Taking it Personally

The number of small-business owners who must put their their own credit on the line to secure funding is growing

Raising capital has never been Kim Isaacsohn's favorite part of running her business, Clever Carriage Co. When she tried to get a $100,000 commercial loan two years ago, the experience proved both frustrating and agonizing. "My business was growing dramatically," she says. "I needed the money for cash flow for just an eight-week period." Clever Carriage, which produces high-end women's coordinated tote bags, travel bags, hand bags, and accessories, was established in 1996 and had built up a network of some 350 specialty-store buyers by the time Isaacsohn applied for the loan. But when she was finally approved for a line of credit in the middle of 2000, it was only on the basis of her personal credit history.

The business has continued to grow, reaching $750,000 in revenues last year, and Isaacsohn hopes to cross the $1 million mark in 2001. To do that, she needs to raise more working capital and plans to borrow $250,000 from the same bank.


  As the slowing economy sees banks tighten credit, Isaacsohn's experience isn't uncommon. "The number of businesses citing difficulty obtaining bank credit or less attractive rates is inching upwards," says Maria Erickson, executive vice-president of NFO WorldGroup, a marketing-research company based in the Tampa. "There is some nervousness on the part of some banks," she says, explaining that increased borrowing during the boom years of the last decade has left many lenders wondering how small businesses will respond to a downturn in the economy.

As a result of tighter credit and financial prudence by business owners, small businesses expect to borrow less in 2001, according to the 13th annual small-business study conducted by the NFO WorldGroup (formerly PSI Global). Of the companies that responded, 53% have no plans to borrow in 2001, while 13% expect to borrow less than in 2000. Just 8% expect to borrow more. "Small companies think they will have a bit of a down cycle, so they'll delay capital expenditures," Erickson says. The size of new borrowing -- either as loans or by accessing credit lines -- is anticipated to decline by 14%, vs. 2000.

The study also shows that more small businesses are using personal credit and company credit cards to meet their financial needs. Ten percent of respondents say they'll use personal credit cards, vs. 4% last year. Meanwhile, 23% are using company credit cards, up from 18% in 2000. "There has been a real expansion in the size of credit-card lines available in the last year or so, and lines of $25,000 or $30,000 are not uncommon," notes Erickson. "And since interest rates are also comparable, there's some shifting from traditional bank lines of credit."

Moreover, while the study indicates that fewer companies are using personal assets to secure business loans, more are using other forms of personal credit, in addition to credit cards, for business needs. Fourteen percent of business owners report using some form of personal credit to finance their businesses, up from just 3% in 2000.


  What can small business do to raise cash in hard times? Michael Bernstein, a partner at Grant Thornton, a Chicago-based accounting and consulting firm, offers this advice:

-- Demonstrate exactly what you're going to use the money for and that you can control expenses during the down cycle. -- Show that the money you're getting will have a direct impact on improving profitability. -- Be flexible when negotiating terms for the loan. Lenders will build in stronger protection factors for themselves in uncertain times.

Meanwhile, as entrepreneurs continue to tap personal credit lines, the experts are sounding a note of caution. "This can be a troubling signal, because the total amount of unsecured credit used for business financing is gradually creeping upwards," notes Erickson, who adds: "There is a little danger there."

By Naween A. Mangi in New York

Edited by Robin J. Phillips

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