Finding Financing For Ecommerce Businesses

All online business owners have something they feel passionate about; what most of them don’t have is unlimited capital to get the site off the ground and firmly in the black. The founders of Abondanteliving.com — Marlin and Laurie Detweiler and Jim and Debi Long — are no different.

Their passion? Keeping the Sabbath, and keeping it well.

“Sunday should be the high point of the week,” not an exercise in prohibitions and obligations, said Marlin Detweiler. “One of the most incredible things we can do is reorder our lives, stop and have a wonderful meal on Saturday evening as a kickoff to a day of worship and rest.” Abondante Living, launched in November 2006, is the couples’ way of sharing that point of view, along with practical ideas and products to make a beautiful, weekly celebration an achievable goal for busy families.

The site clearly has its niche in the faith community, but the partners aim to widen the audience.

“Eating well and enjoying the good things of life can be appreciated by everyone,” Detweiler said. American culture tends to focus on what is fast, cheap and unplanned, “but it’s better to invest in permanence.”

It’s an engaging idea.

But the Detweilers — owners of Veritas Press, an established classical Christian curriculum provider — knew from experience that a great idea is not enough. A fledgling online business like Abondante Living might not need a warehouse or a huge inventory of high-dollar olive oil and Limoges china; it can opt to drop-ship the merchandise. Virtual businesses don’t need a lot of things brick-and-mortar stores require during those first, touch-and-go years.

What Abondante Living did need if it was to be established, survive and ultimately profit, however, was money.

The solution the Detweilers and Longs found was to form a partnership. One couple provided seed money through a personal bank loan, and the other agreed to put in the time and sweat to make the plan work. Detweiler’s background is in capital formation, investments, securities and marketing, so he didn’t dream up the arrangement lightly.

“If you have a relationship with a bank and a solid history with another venture, you might be able to secure a line of credit. Sometimes a second bank will extend a line of credit because a different bank has seen fit to fund you,” Detweiler said. It’s worth exploring, because the importance of adequate funding is not always understood early enough.

“Most people don’t know how to forecast the cash flow. That’s a difficult task even if you have experience,” he said. “You compound that with the optimistic mindset of someone who’s got an idea they think everyone is going to love and you have an idea that’s overrated, capital needs that are underfunded — and you end up as one of the businesses that fail.”

Like Abondanteliving.com, most Internet start-ups seek funding first from family and friends willing to take a chance on a fresh idea. Venture capitalists can inject larger amounts of necessary cash, but the further from home a business looks for money, the more complex the structure and legal considerations and the higher the stakes. Convincing a financial institution to extend credit is a tall order, notes the Small Business Administration in its online article “The Benefits of Making Your Banker Your Friend,” because “bankers, by law and temperament, are not investors.” To the average banker, an online business proposal and loan application is no different than funding a brick-and-mortar venture.

“We don’t differentiate,” between online and real-life business proposals, said Gary Carleton, national sales manager for UPS Capital. “If you’ve got a company that’s growing and profitable and can demonstrate good cash flow, then that’s a deal we’re comfortable with.”

Too often, an ecommerce start-up simply doesn’t have the ability to create that comfort level, said Peter Waller, President and CEO of First National Bank of the Rockies, based in Grand Junction, Colo. Banks prefer to loan money against things “you can put in your pocket and walk down the street and sell to somebody else quite easily,” he said.

Would-be online merchants rarely have something so tangible to offer. Too often, all they have in hand is an abundance of enthusiasm, said Jim Hammersley, director of the office of business loans at the Small Business Administration’s Washington headquarters.

“A lot of people walk in the bank and say, ‘I have this great idea!'” with little notion of what a bank needs to see, he said. Such an entrepreneur, however inspired, is unlikely to find funding. “Convincing factors are not only an idea, but also details to demonstrate you have thought it through, talked to the credit-card vendor, the online payment vendor, calculated your costs per transaction, found out how expensive server space is,” he listed.

In short, when the banker asks hard questions, have ready answers. Still, even the sharpest business plan might not offset the risk factors that can make banks uneasy.

“If I start a business and construct a warehouse, it will have intrinsic value,” Hammersley said. “A warehouse is sale-able. The banker might be more willing to make me a loan because of its value.” However, an archive of great recipes and a list of gourmet baking supplies might make great eating, but it’s still a risky prospect for the bank.

What’s the solution for the determined but cash-poor entrepreneur? Is the only hope to max out the credit cards?

“The SBA is probably the best option,” said UPS Capital’s Carleton. “Find a local bank that works with the SBA to do start-ups. There are a lot of them out there.” When you do, be prepared to put everything you’ve got on the table.

There are folks who just don’t meet the traditional criteria for conventional loans, Hammersley said, but because of the SBA guarantee, the bank is willing to take a chance — as long it’s convinced you’re putting your heart and soul into the venture.

“They’ve got to see this is a business, not a hobby,” he said, and as proof of all-out effort, “the bank is going to ask for anything that will stand as collateral.”

That could mean a second or third mortgage, Carleton noted, “and many people don’t like that. They’ll say, ‘Wait, I didn’t think I’d have to do that.’” Still, the SBA’s low rates might make it worthwhile. “The beautiful thing about this program is that they cap the interest at prime plus 2.75. That’s a fantastic rate.”

Hammersley noted SBA doesn’t actually issue loans.

“We guarantee loans made by banks at 50 to 85 percent [of the loan], depending on size and other factors,” he said.

To Waller’s mind, SBA loans are “a very, very good way to fill in collateral shortfalls. The advantages of being able to have a more liberal structure and pare down the actual monthly debt service generally far outweighs the costs.” Such funds can be used to cover a venture’s expenses or build inventory until money flows, enabling a new business owner who tallies his/her assets to add “available cash” to the list, along with “great idea” and “detailed business plan.”

One thing Abondante Living, LLC, had on its list was experienced people. Veritas Press, the Detweilers’ curriculum company, was not of a size to contend with larger companies, but online sales had steadily increased to roughly 50 percent, balancing catalog purchases.

An online outlet for high-quality domestic products seemed like a feasible venture, based on the positive performance of Veritas and the built-in possibilities for customer crossover. For someone in a similar situation, the flip side of these advantages — an existing, successful business with the know-how that implies — would be the inability to access SBA programs.

As Carleton pointed out, “SBA is there to help people who need it. If you’ve got enough net worth to start something on your own, you won’t qualify.”

“They need to generate the cash, through investment of their own funds or through partnerships. On a grander scales, that is where venture capital comes in,” he said.

Detweiler agrees.

“People who have ideas could easily look for people who have money, and say, ‘I’m willing to do this, if you’re willing to put the money up,'” he said.

Since entrepreneurs tend to be highly individualistic, teamwork doesn’t always come easy.

“I’m not always patient with people,” Detweiler said. “I find it much more desirable to have board meetings in the shower when I’m by myself. That’s a problem. One person can’t accomplish what six can. Even Sam Walton got help.” Yet it’s sometimes difficult for people who are accomplishment-oriented and driven to create effective partnerships.

Detweiler said the importance of putting things in writing cannot be overestimated. “In the real estate securities business, I acquired a great respect for documentation.” Every business experiences rough patches, Detweiler said, and when a partner feels weary or unwilling to continue, the written record clarifies original intent and vision.

“If start-up businesses paid more attention to what to do if things didn’t go as expected, they would have much more success,” Detweiler said. “It takes time — longer than you expect. The key ingredient is to do everything you can to understand what’s going on and why. If what’s happening is not good, seek counsel from someone who can make sense of it.”

While you do that, he acknowledged, it’s essential to have working capital to keep things afloat.

“I heard back in the early 80s that Ted Turner forecasted a net operating loss for 10 years when he started CNN,” Detweiler said. “That takes an enormous amount of courage.”

It also takes money.

Fortunately, “ecommerce does not have the negative connotations it used to have, say 10 years ago,” Waller said. Once a venture is up and running, it often has “very conventional lending needs banks can meet.” Banks like the immediate cash flow generated by credit card receipts because it speeds up the process of turning assets back into cash — “and that is what pays loans back,” Waller said.

And when the banker can see products going out and cash flowing in, added First National Bank of the Rockies’ chief credit administrator Bruce Penny, “that is a really financeable position.”

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The Three Cs of Credit

Business owners seeking financing from banks generally should meet the “three Cs of credit.”

• Character – A measure of what kind of credit you have been extended in the past and, more importantly, whether you have paid that credit back in a timely fashion. It’s the willingness of the borrower to acknowledge a just debt and to have a deep desire to pay that back.
• Capacity – To have sufficient cash flow or profits in order to pay the debt back based on its agreed upon terms.
• Collateral – Something pledged as security for a debt. It could include, for instance, equity in one’s home, various personal investments, buildings or other tangible assets owned by the company and personal guarantees of the principals whereby they become personally liable for the debt in addition to the corporation. A partnership structure financed with capital seemed the best option for Abondante Living, which is what Waller would recommend in similar cases.