Finding Capital

The typical sources of financing such as banks or venture capital firms are generally reluctant to loan money or invest in record label projects. Most labels start through loans from family and friends, or by bands themselves.

Loans to record labels are highly speculative. Banks are often reluctant to fund labels and bands because the chance of failure is so great.

Some first steps to take in financing a record label and/or a new recording are:

1. Go to the library or bookstore and select a "how to start a small business" book. You can also find the The Ultimate Small-Business Resource Guide online at Fortune Magazine's website. There are numerous ones to choose from. Each should have a section on writing a business plan. Traditional funding sources -- as well as family and friends interested in investing -- require a business plan. Writing one is also an excellent means of analyzing exactly how much money you need. Familiarize yourself with the different types of loans banks offer and the typical requirements for loan applications. For example, in order to receive a personal unsecured business loan, you will probably need your last three tax returns, as well as collateral equal to or greater than the amount of your loan.

2. Have an accountant with experience with record labels review your business plan. If you can't afford an accountant you can get in touch with the Texas Accountants and Lawyers for the Arts. You may also want to contact your local Chamber of Commerce, or local office of the Small Business Administration for business plan review and analysis.

3. Make sure that you keep excellent records of the income and expenses for your band. Be prepared to demonstrate how well you have kept track of your band's business, how business has improved over a given period of time, and why starting your own label and/or releasing another record makes good business sense.

4.Grants are awarded to individual artists or to state/federal non-profit organizations, never to businesses. If you are interested in a grant, contact your nearest "foundation library" for assistance. [The Texas Music Office does not issue grants of any kind, but does have complete contact information for these types of libraries.] The Texas Commission on the Arts is the only state agency that issues grants to artists; it takes as long as 24 months for a grant to be awarded.

5. Talk with as many bands and small record labels as you can. Ask what their strategies were to get started, what mistakes they made, how they set up their accounting system, what were there initial source(s) of capital, etc.

6. Loan and loan guarantee programs for small businesses are available through the following three government agencies:

Office of the Governor, Texas Economic Development, Small Business Section
P.O. Box 12428
Austin, TX 78711-2428
Joe Morin; jmorin[at]governor.state.tx.us
Thomas Walker; twalker[at]governor.state.tx.us
(800) 888-0511
The Small Business section of Texas Economic Development assists small and historically underutilized businesses. It provides sources of contacts and research information that will assist with federal, state and local business issues for small businesses.

TEXAS ENTERPRISE ZONE PROGRAM
Upon a community designating a business as an enterprise project, the business would be eligible for a refund for state sales and use taxes paid for building materials, machinery and equipment, electricity and natural gas purchased and consumed in the normal course of business. The total refund amount dependins on investment amount and number of jobs created/retained.

Office of Rural Community Assistance
P.O. Box 12877
Austin, TX 78711
Oralia Cardenas; ocardenas@orca.state.tx.us
Mark Wyatt; mwyatt@orca.state.tx.us
(800) 544-2042; (512) 936-7890
Beginning this year, the Office of Rural Community Assistance (ORCA) will offer two loan programs for small businesses. To qualify as a rural community cities and/or towns must have a population smaller than 50,000 or consist of an unincorporated portion of a county with a population less than 200,000. Click here for application and application deadline information concerning the Microenterprise and Small Business Loan programs.

MICROENTERPRISE LOAN PROGRAM
The Microenterprise Loan Program offers monies for the development of microenterprises at the local level. A “microenterprise” is a commercial enterprise that has five (5) or fewer employees, one (1) or more of whom owns the enterprise. Eligible activities include working capital, machinery/equipment and real estate improvements.
Awards range from $50,000 to $100,000 per contract award with a total allocation of $500,000 for 2005. Awards are made through annual statewide competitions. Eligible cities and counties may submit an application and must contract with a non-profit organization (economic development corporation, community development corporation, etc.) for the purpose of establishing a local loan program that directly assists for-profit microenterprise businesses.
Microenterprises receiving loan assistance must commit to creating or retaining jobs that will not exceed a maximum cost of $25,000 per job. The jobs created or retained by the microenterprises must principally benefit low and moderate income persons. Projects funded through this program must meet primary beneficiary requirements.

SMALL BUSINESS LOAN PROGRAM
The Small Business Loan Program provides for the development of small businesses at the local level. A "small business" is a for-profit business with less than 100 employees. Eligible activities include working capital, machinery/equipment and real estate improvements.
Awards range from $50,000 to $100,000 per contract with awards totalling $1 million in 2005. Awards are made through annual statewide competitions. Eligible cities and counties may submit an application for the purpose of supporting for-profit small businesses through loans meeting a gap financing need.
Small businesses receiving loan assistance must commit to creating or retaining jobs that will not exceed a maximum cost of $25,000 per job. The jobs created or retained by the small businesses must principally benefit low and moderate income persons. Projects funded through this program must meet primary beneficiary requirements.

United States Small Business Administration (SBA)
The SBA offers numerous loan programs to assist small businesses. It is important to note, however, that the SBA is primarily a guarantor of loans made by private and other institutions. That means, if a bank approves your loan, the SBA will guarantee that loan and thus help to reduce your interest rate.

Here is a list of local SBA offices in Texas:

Dallas District Office
4300 Amon Carter Blvd. Suite 114
Fort Worth, Texas 76155
(817) 684-5500; Fax (817) 684-5516

El Paso District Office
10737 Gateway West
El Paso, TX 79935
(915) 633-7001; Fax (915) 633-7005

Harlingen District Office
222 East Van Buren Street, Suite 500
Harlingen, TX 78550
(956) 427-8533

Corpus Christi Branch Office
3649 Leopard Street, Suite 411
Corpus Christi, TX 78408
(361) 879-0017

Houston District Office
8701 S. Gessner Drive, Suite 1200
Houston, TX 77074
(713) 773-6500; Fax (713) 773-6550

Lubbock District Office
1205 Texas Avenue, Room 408
Lubbock, TX 79401-2693
(806) 472-7462; Fax (806) 472-7487

San Antonio District Office
17319 San Pedro, Suite 200
San Antonio, TX 78232-1411
(210) 403-5900; Fax (210) 403-5936

Loans programs offered by the SBA:

BASIC 7(A) LOAN GUARANTY
Serves as the SBA's primary business loan program to help qualified small businesses obtain financing when they might not be eligible for business loans through normal lending channels. It is also the agency’s most flexible business loan program, since financing under this program can be guaranteed for a variety of general business purposes.
Loan proceeds can be used for most sound business purposes including working capital, machinery and equipment, furniture and fixtures, land and building (including purchase, renovation and new construction), leasehold improvements, and debt refinancing (under special conditions). Loan maturity is up to 10 years for working capital and generally up to 25 years for fixed assets. SBA offers multiple variations of the basic 7(a) loan program to accommodate targeted needs. This program is intended for start-up and existing small businesses, commercial lending institutions and loans are delivered through commercial lending institutions.

CERTIFIED DEVELOPER COMPANY (CDC), 504 LOAN PROGRAM
Provides long-term, fixed-rate financing to small businesses to acquire real estate or machinery or equipment for expansion or modernization. Typically a 504 project includes a loan secured from a private-sector lender with a senior lien, a loan secured from a CDC (funded by a 100 percent SBA-guaranteed debenture) with a junior lien covering up to 40 percent of the total cost, and a contribution of at least 10 percent equity from the borrower. The maximum SBA debenture generally is $1 million (and up to $1.3 million in some cases). This program is intended for small businesses requiring “brick and mortar” financing. Loans are delivered through certified development companies (private, nonprofit corporations set up to contribute to the economic development of their communities or regions).

MICROLOAN, 7(M) LOAN PROGRAM
Provides short-term loans of up to $35,000 to small businesses and not-for-profit child-care centers for working capital or the purchase of inventory, supplies, furniture, fixtures, machinery and/or equipment. Proceeds cannot be used to pay existing debts or to purchase real estate. The SBA makes or guarantees a loan to an intermediary, who in turn, makes the microloan to the applicant. These organizations also provide management and technical assistance. The loans are not guaranteed by the SBA. The microloan program is available in selected locations in most states. This program is intend for small businesses needing small-scale financing and technical assistance for start-up or expansion. Loans are delivered through specially designated intermediary lenders (nonprofit organizations with experience in lending and in technical assistance).

LOAN PREQUALIFICATION
Allows business applicants to have their loan applications for $250,000 or less analyzed and potentially sanctioned by the SBA before they are taken to lenders for consideration. The program focuses on the applicant’s character, credit, experience and reliability rather than assets. An SBA-designated intermediary works with the business owner to review and strengthen the loan application. The review is based on key financial ratios, credit and business history, and the loan-request terms. The program is administered by the SBA’s Office of Field Operations and SBA district offices. This program is intended for designated small businesses and is delivered through intermediaries operating in specific geographic areas.

-Casey Monahan, Texas Music Office (512) 463-6666 music[at]governor.state.tx.us