Tim Erven founded Custom Gaming in 2008 when he was 18 years old. Over the next five years, the company grew to become the leader in rapid-fire controllers for serious gamers. Custom Gaming was not Erven’s first entrepreneurial endeavor, however. At the age of 10, Erven started an e-commerce company that sold strategy guides for video games, Pokemon cards, and custom-made skateboards. He was able to use the money from his various ventures to pay his way through college at Drew University in New Jersey.
After five years of operation, Custom Gaming had grown to about 250 orders a week through its Amazon storefront, which generated about $300,000 in revenues. Although the business is profitable, like any small companies Erven has had to struggle with cash flow issues as the company grew. Erven tried to secure a $10,000 loan to help pay for improvements to the Web site and to rent a warehouse to store products. He supplied the banks with tax returns that demonstrated the profitability of his business. However, each of the six banks that he approached for a loan rejected his application. His parents offered to put their home up as collateral for the loan, but banks still rejected his loan application. The bankers expressed concerns about Erven’s age and the fact that his business had no credit record. Because he has not been able to get a bank loan, Erven has relied on several personal credits cards to fund cash flow in his business and support its growth.
Erven’s loan requests were within the amount that banks typically approve for business loans. However, even though Erven was willing to reduce the amount of the loan below conventional standards, he was unable to secure approval from the banks.
Desperate for funding, Erven has explored nontraditional financing. However, he is concerned about the costs of this type of funding when compared to a bank loan. He has even explored getting equity financing from Chinese investors who are interested in having him move his production to China.
“I’m either going to have to give up a portion of the company or pay a high [interest rate],” says Erven. “I’d be able to get a much lower rate [from a bank], but that’s the reality of what I have to do to get the funding.”
1. What other sources of financing do you recommend that Erven consider for the financing he needs for his business?
2. Erven had never borrowed money for his business before the opportunity to expand his business and rent warehouse space. What steps can entrepreneurs take to make sure that they have financing arrangements in place when opportunities such as this one arise?