Galen Gondolfi doesn’t work for a traditional lender. For starters, his institution is among the few who would turn away a borrower for having too perfect a credit report.
“If you come in with an 800 credit score and real estate collateral, we’re going to say, ‘We’re not the program for you,’” he said.
But Gondolfi’s organization, called Justine PETERSEN, isn’t trying to compete with mainstream lenders. The namesake of a community reinvestment pioneer, the unusually monikered nonprofit specializes in helping small entrepreneurs from marginalized communities and those whose credit may pose challenges that would make them an unattractive risk for many financial institutions.
“We consider ourselves a hybrid of social work and banking,” said Gondolfi, who handles communications for the unique social enterprise headquartered in St. Louis.
Justine PETERSEN exemplifies just one aspect of the diversity of outlets Missouri entrepreneurs may choose from when looking for sources of cash that are right for their businesses — ranging from government loans to entrepreneurial grants, from online crowdfunding to high-dollar angel investment, from microloans to equity finance.
They have plenty of options, whether they are trying to reel in millions while working to bring a lifesaving medication to market or just to acquire a few thousand dollars to keep their corner barbershop open. There’s a vehicle out there for everyone.
“Different kinds of businesses need different kinds of funding,” said Kate Hodel, who works in special projects for MOSourceLink, a connection service for potential entrepreneurs. “The good news is that across Missouri, there are all kinds of different funding mechanisms.”
Angels and the tech world
Different funders have different requirements, and the high end can be a pretty exclusive place.
“What you can qualify for and what is the appropriate funding mechanism for you really depends on the kind of business you have and where you are in the business process,” said Sally Williams, a technology development and commercialization consultant for the University of Missouri-Kansas City Small Business Development Center. “Are you pre-nascent, meaning you haven’t started yet? Are you up and have a few months or even weeks under your belt, or have you been in business for a year or two? It is all very different.”
Some of the big money comes from angel investors — wealthy backers who might easily lay five or even a low six figures on the table. Investments by angel groups, which often are located in Missouri’s larger metros, or venture capital firms can run into the millions. So-called “superangels” — high-end investment groups such as Collaboration Capital in Kansas City and iSelect in St. Louis — are stepping in to fill the gap between $250,000 and $1 million, according to Show Me Capital, a 130-page report by MOSourceLink on funding in the state. Missouri is attracting a fair amount of VC funding as well, with the state’s firms raising $1.3 billion and doing 150 deals in 2018.
Still, angels and VC funds aren’t for everyone. These are high-dollar equity deals limited to elite investors who generally are looking for a stake in the company and a sale in a few years netting perhaps eight to 10 times the return in the process.
“Most of the investing is in technology-based businesses,” Williams said. “If you have a landscaping business, cupcake store or restaurant, you are going to find few angel investors who want to invest in those kinds of businesses.”
In fact, tech has a wealth of potential capital sources out there.
Accelerators, incubators and other assistance organizations can even offer the prospect of free seed money or other support. Some groups, such as Digital Sandbox KC, provide “proof-of-concept resources” for a start-up, such as legal help, market research and consultants.
On the other side of the state, ArchGrants in St. Louis runs a contest for $50,000 in cash. In Springfield, efactory gives awards of up to $10,000 in its pitch competition. Show Me Capital lists more than 20 grant funds or competitions offering everything from ready money to constructive feedback.
Moreover, involvement with some type of accelerator or other tech assistance program often is necessary to get entrepreneurs in the same room with important financial players in the community. If you want an angel, you need an introduction.
“It is not like you can get a list and call them up,” Williams said. “That isn’t how they work.”
State government also helps to support cutting-edge industries through a public-private partnership called the Missouri Technology Corporation.
“At MTC, we focus on early-stage technology startups,” said Tori Benson, the organization’s interim executive director. “We’ve got five areas of focus — plant science, animal health, biotech, defense and homeland security, and applied engineering. We’re focusing on companies who are raising their first round of outside investment or one of their very early rounds.”
Investments by MTC, which administers the state’s IDEA funds, constitute equity stakes in the enterprise and must be matched dollar-for-dollar by private backers.
The 501(c)(3) also helps to support other organizations through such vehicles as the Missouri Building Entrepreneurial Capacity (MOBEC) program.
“Basically, we’re open to funding anything that provides a soft landing pad for folks trying to start their own companies,” Benson said.
Unfortunately, the legislature’s budget knife has hit MTC especially hard. Show Me Capital notes that state funding fell from almost $23 million to just $2.5 million in 2017.
Getting your ducks in a row
Plenty of need exists outside the technology universe, and those entrepreneurs face a much different world.
“Where am I? Where am I going to go? How much money do I need to get there? And what’s the best source for that?” said SourceLink’s Hodel in defining the questions a potential borrower should ask.
Hodel’s agency delineates four types of entrepreneurs. The least common but often most publicized are the “innovation-led” start-ups: high-growth, tech-heavy operations that attract angels and dazzling amounts of private equity. There are also “second-stage” companies that are expanding operations with dozens of employees and perhaps tens of millions of dollars in revenue.
But the vast majority of the state’s entrepreneurs fall into two other, less glamorous categories: “Main Street” operations and storefront establishments ranging from coffee shops to grocery stores, or “microenterprises” — small, frequently single-person businesses that have become increasingly popular since the 2009 recession displaced so many workers from their previous careers.
Traditional banks and lines of credit are the standard option for many Main Street denizens with brick-and-mortar businesses, solid financials to show, good credit and desirable collateral. Some lenders also offer federally backed options sponsored by the Small Business Administration, such as the common “7A” loan.
The SBA also offers other resources as well.
“They have a program called Lender Match where you can go to the SBA website, type in your information and then Lender Match will find banks or other lending institutions that might be a fit for your request,” said Kenneth Surbrugg, director of the center for entrepreneurship at Missouri Southern State University in Joplin.
SBA guarantee or not, traditional lenders generally will want to see you are a good risk. Be prepared with a solid business plan and a way to explain how you plan to generate revenue three to five years out. An already-operating establishment or experience in your chosen industry is a plus.
In any case, it also helps to know your market. The bank certainly will.
“If they just closed three restaurants in the last two months, their appetite to lend to another restaurant may not be very aggressive,” Surbrugg said. “They may be a little leery.”
The bank also may offer lending programs at lower rates through the state treasurer’s office, thanks to the Missouri FIRST program.
“You have to be headquartered in Missouri and do business in Missouri,” Surbrugg said. “You have to employ less than 100 full-time employees and be a for-profit organization. The loan can be used for inventory or rent, equipment purchase, renovations or if you need to purchase land or buildings.”
Purchasing land or buildings is also a big part of the mission for Rural Missouri Inc.
“We’ve done all kinds of things from daycares to car washes to restaurants to hotels, veterinarians to lawyers,” said Zola Finch, executive director of the nonprofit organization.
RMI’s offerings tend to work well for “businesses that are in a leased property and they are ready to buy a building or they are ready to move into a bigger property,” Finch said.
RMI doesn’t work as much with start-ups, she added, but it frequently helps businesses to expand outside the major metro areas using SBA 504 loans or through direct lending.
But whether the SBA is part of the deal or not, federal involvement in a loan doesn’t mean that you don’t have to impress your lender — whoever that lender might be, said Kevin Wilson of the St. Louis Small Business Development Center.
“Keep in mind that it is banks that are doing most of the underwriting on 7A, not the SBA — which is important to note,” he said. “The bank has to say yes first before the SBA.”
Other flavors of the traditional 7A include an “express” version with quicker turnaround time and a variant with certain fees waived for veterans.
In addition to looking for federal dollars, you also should check with your local municipality or county, which may offer a revolving loan fund, tax incentive or other help for your business, Wilson said.
Regardless, before you go to the bank, contacting MOSourceLink or your local small business development center isn’t a bad idea.
“There are a lot of entrepreneur support organizations, or ESOs, that can help you make sure that you’ve got all of your ducks in a row before you go in and ask for money,” Wilson said.
For some entrepreneurs — especially microentrepreneurs who are trying to stabilize their personal financial pictures — having all of their ducks completely aligned simply isn’t possible. That’s where Gondolfi and Justine PETERSEN come into the picture. The Missouri agency is among the bigger players in the practice of microlending, which serves as both a source of cash for business start-ups as well as a point of entry into the system for folks with less-than-perfect credit histories.
“What it does is offer what we consider comprehensive consultation to our clients to ultimately graduate them to mainstream finance,” Gondolfi said of the agency’s services.
In short, Justine PETERSEN exists to help clients build enough good credit that they won’t need the agency’s help anymore.
The enterprise’s average loan is about $12,000, although Gondolfi said that its SBA microloan program can give out anywhere from $200 to $50,000 to a given client. Unlike other SBA programs, that loan isn’t federally guaranteed. Justine PETERSEN simply borrows it from the government.
Of course, that entails a higher level of risk and steeper interest. Gondolfi said that, at present, the microlender’s rates run from about 7.75 to 16 percent.
“But our goal is to try and say yes, as opposed to no and give an alternative,” he said.
That’s an alternative to far less attractive options such as financing through credit cards or using predatory lenders who populate online platforms.
“We’re seeing a lot of people coming in wanting to refinance these high-interest rate loans they find on the Internet,” Gandolfi said.
For bigger borrowers, Justine PETERSEN also offers Community Advantage vehicles — more traditional 7A-style loans that have an SBA guarantee.
According to Show Me Capital, about three-quarters of Justine PETERSEN loans went to the St. Louis area with most of the rest in Kansas City.
There are a few other options for improving credit. Show Me Capital suggests developing a good history with a secured credit card or taking out credit-building loans from the Community Service League’s Small-Dollar Lending Initiative or Justine PETERSEN’s Save2Build program.
Small pools of cash can be put together using Individual Development Accounts. Available through the United Way Greater St. Louis Asset-Building Collaborative or the Community Action Agency of St. Louis County, Inc., IDAS allow for savings to be matched by community partners.
Some entrepreneurs are even working through crowdfunding platforms such as Kickstarter or Indiegogo, which give “rewards” such as T-shirts or other keepsakes to donors. But recent legal changes have created equity-based crowdfunding opportunities through sites such as Fundable and Crowdfunder and even those like Nvested, which deals specifically with St. Louis businesses.
Still, despite all of the options, Kate Hodel of Sourcelink is quick to note that there remains one stream of revenue that clearly has the friendliest terms of any financial vehicle.
“The very best way to fund your company is to sell stuff to people and have your customers pay for it,” she said.