Video Entrepreneur: Find Your Financing

by William Ronat
March 1995

It's a safe bet that many of you either started a video business (or are thinking of starting one) because you love the work. Video, as a job, has a lot going for it. You have thousands of chances to use your creativity on every job. Each of these jobs present different and interesting challenges. And if you are really lucky, you might even get a chance to create a video that could help people.

It's no wonder that you want to own a video business (or want to keep the one you have profitable). If talent were the only criteria for success, you would have it made. Unfortunately, you've probably heard of all the famous artists whose paintings didn't sell until long after they were dead. I'll assume you don't care to follow this example, and are planning to do everything in your power to actually make money in this lifetime.

Unfortunately, you need to have money to make money.

Filthy Lucre
Money. There never seems to be enough of it to buy the equipment you want or hire the help you need. Unless you are independently wealthy (in which case you can stop reading--this advice is for the rest of us), you will have to find someone or something to hand over the money you need to start or expand your business.

You may think that receive money on the strength of a handshake and good faith, but it seldom works that way. It seems that many institutions will only lend you money if you can prove to them that you don't need it. If this is not the case in your situation (i.e. you are trying to get money because you do need it), get a supply of #2 pencils and a sharpener. You have some paperwork in front of you.

If you are starting a business, you need to have enough money to cover yourself until the profits start rolling in. Add up costs for tape stock and other inventory, office furniture, computers, camera, lights and other such gear, fees for legal, accounting, licenses and other preopening expenses. On top of that, figure out your operating expenses for four months: payroll, rent and contingencies. Even if you don't have any employees, you need to pay yourself, so don't leave out the payroll. Put all these amounts together and you will come up with a round number that you should have available before you open your doors.

It's probably higher than you thought, maybe between $50,000 and $100,000 (or more, depending on how much gear you are going to buy). If you have that much cash in the bank, you must be one frugal videomaker. If you don't, you can try to start with less or you can borrow the difference.

Neither A Borrower Nor a Lender Be
Who wants to let you use their money for your own ends? How about your family and friends (or are they still mad at you for putting them on your long distance calling circle?). If your loved ones do agree to help you with seed money, remember to treat the loan as a legitimate business transaction. Get it in writing, with the loan duration, interest rate and payment schedule clearly stated. This may be awkward (Mom, I have some papers you need to sign...), but you should do it anyway. Plenty of solid friendships have turned bitter over money, and as sweet as Mom is, things could get ugly at Thanksgiving if she doesn't get her money back in a timely manner.

You could go into business with a partner, who would then have to pony up some of his or her cash. The advantages of this are many, and you have someone else to blame for not paying the electric bill. But you give up some control of your business and if you have a falling out, getting rid of your partner can be as difficult as going through a nasty divorce.

If your company is a corporation (which it can be by doing some paperwork, or to be safe, by having your lawyer do some paperwork), then you can raise money by selling stock. Just don't sell more than 49% of your company, or suddenly it becomes someone else's company (can you say "hostile takeover?")

Corporations can also sell bonds. When someone buys your corporation's stock, they own a part of your business, but if they buy bonds it just means that you owe them money. Bondholders receive a predetermined interest rate over the life of the bond. Unlike the dividends you would pay on stocks, the interest on bonds counts as a business expense and is therefore tax deductible (you do have an accountant to keep all this straight, right?).

Because That's Where the Money Is
You may think that a good place to borrow money would be a commercial bank, and depending on your circumstances you might be right. The folks at the bank want to lend you money, but they have to be darn sure that you will be able to pay it back. The criterion they use to determine whether you are a good risk or a bad risk is called the six Cs of credit. (We would probably have seven Cs, but this phrase was already in use by the Navy.)

The six Cs are: capital, collateral, capability, character, coverage and circumstances. Your banker wants to know how much capital you have already invested in your business. If you think your business is too risky to put your own money into, what does this tell the bank?

You already know what collateral is. If you don't make the payments on the loan the bank wants to come and take away your camcorder...

Of course the bank doesn't really want your camcorder (or any of your goodies, for that matter). They want you to continue to use that camcorder to make money and pay back the loan, so they can then loan you more money to buy another camcorder and so on, forever (or at least until they stop making camcorders).

Capability and character weigh your experience and reputation, so if everyone you know thinks you are a jerk and you haven't worked in the video field before, these facts could make a loan officer think twice before signing any papers. Do you have (or will you be getting) insurance on your assets? This coverage may give you enough money to pay back your loan if a hurricane or fire spells the end of all your equipment.

The circumstances of your business are things like how much competition you have (20 other video companies on your block would not be good), how many potential clients need your service, whether the local factory just hired 700 new employees, and so forth.

How does your loan officer know all these things about you? They don't. That's why you can help them out by providing the bank with as much information about you and your business as you can scrape together. Put together a financial statement, get references from your friends and business associates, do market research data on your potential clients and prepare a business plan outlining exactly how you will make your company a success.

Don't fight your loan officer. Make her life easy by plopping down every piece of information she needs to approve your loan. Does this sound like a lot of work? Get used to it. Having your own business is labor intensive--if you're just starting, you might as well forget about free nights and weekends for a while. But when it pays off, it pays off for you, so roll up your sleeves and get to it.

It's A Loan Way to Tipperary
If you belong to a credit union, you can try for a loan that will generally have lower interest rates than banks charge. But credit unions usually form around a certain membership, such as an employer, professional organization or a church.

If you don't already belong to a credit union, ask them about the requirements to join. Sometimes if you can prove you are a subcontractor for one of their members (you directed the Easter Pageant at the church, for example) this will be enough to get on board. Also, credit unions usually make short-term consumer loans used to buy cars and furniture. If you're looking for a couple of million in cash you'll probably need to keep looking.

Savings and loans are still around and may be able to loan you money, although they mostly handle home mortgages. If you already own your home or have built up lots of equity (through years of monthly payments), you might be able to get a loan using your house as collateral. Of course, if your business goes down the tubes and you can't repay the loan, the savings and loan will take the collateral. In other words, you lose your business and your house. Be careful of using this option.

Say Uncle
If you have no rich uncles related by blood you might try good ol' Uncle Sam in the form of the Small Business Administration. Be aware that this agency considers itself the "lender of last resort", so the SBA shouldn't be first on your list when shopping for money. The SBA makes two types of loans, direct and indirect. Direct loans are made by the SBA and indirect ones are made by financial institutions but guaranteed up to 90 percent by the agency.

When deciding to give you a loan the folks at the SBA will look at these conditions (the following information comes from the SBA publication "Business Loans & the SBA"):

Collateral Requirements: you must pledge sufficient assets, to the extent they are available, to adequately secure the loan. Personal guarantees are required from all the principal owners and from the chief executive officer of the business. They may require liens on personal assets of the principals as well.

Credit Requirements: A loan applicant must: be of good character; demonstrate sufficient management expertise and the commitment necessary for a successful operation; have enough funds-- including the SBA-guaranteed loan plus personal cash--to operate the business on a sound financial basis. For new businesses, this includes sufficient resources to withstand start-up expenses and the initial operating phase when losses are likely to occur. SBA may require that you provide, from your personal resources, up to one-third or even one-half of the total assets needed to launch your new business; show that the past earnings record and probably future earnings will be sufficient to repay the loan in a timely manner.

Applying for a loan from the SBA also involves preparing a current business balance sheet, profit and loss statements, current personal financial statements, collateral lists and more. Fun.

You can find out where these folks are by looking in the telephone book under U.S. Government for the local SBA office or you can call 1-800-U ASK SBA. There are also publications and videotapes on starting and managing a small business and you can get a list of them from: Small Business Directory, P.O. Box 1000, Ft. Worth, TX 76119.

Any person or institution you borrow money from actually wants you to succeed in business. It may feel like they are pounding away on the negatives when you ask for money, but look at it from their angle. More than half of all the companies that go into business fail within the first five years.

You can be the hardest worker on the planet with the best ideas around and your dream can still go down the tubes. It's harsh. There are many factors that have nothing to do with your character--economic conditions, natural disasters, changes in technology--that can put you out of business. Lending money to you or anyone else is a risk. Banks, credit unions, the SBA, your rich Aunt Mabel--all will want to see if that risk is worth taking.

So put together your financial forms and go for it. Yes, it takes some work. Yes, it can be frustrating. You may not feel comfortable when loan officers sift through the intimate financial details of your life, but there doesn't seem to be another way. Just get through it, get your money and get back to doing what you got into business to do -- make video.

Then, with any luck, it will all be worth it.

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