spell without auto-correct, are encouraged in Phase One to do most of their fundraising through a round known as Friends and Family. In fact, panelists at the Innovation Showcase in Indianapolis informed a room full of startup hopefuls that most venture capitalists and angel investors won’t even consider investing in a company that hasn’t already secured a significant capital base using this method.

This is a challenge or even impossible for those of us who lack connections with endless generosity and disposable resources. Read: most people. Read: me. This begs the question: how am I doing this?  Please allow me to introduce you to something I like to call:

The Merry-Go-Round of Credit

It goes like this. You apply for a small business loan. In order to secure a small business loan you have to prove that you have a substantial enough income to pay back the small business loan. However, you don’t have a substantial income because you’re starting a business. So you’re rejected.

Version two: you apply for a small business loan. In order to secure a small business loan you have to provide collateral to ensure that you’ll pay back the small business loan. You have no collateral because the recession kicked your ass and you don’t even have equity in your house yet. Your inventory could be your collateral, but you don’t yet have the inventory because you don’t have the funds to purchase inventory, and since the inventory collateral doesn’t currently exist, you’re rejected.

Version three: you apply for a small business loan. In order to secure a small business loan, you need perfect credit. You have good, although not perfect, credit because the recession kicked your ass, and I mean really kicked your ass big time, with several layoffs and a poorly-timed medical emergency and 2009 was really a bad year all around and I’d rather think about puppies.

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Puppies!

The point is, while you’ve repaired your credit big time since then, it’s still a black mark on your credit and people go nopenopenope and you’re rejected.

Version Four: you apply for a small business loan. In order to secure a small business loan you need to have at least 20% of your asking amount in cash, in your possession, and it can’t be borrowed from anyone else. Which is perfectly logical if you are in a financial position to be able to sock away, oh, say, $1,000 a month for the last, oh, say, 10 months, but you haven’t because you’re supporting a family of four and even with an above-national-average salary it just isn’t possible, meaning for most of us socking away $10,000+ dollars just isn’t within the realm of possibility.

And the merry-go-round keeps spinning because you can’t have this without that, but you can’t have that without this, and sooner or later you just want to get off.

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You.

I understand WHY this is true; banks need guarantees because they have to be prudent, and someone with no income, no collateral, no money down, and good-not-great credit is high risk. Very high risk. Very very very high risk. Rejectably high risk.

At the same time, there is a macro-economic risk to the country because this exact crap is what prevents many many people from starting their own businesses in the first place. New businesses are good for the economy. They create jobs. They contribute to the GDP. They’re self-sufficient and aren’t draining our tax money expecting “hand-outs.” They’re prominently featured in ads for various politicians running for office.

They’re just trying to build the American dream–this myth we’re all still living in that anyone can become anything if they just give it their all, and go for it, and something having to do with bootstraps which aren’t really even a thing anymore. But the reality is that you still need to have money to make money, and it’s no longer legal to just stake a claim and dig for precious metals on the mountainside because Teddy Roosevelt put a stop to that.

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Thanks a lot, asshole.

So if we can’t build a fortune by plundering our nation’s resources, how do we build a fortune? Or even make a living on our own, not answering to anyone whose fortune was already made because they had connections and collateral and start-up cash already in hand because of their incredible already-existing fortune?

I have to excuse myself, because as it turned out, if I gazed off in the distance and squinted really hard, it turned out I do/did have an existing fortune upon which I could draw. And thus begins my categorization of my privilege, with the understanding that there are many many many people out there without even these.

How I Secured Some (Not All) of My Startup Capital

  1. Prosper will give out unsecured loans to basically anyone with any kind of income. I was lucky enough to apply for a loan from Prosper during my last few weeks at my last job. I was able to provide proof of income using my most recent pay stub, and they didn’t ask questions about whether or not I would continue to work there so I didn’t say anything. I’m aware that this was pushing the boundaries of ethical, knowing I’d already given my notice and would no longer be earning that income. I feel sufficiently badly about it. The lesson here is to apply for business loans while you still have an income. Prosper loaned me $25,000, of which $1,000 went to the origination fee. That’s a lot. Credit is expensive.
  2. A woman at Springleaf Financial was incredibly helpful. After I applied online she gave me a call and asked me a ton of questions. The upshot is that it turns out I had a small amount of equity in my car. Even a 10-year-old Camry has a Blue Book value, and I’d paid it off a few years before. By signing over the title to the Camry, I was able to borrow about $6,100 with a $250 origination fee. However, my previously paid for Camry is now no longer paid for.
  3. Back in 2012 when this notion for a fabric store first germinated, I applied for and was awarded a Spark Business Visa Card from Capital One, with a $4,500 limit. I have no idea why I was approved. My credit was absolute shit, and I only had 4 months of job history with a much lower salary than I ended with. I can only consider this a complete fluke. At any rate, the available credit is a nice cushion. My APR is astronomical.
  4. When I realized I’d be traveling to acquire inventory for my store, I applied for and was awarded a Delta SkyMiles AmEx. I’m a loyal Delta flyer and getting double miles on purchases has already paid off with a free flight to LA. I have a $5,000 limit. Well, I had a $5,000 before I spent it all on travel and inventory. My APR is astronomical.

For those who can do math, that amounted to $39,650 in cash and available credit to start my store. In exchange my interest rates are averaging in the teens and I am doomed to continue driving my mom’s old car until it’s paid off. I may have thrown in my first-born child, but nobody asked. (Yet.) This has dramatically increased the risk factor of my business, and places a huge initial financial burden on the balance sheet.

Still, this continues to remind me just how much starting a business is for the already privileged. Even with a bad credit history, no income, and no assets, I was still able to pull together nearly 40K based on a solid job history, a car I owned outright, and credit that I was able to repair because I had a good, stable job for 4 years. That simply isn’t a given for a lot of people. It wasn’t a given for me even four years ago, when my spouse and I were in the downward spiral of job layoffs. All this leads to the increasing income inequality in our country, and the reality that achieving the American Dream is getting further and further beyond the reach of many, many people.

And even with my privilege, it wasn’t easy to achieve. I applied for and was rejected by over 20 financial institutions. I’m currently heading into Round 2 of securing capital, and I’m I rejection away from exhausting my options.

More on this in future posts. Meanwhile, here are some more puppies.

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OMG LOOK HOW CUTE THE ADORABLE SLEEPING PUPPIES!!!!

Melissa Dylan is a writer and MBA who can’t be trusted around puppies.

 

 

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