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Banks Aren’t Lending: Where Can Small Business Owners Find Money?

CHICAGO - DECEMBER 19: President-elect Barack Obama (C) speaks during a press conference to announce his nomination of venture capitalist Karen Mills (R), nominated to head the Small Business Administration. (Photo by Ann Ryan-Pool/Getty Images)

There is no question that new banking regulations, combined with skittish business owners, and current economic uncertainties, are taking their toll on small business expansion. Business expansion wears many hats. It might be expansion of the physical plant; it might be expansion of locations; or expansion of the work force. All these decisions come down to one common denominator — risk vs. reward. Is there confidence in the planned investment? Will the market support this decision?

If the answer to the last two questions are yes, then you are ready to expand. The next question is, “Where will the money come from?”

Here are some sources that the latest US Census revealed as the top places to find the bucks you might need.

Family

The most common place for new or existing businesses to find money is looking in their own piggy banks, or mom and dad’s piggy bank. Loans from family members, and investing your own savings, account for fifty-one percent of all small business expansion.

A word of warning, borrowing from relatives can be a risky business. If the business fails, you might lose your favorite guest status at the annual Thanksgiving feast. It’s a smart idea to have an official contract drawn, explaining payment structure and conditions of any default.

The Business Itself

Twenty-one percent of business owners finance their own expansion by using cash in the business. In most cases it’s simply running the business more profitably. In other cases they might reduce payroll, sell off older assets, reduce inventory, and/or eliminate non-productive products or services. However they do it, it seems to work for 1/5th of small business owners.

Banks

Above, I said banks aren’t lending. Well they are, the problem is all the hoops one must jump through. There’s an old saying, “The bank will loan you money, but only if you can show them you don’t need it.” That becomes an oxymoron in that, if the business could finance it’s own expansion, it would not be on the banks doorstep. If you have gold plated credit, your chances are better than average of getting a favorable nod from the bank. But, if you are in such a good financial position, why can’t the business finance it’s own expansion? Can you say, “Rock and a hard place?”

Company and Personal Credit Cards

About a fourth of small businesses use this form of financing. This is how I financed my first business. As a startup, my company credit history was nonexistent. I don’t advise people to go out and create or expand a business borrowing money at 18-20% interest. If you do this, borrow the money on the high rate card, and see if you can transfer the balance to a card with a lower rate. Card issuers are always looking for new customers and are often receptive to giving up a point here and there. Keep calling until you find a receptive one.

Home or Business Equity

I’m not a big fan of putting your house at risk to expand your business, but about 10% of business owners use this method. Depending on the balance remaining it’s possible to borrow, keep payments the same and simply extend the loan. My advice here would be to make one extra payment per year. That alone will save you thousands of dollars in interest charges and reduce the payout time. See if your lender will allow you to do that without any pre-payment penalty.

If you own the building that houses your business you can also borrow against the equity that way. This is preferable to risking your primary residence.

Guaranteed Government Loans

In Montana, businesses that receive SBA (Small Business Administration) Guaranteed loans succeed 97% of the time. However, only about 2.6% of businesses qualify. And please don’t be misled by the “Guaranteed Loan” wording. Yes, the government will pay off your loan to the bank if you default, or your business goes south. However, they will not give you the money without a personal guarantee.

What that means is, the bank gets paid, but you are still on the hook to the Fed’s for the entire unpaid balance. And, I’m not sure this type of obligation can be discharged in bankruptcy court. Please seek the advice of a qualified legal advisor before signing a personal guarantee.

Some Final Thoughts on Finding Money

Venture capitalists and “Angel Investors” and common terms throughout the financial industry. Unless God came to you in a dream and convinced you that your idea is the next Apple, I would not advise using venture capitalists.

Here’s the problem, they are going to want to have a heavy hand in decisions regarding the company return on investment. They are going to ask for a large percentage of the profits that most owners would like to reinvest in the business to help it grow. Last, but certainly not least, they are going to want to be paid back quickly.

My best advice is to give yourself an honest evaluation of your business. The expansion or startup must pencil out financially. Next, use the method with the least risk and most reward. If you do your homework good things can happen.

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