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Alternative Business Financing: How Changing a Business Model Led to New Possibilities

September 20, 2017

It is nearly impossible to predict how your new business venture will unfold. You may have visions of who your company will sell to and how your company will grow and slowly but assuredly take over the market. But as any entrepreneur will tell you, this is not how it works. Just ask Dawn Cole as she originally started her company, Kerberos Inc., as a marketing company aimed at helping small businesses sell their products and services to the U.S. government. However, her business model quickly changed into designing and delivering effective communication tools between U.S. military service members when she received her first contract of $500,000 to build six customized radio and satellite units.

It all started when Cole was teaming with a non-profit client in Afghanistan who worked to improve the rights of women and children. Cole also worked among several U.S. military service members and witnessed a lack of effective communication tools between them; she saw this instantly as an opportunity. So, Kerberos quickly changed its business model from marketing into a diversified company that designs and develops specialized radio and satellite communication tools for the military, as well as providing armed security guards for U.S. federal facilities.

Excitedly, Cole quickly set out to obtain the necessary capital required to design and build the radio and satellite units, however, despite having an official U.S. government contract banks denied her requests for a loan. She attempted bank after bank -- eleven banks in all -- and every time the answer was the same “no.” Each bank expressed varying concerns with the risks involved: it was her company’s first government contract, there was no guarantee the product would work, Cole had no collateral other than the contract, and she couldn’t invoice the government until she delivered the product. Cole suspected that the banks also lacked confidence in a woman’s ability to successfully build military equipment. No matter the banks’ reason for denying Cole’s request for a loan, the fact remains that only 16% of conventional small business loans are awarded to women, according to a U.S. Women’s Chamber of Commerce Policy Brief, 2017, and these loans account for only 4.4% of the total dollar value of loans in the U.S.

Obtaining the capital she required to get her new business model off the ground was proving nearly impossible. “Desperate,” she says, “I approached the Houston Regional Manager at the Small Business Administration and shared my problem with him.” He ended up recommending the Spirit of Texas Bank, as well as two others. Cole had to convince the Spirit of Texas Bank to not only take a risk on her business, but also on herself. “I shared all of my financial statements and projections, all costing details for the product, details about the timing of expenditures and all of our engineering drawings,” she explains.

A traditional small business loan would not work for what Cole needed to accomplish, however, working with the Spirit of Texas Bank, Cole ended up getting the capital she needed in a unique way. She went back to the government contracting office and convinced them to assign the contract to the bank instead of herself. The way this played out was the bank paid her suppliers directly rather than giving the funds to Cole. Then when Cole delivered the product to the government and received payment, she didn’t pay off the loan, but rather put the funds into an interest-bearing savings account, which then served as collateral for an SBA loan. Cole is now able to assign the contract to the bank when she needs funds, and withdraw the required amount from the savings account. Doing this allows her to avoid the additional time it takes to write a new loan as well as any closing costs, “which can easily exceed $10,000,” she says.

Today, Kerberos Inc. is growing at an impressive rate of 80% each year. This alternative funding route has allowed them to grow at a healthy rate due to the ability to handle large contracts. She advises other women business owners to try and get the SBA to back you up, and be a personal advocate for your business. Also getting the endorsement of the highest-ranking SBA regional manager doesn’t hurt either, it certainly helped Cole get her initial funding. Cole is optimistic about her company’s growth, and states, “we could very well be earning contracts in the $5 million range soon.” She wants to obtain a more standard line of credit in the future, but still thinks there’s some time until that will happen. “For now,” she explains, “this financing method is working very well for us!”

There are numerous alternative or nontraditional routes to funding and investing money for emerging businesses that are often unknown to the greater business community. Leading Retirement Solutions is proud to bring you these unique stories of prosperous business ventures that find success despite the financial obstacles laid before them.

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