Small Business Academy

9 Sep

 

9/9/2011

Q: If I want to get a small business loan but am having trouble getting one from a bank, what are my other options?

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This is a great question and one that I am actually helping two of my clients with that are in my Small Business Success Coaching Program. You may have been told that going to friends and family for loans is a possible alternative, but I am going to strongly advise you against it. I am going to tell you why and then give you a sound alternative. First I would like to touch on a few of the possible reasons that you’re having trouble with the bank and some misconceptions about small business loans.

Small business loans are usually considered by the bank to be higher risk than some other types of loans such as mortgages that are borrowed against real property that can be sold to recover most if not all of the loan should it go into default. Unless you own the building you do business in (not including your home) you most likely don’t have any “real assets” to borrow against thus make your loan a higher risk. The take away here is not to look at this as a personal rejection. In fact they may have been doing you a favor. I am not a real fan of small business acquiring debt in the first place. There are times when you could use a little cash flow help such as when you need to purchase additional inventory. I am going to give you two possible options.

First, if you are purchasing a large quantity of inventory you had better already have a buyer for it. They should have made a deposit and given you a purchase order with the balance due on delivery. With these two things you could go into your bank and ask for a business “Line of Credit”. This is for short term use only and you should never carry a balance on this for more than thirty days.

If what you need your bank loan for is more long term then I have a second alternative for you and a strong word of caution. Depending on just how much you need and why you were looking to the bank for help in the first place you could do one of two things. First, set up a dedicated revenue stream and apply all net monies to whatever you were going to borrow the money for in the first place. This way you are able to fund your project without debt and when your project is completely funded you now have an additional source of income to use on other business growth projects. If this is not an option you might want to consider going to a venture cap company and taking on a short term investor. They are all about making money so any insights they may offer will only serve you to become more successful. Usually they will invest a large sum of cash into your business for a percentage of ownership and profit. When they have made their money they will want to get out and move on to the next deal. So though it may feel like you are giving up a lot of ownership at the time, remember this is just short term and if they make money so will you.

Now a strong word of caution. Never, and I mean never, risk your own assets to cover business expenses. Don’t take a loan out on your house, don’t max out your credit cards, and don’t take loans that are guaranteed by you personally or against your personal assets. If your business venture should run into trouble you don’t want to also end up homeless. There is also one other reason people don’t often think about when using their own assets. Knowing what you have personally put on the line will often cause so much added stress that you may find yourself very fatigued and not always thinking clearly. Decisions and choices may e made that are not well thought out that will in fact lead to the eventual end of your business. A large part of being successful is making good choices and decisions and you can’t do that if you are exhausted operating in a mental fog. One last note, borrowing from friends and family is nearly always a bad idea. I have rarely seen it end well with all parties still feeling good about each other. If you want to loose a friend or relationship, this is a very effective way to do it. You are in the business world and it is better to operate your business like it using the alternatives I mentioned above.

AlexzandraD.com and click on the “Ask Alexzandra” tab. You can send me a detailed message and I usually respond within 24 hours. I would also recommend that you pickup a copy of The Princeton Principle. I think it would be very helpful to you. You can find it online at Amazon.com and Barnes & Nobel.com. Until next time, I wish you continued success.

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