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Industry News

Unconventional lenders may fill funding gap for entrepreneurs

Regardless of how a business receives initial funding, incorporation can help set the stage for success.

Regardless of how a business receives initial funding, incorporation can help set the stage for success.

New York Times contributor Melinda Emerson recently wrote an article providing an overview of how "alternative lenders" can fill some business owners' financing needs in certain situations where banks may be unable to provide loans.

Although these institutions consider traditional indicators of creditworthiness such as credit scores and financial records, they also attempt to account for other factors that may be indicative of whether an organization will be able to make good on its obligations. This includes the amount of content a company posts on social media sites and the number of people who "like" or "follow" its accounts.

Emerson recounted how one such lender helped a Chicago entrepreneur and his wife breathe new life into their pet supply business—Windy City Parrot—which specializes in items for the care of exotic birds.

Lender's consideration of social media statistics helped entrepreneur secure funding

Mitch Rezman and his wife were very active on social media and had operated an e-commerce site since 2002. They attracted interest in their pages by making as many as six posts per day, asking questions about animals, sharing photos of birds using their products and sending out notifications about birds that had been lost or found.

When Rezman read about an alternative lender called Kabbage, he had already been rejected by a number of banks and a state-run program that provides financing to entrepreneurs, despite writing a 16-page business plan with supporting documentation and completing six in-person interviews. They told him the company's margins were too small to meet their standards.

After seeing a piece about Kabbage in a newsletter, Rezman submitted some basic information about his business and quickly received his first tranche of funding—$4,600. The lender's consideration of social media may have been one of the key factors that made it see value in Windy City Parrot's business model. At the time, the company was liked by nearly 27,000 people on Facebook.

After paying back his initial line of credit, Rezman began to receive larger advances with lower interest rates. He told the Times that he has borrowed and repaid almost $40,000 this year.

"It's really hard to find money today," Rezman said. "We have some situations where we're just a little guy fighting with big-box retailers, and I was able to buy at distributor levels with Kabbage money, to bring down costs enough to lower my prices, sell product and still compensate for Kabbage interest."

Rob Frohwein, founder and CEO of Kabbage, said that Rezman's experience offers a good example of how companies can benefit from working with alternative lenders. He said his firm had lent about $140 million since being started in 2011, with the average customer growing 70 percent during the six months after taking an initial advance.

"What we're trying to do is get a 360-degree view of a small business, not just at a point in time but trying to keep that view over a long period of time," Frohwein said, adding that Kabbage had started incorporating social media statistics into its evaluation process after determining that companies with high levels of social activity tend to have low delinquency rates.

Access to capital only one component of success

Growing companies need more than funding to generate long-term value. Incorporating can help by allowing business owners to establish an independent legal entity that is insulated from their personal finances. For many companies, incorporating in Delaware provides an attractive option.

Unlike certain other states, Delaware does not require companies to disclose the names of owners or corporate officers on initial incorporation documents, which makes it a sound choice for organizations with stakeholders who are concerned about privacy.

Another advantage of incorporating in Delaware is the low cost. Both the initial incorporation fee and the annual fee are relatively low compared to most states.