Small Business

The Case for Affinity Lending


By Sandra G. Wagenfeld You're an entrepreneur, but you're not in the business of making mundane products or offering run-of-the-mill services. Instead, your business features a creative twist. It's an advertising agency that places in minority media, or a design firm that carries your name, or a studio that produces, say, DVDs that extol the virtues of basketball for inner-city youth.

So where do you go for financing? Likely to those same resources favored by all entrepreneurs: personal savings, loans from family and friends, grants from the Small Business Administration. Eventually, you decide to approach conventional lenders such as banks -- and that's where the music stops.

As a creative person, you're likely to have a vision for your idea, but not necessarily for turning it into a business. You might be at a loss when it comes to business fundamentals, such as strategic thinking, long-range planning, and adequate capitalization. Instead, you think, live, and breathe your idea.

SPEAKING FROM EXPERIENCE... That could put you at odds with traditional lenders, such as banks. Indeed, you might find it awkward to approach the "suits" that fund by the book -- and expect you to have yours in order. And that, in turn, is where affinity lenders come in. They provide the gap between the idea that is sometime stalled or stopped because of a lack of funding; indeed, they provide what we call a "booster rocket" to propel businesses to the next stage.

We know. We've been there. Starting our own company, a New York-based staffing agency in 1986, my business partner and I endured the well-trod path of pursuing loan financing, because we didn't want to take equity funding, with its requirement for an ownership stake in our business. To launch Swingshift, we used personal resources of about $150,000, and eventually secured a bank line of credit for $750,000. Looking back, it is clear that the process was arduous and time-consuming.

Our agency was, at the time, in the business of placing talent trained on the then new graphics software programs, such as PageMaker and Quark, which were fast putting traditionally trained talent out of jobs. The shift opened up an entrepreneurial opportunity for us, and more importantly, allowed us a unique glimpse into what makes creative businesses tick.

From the beginning, we were amazed by the gap between these owners' focus on the idea and their need to build a business. In one case, the designer of an innovative household product found his business at a standstill for the lack of $150,000 to put together a prototype. He was overwhelmed by the thought of having to secure the funding.

FUNDING FROM FRIENDS. Enter MIXcreative, a private investment company founded in 2004 to serve the arts-oriented entrepreneur. A look at what my company is and how it operates constitutes a primer of how to seek funding from an affinity lender.

In many respects, this enterprise falls somewhere on that vast spectrum of entrepreneurial financing known as angel funding, namely, money provided by individual investors. Some angels work like venture capitalists, demanding an equity stake. Others, such our MIXcreative, veer toward making investments that more closely resemble loans.

As an affinity lender, our company provides a comfortable venue for creative entrepreneurs to find financing in a timely manner. Because we speak their language, we are less psychologically intrusive when hearing their story. They, in turn, are more apt to approach us, because they know they will get a sympathetic ear.

FLEXIBILITY-PLUS. Critical to our philosophy is that we don't take an equity stake at the beginning. We know and understand that creative individuals view the idea as their baby. Indeed, it is the integrity of the idea that entices MIXcreative to finance the company in the first place.

As do all financiers, we seek a return on our investment, specifically 25% to 45% over three to five years on loans that average $250,000, but can range from $100,000 to $1 million. Our approach is to focus on companies with sound business plans and annual revenue of at least three times the amount of funding sought. Conversely, we do not fund startups.

As affinity lenders, we are able to alter those terms to fit the needs of the emerging business. Simply put, we can be more flexible than conventional lenders. We might extend the terms of the loan, for example, or accept equity in lieu of cash payments. In some cases, we offer -- or strongly advise -- management assistance. We even provide talent from our staffing agency at reduced rates.

COMMON TONGUE. Affinity lending, of course, isn't entirely the province of arts-oriented lenders, nor is it a new concept. In high technology, and in particular, the software arm of that industry, like-minded private lenders -- many of them former entrepreneurs -- have long stepped up to the financing plate.

In our case, we've extended the concept to the creative industries. The minority-oriented advertising agency I mentioned at the beginning of this article, as well as the name designer and the producer of DVDs featuring basketball are all currently applicants for MIXcreative funding.

More critically, all those outfits feature owners who understand the benefits of this alternate financing source. These entrepreneurs know they might secure the funding they need, sooner, and with greater ease, if they approach individuals who speak their language.

You may well be one of those enlightened entrepreneurs. In fact, you are lucky if you are in the arts, because then you can approach us -- and you won't even have to wear a tie!

Sandra G. Wagenfeld co-founded SWINGSHIFT LLC, a staffing agency with offices in New York and Greenwich, Connecticut, in 1986, and currently serves as chair, overseeing financial management and long-range planning. The agency has annual revenue of $1.5 million, six employees, and places 50 to 100 individuals. In 2004, Wagenfeld founded MIXcreative, a private investment firm that specializes in funding creative businesses, including design studios, advertising agencies, and branding and marketing firms. She serves as its president. MIXcreative expects to fund three later-stage companies annually with loans averaging $250,000. Entrepreneur's Byline comes to BusinessWeek Online readers courtesy of EntreWorld.org, a resource for entrepreneurs that is sponsored by the nonprofit Ewing Marion Kauffman Foundation.


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