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Lifting All Boats
December 6, 2022
Business handshake.

The first rule in financing a start-up is often; don’t finance a start-up.  Banks are good about adhering to this rule and many entrepreneurs should heed their example.  

Start-up loans are essentially personal loans.  Even if you are incorporated, the loan will likely require personal guarantees or liens on personal property, impacting your credit rating or that of your guarantor. 

But many start-ups require additional funding for specialized equipment, rent, inventory, or working capital just to open their doors.  It also makes sense to build credibility and access to capital as quickly as possible, even if you have no immediate need. With banks requiring several years of financial statements or requiring sizable minimal loans, fledgling companies have difficulty accessing needed credit. 

One way the eligibility gap is addressed is by non-traditional community lenders such as The Rising Tide in Bethlehem. 

The Rising Tide ( ) is a not-for-profit Community Development Financial Institution or CDFI, certified by the US Treasury Department. CDFI provides credit to low and moderate-income business borrowers underserved by traditional commercial lenders.  Their goal is to first sustain, then graduate businesses into “bankable” prospects for commercial loans.  In fact, as Christopher Hudock, the Director in charge of The Rising Tide, explained to me, “We will not provide funding to someone who is bankable.“  

Unlike banks or credit unions, The Rising Tide has no depositors but relies instead on borrower repayments to supplement the seed money provided by private foundations, public funding, and banks, through loans and grants. 

But, local governments will periodically make small grants available to businesses, often for real estate restoration or facades.  What about The Rising Tide?  Does it give out grants or “free money”? 

“ We get this question all the time.”, laughed Chris. Short answer, no. They make loans. As for repayment, “We take it very seriously.” Christopher stressed the need for loan repayment to continue their program. “We need the money back so we can help the next person. We don’t have an endless supply of funds.”

Chris identified several popular loan products tailored to start-ups and small businesses: Micro-loans, Small Business loans, and Lines of Credit, as well as what it takes to get them. 

Microloans under $50,000 are designed for start-ups, though they can be used by other businesses. Small Business loans up to $150,000 are available to businesses older than one year. Both types have fixed durations and interest rates. Working capital or revolving lines of credit up to $15,000 are available to all businesses. The amounts borrowed can fluctuate and repayment can reactivate the available credit. 

What about interest rates? 

On fixed-rate loans, per Christopher, “On average, our rates are right around 9.5 to 9.75%.... It is a couple of points higher than you would pay to your bank”. 

That is if you could get a loan. Of course, if you could, you wouldn’t be their customer. Their modestly higher rates reflect a few realities. The Rising Tide uses bank loans to fund its loans, replacing the role of depositors. Higher risk too requires higher rates to cover losses and operations and as Chris mentioned, “We want you to pay us off”, referring to refinancing, ”and that is one of the ways that…as best as we that (payoff) happens.”

What about the length of your loans?

“The vast majority of loans we do are term loans”, according to Chris. “They come with a fixed interest rate and what’s important is they have no pre-payment penalty.” Once again, the waiver of the penalty is a benefit over standard commercial loans. It’s designed to encourage a bankable small business to re-finance, once it finds its footing.  

“A term can range anywhere from a year to 15 years…based upon the dollar amount you’re looking to borrow and sometimes the collateral…”A general rule of thumb is that for every $5,000 we give you a year up to 7 years.”

The Rising Tide will look to business assets too for collateral including, receivables and inventory, and even equipment. Larger loans or loans secured by real estate may justify longer terms and The Rising Tide may take a junior or subordinate lien position.

Who gets the loans? 

Application requirements are similar to commercial banks and can be found online. The Rising Tide approves roughly half the completed applications they receive.

Over 75% of their loans are made to start-ups or businesses under two years old. Seventy percent go to applicants in low to moderate, income areas.  Two-thirds are ventures at least partly owned by women and 40% are minority-owned.  

Collateral and personal guarantees are requested. Both may not be required, but personal guarantees usually are. Collateral is not the critical element in making credit decisions. Neither is a personal credit score a showstopper. 

“Collateral for us is…we like it, we want it…. but that is where we differ greatly from a bank… we don’t need to be fully secured if everything else works.”  He went on to emphasize that a typical bank is constricted by its regulatory environment. It needs to limit risk to protect depositors. At a CDFI, the differences in funding sources and the community service mission provide more flexibility in evaluating risk.  At The Rising Tide, Christopher summarized that attitude as, “We start with a “yes” but don’t screw it up. Don’t make me say “no”…We will do what we need to do to help somebody.”

How long does it take to get a loan?

Because there are various hurdles to clear, including finalizing the business plan and working through a loan review committee, Christopher said, “I tell people about a month.”

Best time to apply for a loan? 

When you don’t need it, of course. Revolving lines of credit should be considered by successful small businesses without immediate borrowing needs. Even large businesses need to cover temporary cash flow shortages or take advantage of seasonal or unexpected opportunities.  “Too many times something comes up and you’re not prepared to handle it.”, Christopher noted.

Just having a line, without withdrawing funds against it, can slowly build creditworthiness and it costs nothing.  In the event a line is inadequate, a business with a steady track record under a line of credit has a great opportunity to secure a term loan of an even greater amount and longer duration.  

What is the biggest mistake applicants make? 

Unbelievably, it’s not completing the loan applications.  Only about half of loan inquiries result in completed applications. 

The second, said Christopher, is “overestimating their revenues and underestimating their expenses. I tell people, they have to separate their heart from their coconut…we’re going to spend a lot of time on the business plan”.  

Since many applicants have little collateral and may not even be operating a business yet, a solid business plan and cash flow statements are the most critical elements in the loan application. 

So how do you draft a winning business plan?

A solid business plan doesn’t have to be complex, simplicity helps, but it has to be realistic.

When his describing borrowers’ businesses, Christopher pointed out that “probably the most popular…are hair…barber shops and hair salons”, with personal services of all types being the most popular business grouping.  These markets you’d presume were well served, but within The Rising Tide portfolio most of these businesses continue to perform and new ones are always added. 

Maybe that’s because the owners not only understand the service details, being, for example, experienced hair care professionals. But their personal experience may help them understand their clients’ habits and how to attract them and cater to their needs. They possess a “top-down view”, so to speak, of their business environment, helping them create reasonable business projections. 

They may not understand how to run a business or build a financial plan, however, so there is a learning curve for most. Having prior experience in a business or management, though helpful, is not critical, as thousands of new franchisees, dozens of The Rising Tide clients, and numerous local start-ups prove annually.

The Rising Tide can assist entrepreneurs to refine initial plans prior to submitting their applications. But starting plans from scratch is beyond their scope. As Chris said, “I tell people we won’t write it”.  He also discourages people from paying someone to write their business plan. Fundamentally the owner needs to understand the plans and personal commitments in detail, requiring a level of effort and knowledge that can’t be completely delegated to others. 

Building a comprehensive plan is a challenge for budding and even active businesses, and sometimes getting assistance is important. SCORE of the Lehigh Valley, in cooperation with the SBA, is one mentoring resource to use when building business plans from scratch. There are others too, like the Small Business Development Center at Lehigh University or the various Community Action Development Corporations located throughout the Valley. 

But running a business requires passion behind the business plan.  Christopher felt that the major red flag he identified in businesses that did not succeed was building and sustaining this passion. “If you are a small business owner and aren’t 100% committed and determined that is what I want to do. You are going to fail”.

Author: Hugh Kelly

511 E. Third Street, Northampton Community College Center for Innovation and Entrepreneurship Room 112
Bethlehem, PA 18015
(610) 266-3000

Copyright © 2023 SCORE Association,

Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.

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