Alternative Financing Options Explored

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In an economy where it can be difficult for small business owners to secure loans from traditional sources, an increasing number of start-ups are finding alternative sources of funding via social media and community outreach. “Is Alternative Financing an Option?” was the question explored by Janet Geddis of Avid Bookshop, Rebecca Fitting of Greenlight Bookstore, and Amy Cortese, author of Locavesting: The Revolution in Local Investing and How to Profit From It (Wiley), at last month’s Winter Institute.

Cortese, who spent more than a year chronicling the local investing movement, began the Wi7 session by noting that bank loans for small businesses are at a 10-year low. In 2011, big banks approved just 10 percent of small business loan requests, small banks approved 44 percent, and credit unions approved 50 percent, she said. However, local investing is gaining popularity since people are now, more than ever, ready and willing to invest in companies they believe in. “I think there is a growing awareness in the public that our investment decisions carry consequences,” she said, “just as our buying decisions carry consequences.”

Cortese pointed to three alternative financing methods that booksellers might consider:

  • crowdfunding platforms, such as Kickstarter and IndieGoGo, that have been gaining traction in recent years;

  • the Community Supported Bookstore model pioneered by California’s Point Reyes Books, wherein customers set up an account with the store, deposit a specified amount, and draw future purchases against the balance; and,

  • a direct public offering, “which is basically a do-it-yourself IPO,” Cortese said, where a bookstore owner would reach out to friends and family, and their social network, offering rewards and incentives in exchange for capital.

Whatever the method, Cortese cautioned the audience to be careful to comply with federal and state regulations, and to always consult a lawyer before making financing decisions.

Geddis, who opened Avid Bookshop in Athens, Georgia, this past October, told booksellers that she chose IndieGoGo as her crowdfunding platform, since it allows users to keep the money they have raised even if they fall short of their goal. Geddis set a goal of $13,000 and made slightly less than $2,000, so she immediately turned to other fundraising avenues.

Her aim was to start her business online and then open a storefront. With the creation of her online bookstore in mind, Geddis hosted a photography show, selling some of her photos to finance the launch of the website. Throughout the process, she shared her story with as many people as possible to create community awareness and in the hope it would lead her to financing options that weren’t well advertised.

“I did have heartbreak,” Geddis said, including an angel investor who later changed her mind and several local banks that wouldn’t risk giving her a loan.

Geddis then borrowed an idea that had been successful at Brooklyn’s Greenlight Bookstore: a Community Lender Program. Thirteen people agreed to loan the business $1,000 each. Someone else offered to co-sign on a line of credit. “I found people who really believed in what I was doing, and that really helped,” she said.

Geddis also worked with her county government, which was able to offer a “gap loan,” a lower-risk loan that covered the difference needed to open the store.

When it came time to open, Geddis used Time Bank, a local organization that rewards users with “time dollars” for doing labor for others in the community. (For every hour spent doing something for someone else, you earn a TimeDollar, which can be redeemed for another person spending an hour doing something for you.) “That really lowered my cost tens of thousands of dollars in build-out,” she said. Community members helped clean and paint the retail space, as well as to build and move shelving throughout the store up until opening day.

In 2009, Rebecca Fitting and Jessica Stockton Bagnulo opened Greenlight Bookstore in Brooklyn, New York. In 2007, Stockton Bagnulo had won the Brooklyn Business Library’s Power Up! business plan competition and was awarded the grand prize of $15,000. Fitting became her business partner in 2008, and they were working on their business plan and exploring possible store locations about the same time the Fort Greene Neighborhood Association (FGA) conducted a comprehensive survey that revealed a void in the community: Survey participants wanted a bookstore in their community more than any other retail store.

The FGA threw a party to celebrate their bookstore that didn’t yet exist and closed the night with a loan pitch: a Community Lender Program. Community members were asked to provide loans of a minimum of $1,000, and lenders were allowed to choose their own interest rate between two and four percent. The program yielded more than $70,000 in start-up capital. After one year in business, the owners began a five-year plan of quarterly payments to their community lenders. The party was attended by 300 community members, and in addition to a flurry of local press, Fitting and Stockton Bagnulo drew the attention of the New York Times, and their two largest lenders were a direct result of that story.

“We were a positive story in a news muck,” said Fitting. “Opening a store in a recession is actually good timing. You’re better able to negotiate cost, and if you pitch yourself as a positive story, people want to follow you.”

While they were conducting more unconventional methods of fundraising, Fitting and Stockton Bagnulo were also trying to acquire traditional bank loans. Like Geddis, they were turned down by several banks for not having a business history. Eventually, they received a loan from the World Trade Center Small Business Recovery Fund, which was created after September 11 to rebuild small businesses.

After opening their store, they continued to rely heavily on their community to pitch in with cleaning, painting, and building. “That kind of community involvement is invaluable,” said Fitting, adding that customers continue to come into the store to show off their work to family and friends. “You really can’t get that any other way. It was so much like a barn-raising. It really took a whole community to do this.”