Financing Your Craft Business

ven if they start out slow and build their businesses a little at a time, many new business owners need loans in the short term to buy materials, obtain a lease or finance travel and exhibit fees. Long-term needs can include equipment rental or purchase, buying real estate for retail space, a studio or workshop or fixtures for their operation.

Startup entities face an especially difficult challenge when it comes to obtaining financing. Most bankers want to see some track record of positive net income before they’ll make loans to a business. So, how do craft artists and retailers get backing in the early years?

According to SCORE, a national organization providing free counseling to small business entrepreneurs, more than 50 percent of start-ups borrow money from business associates, friends and family. You can download a free, how-to Small Business Financing Guide that explains how to successfully borrow money from people you know at www.score.org.

If you own a home with equity, you might be able to put it to use in financing your new craft entity. “I started out trying to get a small business loan, but decided to get a $20,000 home equity loan instead,” says jewelry artist Lisa Krikawa. “It actually was a [much] easier process to go through.”

Krikawa has used her equity line for advertising, Web site construction, printed materials, booth fees, payroll, and inventory materials.

If you don’t own a home, you might qualify for a conventional small business loan, and some equipment vendors also will provide lease financing to startup craft ventures.

The Small Business Administration (SBA) offers loan and micro-loan programs to assist small businesses. It’s important to note, however, that the SBA is primarily a guarantor of loans made by private and other institutions. Here are a few of the loan options that can be found on the SBA Web site.

The Basic 7(a) Loan Guaranty serves as the SBA’s primary business loan program to help qualified small businesses obtain financing when they might not be eligible for business loans through normal lending channels. It’s also the agency’s most flexible business loan program, since financing under this program can be guaranteed for a variety of general business purposes.  

The SBA offers multiple variations of the basic 7(a) loan program to accommodate targeted needs. Start-up and existing small businesses qualify for this program through commercial lending institutions.

The SBA’s Certified Development Company/504 Loan Program is a long-term financing tool. The 504 Program provides growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings.

A Certified Development Company (CDC) is a nonprofit corporation set up to contribute to the economic development of its community. CDCs work with the SBA and private-sector lenders to provide financing to small businesses. There are about 270 CDCs nationwide. The SBA provides a list of CDCs on its Web site.

Small businesses needing small-scale financing and technical assistance for start-up or expansion also may qualify for the Micro-loan/7(m) Loan Program that provides short-term loans of up to $35,000 for working capital or the purchase of inventory, supplies, furniture, fixtures, machinery and/or equipment. This loan cannot be used to pay existing debts or to purchase real estate.

The SBA makes or guarantees a loan to an intermediary commercial institution that then makes the microloan to the applicant. These specially designated intermediary lenders (nonprofit organizations with experience in lending) also provide management and technical assistance to the business owner. Note that microloans, available in selected locations in most states, are not guaranteed by the SBA.  

Each intermediary lender working with the SBA has its own lending and credit requirements. However, business owners contemplating application for small business loans of any kind should be aware that borrowing will generally require some type of collateral as well as the personal guarantee of the business owner.

Here are tips you should follow to better your chances of securing financing whenever you need capital for your craft business.

Keep Your Credit Record Clean

Many viable business loan applications have been turned down because the owner didn’t pay his personal bills on time. And many banks’ small business loan approval systems are heavily affected by the personal credit rating of the business owner. Most lenders also want to check trade credit references. You don’t want any negative feedback throwing a cloud over your request.

Know How Much You Need to Borrow and Why

It’s not unusual for a small-business owner to go to a lender with no idea how much he or she wants to borrow. This gives the lender the impression that the business owner doesn’t understand the financial side of his business.

Use Contacts To Find a Financial Partner

This is good advice when you are pursuing any new business goal. Asking your current CPA, attorney or business associate to introduce you to a potential financial partner could add credibility to your request.

Know Your Financial Information

Many small-business owners are much more focused on the day-to-day operation of the business than on the numbers. But when a new craft business owner sits down to meet with a lender or government agency, he needs to understand the financial performance of his business. Saying, “I leave that financial stuff to my accountant,” won’t help you get the loan.

Bankers or other loan providers like to know that they are making a sound investment in you. This is where your business plan and your budget will repay the time you took to create them. (See TCR, February 2004.)

Your business plan contains information on who you are and what qualifications you have for operating a business (i.e., how long you’ve been at your craft and how successful you’ve been with it thus far).

Your business plan and budget should also have specifics about your predicted operating expenses and, most important, what your reasonable expectations are concerning income. Having identified your market and what steps you intend to take to reach that market, you are ready to discuss how financing will help you reach your goals.