Wi12 Education: Finance — Securing Capital

The education session “Finance — Securing Capital” on Saturday, January 28, at Winter Institute 12 explored the different avenues available to current and prospective bookstore owners looking to secure capital for their business, including loans from the Small Business Administration (SBA) and community lending.

The panel, moderated by Bradley Graham, the co-owner of Politics and Prose Bookstore in Washington, D.C., included Sara Hines, co-owner, children’s buyer, and events manager at Eight Cousins in Falmouth, Massachusetts; Kalen Schwartz, assistant vice president of business banking at Anchor Bank in St. Paul, Minnesota; and Patrick Thomas, managing director of independent publisher Milkweed Editions, which recently opened the bookstore Milkweed Books.

Securing capital is one of the challenges most frequently cited by small businesses when it comes to financing an expansion, buying out a partner, or undertaking a costly project. Just a finding a potential lender who is willing to talk to you is a common problem, said Graham, adding, “Many financial institutions seem not to understand small businesses and show an aversion to getting involved with them.”

Hines confronted this very issue three years ago in her quest to buy Eight Cousins from then-owner Carol Chittenden. The problem for Hines, who has three advanced degrees, including a Ph.D. in book history and English, was massive student loan debt coupled with a significant need for start-up capital. To help, Chittenden suggested that Hines reach out to SCORE, a nonprofit association supported by the SBA that offers mentoring and education services by retired business professionals as a way of fostering vibrant small business communities.

Hines worked with SCORE counselors Mike Baker and Jean Mojo, who were instrumental in helping her achieve her goals by, among other things, holding her accountable when it came to demonstrating cash flow and creating a viable business plan to show lenders.

Once her business proposal and other required paperwork were complete, with the help of her counselors Hines met with a number of local banks and found success with Coastal Community Capital, a Cape Cod-based institution on the list of local preferred lenders that sign off on SBA loans. Hines said Baker recommended that particular bank because he knew, through his personal connections, that the bank president was someone who values bookstores and community.

“My counselors were able to help me focus in on the one bank that might consider my proposal and that way we could tailor it very specifically to that person, and I just think that’s a tremendous amount of work that they saved for me,” said Hines.

SBA does not give loans directly, but guarantees loans provided by banks. The SBA loan type that Hines qualified for was the SBA Advantage Loan 7A. With a 7A loan, the bank gives the recipient a lump sum — for example, $50,000 or $100,000 — that must be paid back in installments over a period of time, similar to a mortgage.

Ultimately, Hines was able to connect with two community members who agreed to buy the store with her so she did not end up applying for a 7A loan. But, she said, her experience with SCORE was invaluable. One of her prospective partners even requested a look at the paperwork and business plan she had prepared for her loan application.

Schwartz, who works with local businesses to find short and long-term solutions for their financial needs, said that SBA financing is a great opportunity for business owners to take advantage of terms and loans that banks don’t normally offer. SBA usually guarantees 50 to 75 percent of the loan, he said, “so if we do go into a liquidation scenario, the SBA will actually cut the bank a check.”

Whether an applicant chooses to open a line of credit or apply for a 7A loan should depend in part on what their need is, according to Schwartz. If an applicant is looking to raise capital to buy inventory, they should apply to open a line of credit, which requires recipients to pay a monthly interest expense based on the amount borrowed. Applicants who are purchasing a business or undertaking an expansion should go with a 7A, said Schwartz, noting that the interest rates on 7A loans typically vary depending on how risky the bank perceives the deal to be.

Applicants for SBA-backed loans must have a clean criminal background and, typically, a credit score of at least 680, he said. Applicants also need some amount of start-up capital before approaching a bank, as banks don’t usually finance 100 percent of a project. Applicants must also develop a business plan, which programs such as SCORE can help with. If the applicant owns an existing business, the bank needs to determine if that business can demonstrate sufficient cash flow on an ongoing basis, which typically requires an income statement for a minimum of three years, said Schwartz.

“That gives us an opportunity to see if you are doing your due diligence,” he said. “We want to make sure you’re really thinking about who your competitors are and how successful you will be. The other thing you need is meaningful projections. Make sure you don’t have what we call ‘pie in the sky’ projections; we want to make sure they are figures you can obtain in a reasonable amount of time.”

As an alternative to bank loans, some businesses are turning to crowdfunding campaigns to cover everything from start-up costs to renovations, moves, and special projects.

In spring 2016, when Milkweed Editions’ proposal to open a bookstore in the Open Book, Minneapolis’ nonprofit literary arts center, was approved, the nonprofit literary publisher turned to the online fundraising platform Kickstarter, which has a separate department for publishing projects.

“As a 35-year-old nonprofit, we were really frightened to go out and do a relatively modest Kickstarter campaign that might fail,” said Thomas. “We had never done it before and that would be incredibly embarrassing for us because we had a whole professional fundraising team on staff.”

Milkweed began working with Margot Atwell, Kickstarter’s director of publishing, in June and by August was ready to launch the campaign.

“That might seem like a long time but over that period we refined a whole narrative around the store,” said Thomas. “Being forced to develop the brand and define the vision was really powerful for us and has made the store more successful as a result.”

The Milkweed Books campaign raised a total of $40,000, of which Milkweed netted $20,000. Five percent of the total was claimed by Kickstarter, while other funds covered the cost of developing promotional videos, graphics, and sound bites for the campaign website as well as 27 different donor gifts, including such custom swag as totes, bookmarks, and postcards.

Though Milkweed made $20,000 on the fundraiser, Thomas said it was the marketing aspect that was profoundly impactful for Milkweed Books.

“Community-building is probably the most powerful aspect of the whole thing for us,” he said. “A big thing we were trying to achieve with our campaign was less to raise money and more to raise ownership. We have 500 people who have a stake in our store now and a stake in its success.”

To learn more about SCORE and to find a mentor in your area, visit the SBA website.

Booksellers can also learn more about launching a Kickstarter campaign.