Editor’s Note: This article is the second in a three-part series on scaling up women-owned businesses. Part 1 covered using cash. Next up is equity.
For years, Rebecca S. Hage Thomley successfully self-funded her Golden Valley, Minn.-based firm Orion Associates, a growing family of companies that provide management services to social-services providers. But in 2013, she wanted additional funds to fuel a national expansion.
Not keen to give up control to equity investor, Thomley turned to her bank. She was looking for a substantial sum, and to meet her needs her small local bank had to partner with a mid-sized bank, but she ultimately got a $9 million credit line. “One of the things we do very well is build relationships with our banks. They’re not just someone we get money from, they are a partner,” Thomley told us last year.
The expansion has gone well. Today, Orion operates in six states and brings in $124 million in annual revenue, up from four states and $56 million at the end of 2012.
Thomley is one of many growth-oriented women business owners who relies on her knack for forging relationships to secure the outside capital her business needs to thrive. It’s a talent that the National Women’s Business Council has said could help more women get the funds they need to grow — and narrow a funding gap between men and women that contributes to persistently smaller women-owned firms.
“One of women’s strengths is building relationships, yet they seldom focus on building relationships with banks and bankers,” the NWBC says in a 2010 report. “The most successful women business owners have moved from seeing themselves as a supplicant in relation to the bank to viewing the banking relationship like any other business relationship.”
Cultivating Relationships with Banks
Most owners finance expansion the same way they finance starting up — with personal savings and business earnings. But this approach can cap growth, if they have too little money to seize key business opportunities. In fact, taking on business debt to bolster operations is, arguably, a sign of maturity. Three-quarters of firms with 50 or more employees carry some debt, compared with 60 percent of firms with fewer than 10 employees, according to the U.S. Small Business Administration. Older firms carry far more debt than their younger counterparts.
U.S. women, regardless of the size of their businesses, are less likely than men to access capital, whether debt or equity, according to a 2014 NWBC report. However, women owners who are focused on expansion are more likely to do so. Women’s reticence is often due to a lack of comfort with financial products and services, fear of having their applications denied and a common view among women that debt is “bad,” the council says.
Indeed, women are only half as likely as men to obtain business loans from banks, according to the SBA. That appears to be changing, however. The NWBC’s 2015 annual report notes that women’s use of several types of SBA-backed loans backed saw more than 25 percent growth from 2014, amid a push to expand public awareness and the participation of community banks and credit unions as lending partners.
These gains for women came during a bumpy recovery for small business lending after the 2008 financial crisis and resulting Great Recession. In the second quarter of 2015, 24.2 million loans worth $599 billion were outstanding to small businesses, according to the SBA. Almost half, or $298 billion worth, were generated by community banks.
An early relationship with a bank is critical to securing future business financing, experts say, and should start well before a company needs money. New entrepreneurs should carefully select a community bank, looking for one that will provide a personal banker and that has the products and services they will need later on, advises Garnett Newcombe, co-founder of CEO Real Talk, a business-mentoring firm, and also the CEO of Human Potential Consultants, an employment company in Torrance, Calif.
Then they should open an account, make direct customer deposits and maintain enough funds in the account to more than cover expenses. “This shows your banker that you are consistent in making deposits and have an ability to handle money. You establish a history with the bank, and when the time comes for a loan, your business banker will represent your business with confidence to the team that makes the decisions,” she says.
Courting Private Lenders
Community bankers are not the only people who do business lending, though. Many business owners turn to friends, family and private investors for cash infusions — arrangements that, arguably, depend even more on strong relationships.
Ana Sortun, a Boston-area chef and restaurateur who we featured in a July 2014 video, discovered that private lenders from within her own devoted customer base are her best source of expansion capital.
Sortun has three restaurants — Oleana, a Mediterranean spot near Harvard Square, nearby Middle Eastern cafe Sofra, and a Turkish tavern called Sarma in Somerville — that, together, employ 150 people and gross about $8 million in annual revenue.
She spent 3 years raising almost $1 million from private lenders to open Oleana in January 2001. Paying that sum back wasn’t easy, since margins are thin in even the best-run restaurant. So when she set out to open Sofra in 2008, she took $250,000 from a bank, which offered a lower interest rate, and $400,000 from private lenders.
“It was a big mistake, so we won’t do it again,” she says. “The bank comes first always. There’s lots of paperwork, literally a medical exam… It was not a good experience for us.”
When she launched Sarma in 2013, she returned to private lenders for the $1.3 million she needed. “For us, it made sense to pay a little more interest but be more flexible” to set terms that worked for all parties, she says. “The bank has absolutely no flexibility and really throws their weight around.”
When pitching prospective lenders, Sortun presents a meticulous business plan, restaurant concept, description of the team and plan for repayment. With a well-thought-out blueprint and an attractive interest rate, she has never had problems raising money.
“These people have particular interest in restaurants, and they want them around,” she says, but don’t necessarily want to be an equity partner. “You’re tapping into a group of people who really love food.”
Sortun says the hardest piece of the restaurant business is the talent. For both Sofra and Sarma, she and her business partner Gary Griffin secured a key player by bringing in a third “sweat equity” partner who contributes creativity, passion and talent needed to make the place go.
“You build teams because nobody does any of this alone,” she says. In fact, business growth is “really about the growth of people for me. The concept is worth nothing unless you can find the people to invigorate it and make it come true.”
These days, Sortun focuses mainly on management, strategy and vision. The latest plan she’s cooking up is to expand Sofra’s retail business, which currently accounts for about 35 percent of sales. It sells takeout prepared food, baked goods and grocery items like special tahinis, preserved lemons and pomegranate molasses from a small retail area. She has a cookbook coming out in October to share Sofra’s story and help curious cooks use those delicacies.
Sortun wants to open a larger retail space, expand Sofra’s presence at Boston farmer’s markets, and build much bigger kitchen to support it all. To do so, she and her partners would likely, again, seek private loans from investors — probably between $500,000 and $1.5 million, depending on the ultimate scope of the project.
In retail, Sortun sees opportunities for both sales growth and to touch more people. “When the restaurant is full, it’s full. But with this, as long as we have the space and the means to produce, we never have to say ‘no,’” she says. “Food, it can get people’s heart. That’s why we do it.”