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WHEN ITS TIME TO EXPAND

When it’s time to Expand
By William Lynott
Skin Inc, Dec 04, p20-p24

You may already be feeling it in your business. After a long period of less than robust growth, the economy is showing signs that it's ready to climb out of a three-year recession. To some spa owners, an improving economy sparks thoughts of expansion, an additional profit center or even the acquisition of a competitor.

If you've been thinking about expanding your business' operations, you already know that the first hurdle to overcome is finding the money. This often turns out to be a tough job for small business owners, but for those in the know, there are enough options available to make the task a little easier.

Banks
The first place many spa owners turn to when in need of a business loan is their local bank. This is why it's essential to build a solid business relationship with your bank well before asking for money. Allowing a bank to become familiar with your business and how it’s progressing sets the stage for the time when a loan is needed.

For relatively new businesses, most experts like the time-honored system for establishing good credit. "Take out a relatively small loan-say $10,000 or $15,000. Put that money in the bank where it will draw a little interest," says Tom Normoyle, a CPA in Huntingdon Valley, Pennsylvania. "Then a few months later, payoff the loan in fun, plus interest. Now the bank knows you, and you have a solid credit history."

Occasionally establishing a relationship is not enough, causing some business owners frustration when the bank turns down a loan application. Many bankers agree that this usually is because the owner has failed to come prepared with the information a lender needs to make a positive decision. "How to find the money to finance an expansion or acquisition is the last thing many business owners think about when they plan a project,” says James G. Marshall, vice president of Premier Bank in Abington, Pennsylvania."It's best to have a team lined up behind you when you begin to plan a major financial move-and your bank should be a member of that team."

How to prepare for a meeting with a bank loan officer? Marshall suggests coming armed with:

Financial statements for your existing business
Accountant-prepared financial projections and cash flow analysis
Marketing feasibility study for the project
Owner's personal financial statements and tax returns
Information on the background and experience of the owner

"With this information, the bank can give proper consideration to your loan application," explains Marshall.

If you're thinking about acquiring a competitor, it also is important to have a clear understanding of the value of every asset in your acquisition target. Banks or commercial lenders are more likely to look favorably on a deal that already has been inventoried and valued by individual assets. Before going to a lender, count, confirm and value every single hard asset you are able to identify, including all operating equipment, furniture and fixtures.

Attention to details such as this will emphasize your knowledge of what the assets of the target business are worth in the market and why someone should lend you the money to buy those assets.

State government programs
When your best efforts fall on deaf ears at your local banks, all is not lost. Alternate sources of business financing may meet your needs.

Most states have loan programs designed to provide small business financing. "Some of these programs provide loans at lower than market interest rates provided the business will create jobs in the state," says Donna A. Holmes, director of the Small Business Development Center at Pennsylvania State University "Some state programs will take a subordinate position to the bank, giving the bank a better collateral position and an incentive to make a loan that may have otherwise been rejected."

For information on small business financing programs in your state, contact the office of your state representative or state senator.

Federal government programs
The federal government also has loan programs available to assist small business owners. The most popular of these is the Small Business Administration's (SBA) guaranteed loan program that guarantees as much as 80% of the loan principal. "This program gives your bank an incentive to lend to a borrower who does not otherwise meet the bank's lending guidelines," says Holmes.
Among other SBA loan programs available to small business owners is the 504 loan. Established in 1980, the 504 Loan Program provides long-term, fixed-rate financing for major fixed assets, such as real estate, facilities construction or expansion, or other needs.

If you decide to seek an SBA loan, your best bet is to work through a certified or preferred lender. The SBA's guaranteed loan process is rather complex, so look for an experienced lender. To find certified or preferred lenders, visit the SBA Web site, www.sba.gov, or call your local SBA office for guidance. The SBA has local and regional offices in every state, and phone numbers can be found in the federal government section of your local phone directory.

SBICs
Small business investment companies (SBICs) are private investment firms licensed by the SBA to provide investment financing and long-term loans to small businesses. Some SBICs make only equity loans, others provide debt loans and some do both. As a rule, SBICs will require the same level of collateral and credit ratings as banks.
For information on how to contact an SBIC, check with your local SBA office or visit www.sba.gov/inv/.

Local organizations
"Your local Chamber of Commerce or other business group may have some revolving loan funds available to businesses specific to your community," says Holmes. "Generally, these funds come from a variety of local resources and have specific guidelines for their use. " Holmes recommends contacting the director of your local Chamber of Commerce to see what help might be available for your specific purpose.

Angel investors
When conventional financing options seem out of reach, many small business owners have had success seeking out individuals or commercial lenders willing to invest in a business expansion, either with debt financing or by taking an equity position in the business. When utilizing an "angel" investor, you'll probably discover that this option is more flexible than a bank loan or government program.

If you don't know anyone with the economic firepower to fund your expansion, don't give up. There is an entire industry of professional investors looking for opportunities to invest in growing small businesses. For more information on how to match up with an investor who might be interested in your situation, visit www.entrepreneur.com/article/0,4621,300807,00.html.

Be advised, though, that unless you're willing to give up an equity position in your business, working with a professional investor is not for you.

When all else fails
Depending on the size and economic health of your spa, the only source of expansion money available to you may be what you can dig up on your own. Be advised, though, that each of these money sources carries specific risks.

Friends and family members. If you have a friend or family member able to help finance your expansion, you may find this to be the easiest type of loan to obtain. Use caution, however. Most financial experts agree that mixing business and personal relationships can lead to destructive problems in both your business and personal life, especially if you aren't aware of the pitfalls. If you do take a loan from a friend or family member, make sure that all details are spelled out carefully in a written contract.

Home equity financing. If you have enough equity in your home, a second mortgage may provide all the money you need. While the interest rate on this type of loan may be among the most favorable, keep in mind that it also puts you at risk of losing your home if your business falters.

Credit card financing. You may have credit cards with lines of credit substantial enough to find all or part of your expansion plans. While it can be tempting to charge everything, this is arguably the riskiest and least desirable of all financing methods. The burdensome interest rates charged by credit card issuers can become impossible to meet if your business hits even a minor bump in the road. The result could be a severely damaged credit rating or even the loss of your business.

When you need to raise money for your business, most experts agree a thorough and detailed business plan is the key to the safest and most desirable types of financing. While unconventional sources of money may seem the easiest to find, they are seldom the wisest choice. With so many options available for expansion financing, do the research to find the best fit for you and your business.