Retailers look to rich relatives to help set up shop.

Money available for start-up ventures gets harder to find

The only way to start up a new retail business these days is to either borrow money from a rich relative or take out a personal loan, retail experts say. With credit tight, lenders are having enough trouble finding qualified existing retailers to lend to, and are reluctant to loan to a retailer with no track record.

Entrepreneurs are now forced to ask relatives for financing because banks aren't lending to them, said Richard Giss, partner in charge of the Southern California retail group of accounting firm Deloitte & Touche.

The banks formerly made loans for entrepreneurs to open new stores or to expand, but now most banks' terms for such loans are too stringent, he noted.

Some banks, though, are willing to lend to mom-and-pop retailers who are prepared to put up their personal assets, such as their car or house, as collateral.

"The financing for people willing to put their personal signature on the line is still there," said Ed Zorehkey, chief executive of Zorehkey & Associates, a retail and real estate consulting firm based in Sherman Oaks.

But San Francisco-based Wells Fargo Bank, for instance, will not lend to retailers that have been in business for less than three years.

"We really focus on how long somebody has been in business. There's nothing like a track record," said Mike James, senior vice president of the Wells Fargo division in charge of small business lending.

Among retailers that do have a track record, it is easier for some to get loans than it is for others, said John Golisch, a partner specializing in the retail industry in the Los Angeles office of accounting firm Arthur Andersen & Co.

Entrepreneurs can more readily get loans to open stores with low overheads, he said. For example, financing is more available to open an apparel store than to launch an automobile dealership because a clothing store only needs some small space, some clothing racks and inventory, Golisch said. In contrast, a car dealer needs a much larger space, a showroom and costly merchandise to open up for business, he said.

Certain restaurants are also relatively expensive to start because special equipment is needed to operate them, Golisch said, noting that it costs about $750,000 to open a McDonald's outlet, including the start-up cost and the franchise fee.

Giss argued that it's tough for all retailers to get financing during these tough economic times. "Right now retailing, to most sources, is a dirty word," he said.

But retail financing isn't as hard to obtain as, say, real estate financing, said Mark McGaughey, first vice president specializing in retail with the downtown office of CB Commercial Real Estate Group. "They (retailers) are not burdened with the same problems as developers," he said.

A retailer with a good balance sheet, good profit margins and good sales is as likely to get a loan as a manufacturer of widgets, McGaughey said. Lenders are looking at each retailer on a case-by-case basis rather than at the performance of the industry as a whole, he noted.

James of Wells Fargo said his bank hasn't tightened qualifying standards for retail loans but recently a smaller percentage of retailers have been able to meet those standards. "Year-to-year financial results are not as good. In general there's been a deterioration," he said.

James said he primarily looks for three things when he considers lending to a retailer. The first is the retailer's track record, the second is the retailer's profit, and the third is retailer's secondary sources of payment, which could include assets like inventory or property.

Cash flow is easier to determine in the retailing business than it is in other industries, such as contracting, he noted.

Most of a small retailer's revenue comes in as cash or via credit cards. The only risk a retailer is open to is a bounced check, James said.

By contrast, contractors send bills for their services and have to go and collect if the bills aren't paid. Thus, operating a business like contracting is financially riskier than retailing.

But the secondary payment sources, or assets, of small retailers are more questionable, James said. For instance, he said, if a lumber company owner defaults on a loan, the lumber is easy to sell, but inventory from a stationery store is not as readily peddled, if the bank can get hold of it at all.

Since most small retailers lease their space, and in the case of a loan default are not making payments to their landlords, the landlords often hold the inventory ransom for the rent and refuse banks access to it, James explained.

But lending to retailers where there's a good chance the bank will get access to the inventory is only a little riskier than lending to other types of small businesses, he said.