With the recent credit crisis, everyone’s talking about how hard it is to borrow money, even for small businesses that are showing profit and have established a good credit history. A lot of small businesses get financing through the owner’s personal credit/equity, or from family and friends, but even friends and family may be hesitant to part with the savings they still have after two years of economic downturn and investment value loss. While it seems natural to query whatever bank you use for your regular business account for financing, you may find that larger banks are unwilling or unable to offer you the financing you need to stay in business.
Before you go out in search of a loan or other financing, do some research. You’ll need a business plan with projected earnings and, if available, past earning records. You’ll also need a basic understanding of how loans work, including compound interest and penalties for missed or late payments. If you’re using your personal finances as the backbone of your request, lenders will examine aspects of your financial history like past utility payments, historical income, and other factors. It is a good idea to talk to a lawyer and to read whatever you can find about borrowing money. Most importantly, when you go in for the meeting with a prospective lender, you want to make sure you have all your ducks in a row. Call ahead and find out everything you’ll need to bring to your meeting. Make sure you have all the necessary paperwork, and keep it organized, so you can avoid prolonging the process.
If your regular bank turns you down for financing, there are other options:
Visit smaller, independent banks in your area. Smaller banks deal with a smaller overall amount of money and therefore are not in as great a danger of losing everything and going out of business. As per my post on April 3rd, small businesses are persevering through the economic crisis better than big businesses because they have already cut out the fat. Big businesses have been overstaffed and pampered for years, and aren’t accustomed to cutting corners. The same goes for banks. Big banks that have loaned billions of dollars to individuals and businesses stand to lose everything if the bulk of their borrowers default on loans. Small banks may be less panicked right now, and therefore more willing to loan money to strong, promising small businesses.
Every city has organizations designed to provide financing to small businesses and individual entrepreneurs. They can often offer competitive interest rates and more flexible payback schedules than banks, who are bound to their corporate policies. The SBA may be able to help you find independent lenders in your state or locality. In my family business, a bakery, we once borrowed $3500 for an emergency refrigerator repair, from a small lending company just a few blocks from our storefront. These independent lenders offer personal service, less red tape, and a much smaller bureaucracy than big banks.
Another idea is to seek out grants. The Small Business Administration not only offers federal loans to small businesses, but also has programs that may allow access to grants (which do not need to be paid back). Grants are available for various types of businesses, especially minority-owned and women-owned businesses.
These are just a few ideas. The main point is not to be discouraged if your first attempt at getting financing is unsuccessful. At the federal, state, and local levels, there are a variety of possible financing sources for any business that shows promise. If you’ve only checked with one bank, you may be missing out on better opportunities elsewhere.
Most small businesses start with loans or investors. True, a small percentage of business owners use their own money for start-up costs, but that is not the norm. Most of us are not independently wealthy. We start with a great idea, a few dedicated individuals (usually ourselves and a few friends or family members), and a loan to get us going. This means that from minute one, the business is in debt.
It is standard to borrow enough money to operate the business for the first year with little to no profit, even though we hope we’ll have profit from day one. However, getting enough money for the whole year is impossible for most of us. This means we have to find other ways to make ends meet, which usually translates to underpaying employees and cutting corners on expenses.
My mom bought her business (a bakery) for nothing from the previous owners, who wanted out in the early 1990s and didn’t think the business was worth anything. At the time, we were serving only wholesale clients (restaurants), and our profit margin was ridiculously small. The building was leased, but we did acquire some basic cooking equipment, including two convection ovens, a walk-in refrigerator, and a few large mixers. When we decided to expand the bakery into a bakery/café with a dining area, we needed a lot of new equipment.
We borrowed as much money as we could using my mom’s house as collateral. Most banks will only loan you a portion of the equity you hold. In our case, we were only able to get $23,000 to start the business. That may seem like a tiny sum to fund a new business, and it is. We were forced to make tough decisions about how to spend the money. The portion of the building that would become the café needed lots of work. We also needed an espresso machine (commercial ones start at about $6,000), tables and chairs, counters, display furniture, and cash to pay our staff until we could get going.
We spent over $12,000 on rent during our first year in business, which was more than half of our start-up money. Though we inherited some equipment from the previous owner of the bakery, we were surprised at how quickly the money went, even with my family doing most of the work ourselves.
When we first opened, we had nothing in the bank. We were depending on our new income to help us pay off the loan and our new, larger bills. This meant that we were always a few steps behind our expenses. If we had a slow week, bill couldn’t be paid.
Small Businesses MUST Juggle Cash Flow & Expenses
A big part of running a small business is juggling cash flow and expenses. It is necessary to rob Peter to pay Paul, on a daily basis. In the case of my family business, we struggled through the first two years and paid off about a third of our start-up loan before we decided to borrow more money. Sometimes, loan money is used for start-up or expansion, but in small businesses, loans can also be useful just for improving your financial situation, paying off bills, and bridging the gap during slow times.
In the seven years since we opened, we’ve borrowed money three more times. But, we’ve managed to pay off the original bank loan and we’ve made capital improvements along the way. Every business has moments when cash flow is nonexistent and it seems to be circling the drain. Even soft drink giant Pepsi Cola declared bankruptcy in the 1920s and then recovered. Slow times and financial turmoil don’t have to mean the end, even for small businesses. Before you think of giving up, it’s important to know your options. Whether you need a new budget, an adjusted business strategy, a line of credit, or just more money, step one is believing that success is possible. Don’t be too quick to decide that it’s not worth it.
Note: If you’re interested, the bakery’s name is La Dolce Via, located in St. Louis, MO. View our website.
Small Businesses Need Credit
In his February 24th speech to Congress, President Barack Obama said the solution to our economic troubles lies “in the imaginations of our entrepreneurs and the pride of the hardest-working people on Earth.” As of 2003, well over 12.2 million Americans were self-employed. President Obama vowed to make it easier for entrepreneurs to get loans, which may be the only way for us to weather the storm of a struggling economy. Of late, many of us have seen a reduction in available credit that threatens to stop our business’s growth dead in its tracks.
When you own a small business, your life becomes a perpetual to-do list. Not being able to get loans and financing adds insult to injury. It seems as though the system is against us, but in fact the US creates and fosters more independent businesses than any other nation. Now that President Obama is working hard to give us the financial tools for success, it’s up to us to use them wisely.
Inspanning and Outspanning
“Inspanning” is a term of African origin meaning “to yoke an animal.” Inspanning is the process we go through when we start a small business. Slowly we become yoked by the business, which seems to take and take until we feel like we have nothing more to give.
This blog is about “outspanning,” or unyoking yourself from the stress of your business. In its original South African usage, outspanning referred to the unyoking of an animal. We’re going to focus on unyoking people from the oppressive struggle of making ends meet without a surplus of cash. For our purposes, “small business owners” may also be heads of their household, church, or even a small town.
By creating a safe place for small business owners to talk about their struggles and share solutions, we want to help you unyoke yourself from the stress of living and breathing nothing but work. We encourage our readers to share the tricks you’ve discovered for making your business run more smoothly and for relieving stress. How do you keep yourself going every day?