Our columnist addresses a few frequently asked questions regarding small business loans and financing strategies.
When I finished writing my book, Loan Financing Guide for Small Business Owners, I realized it is only a small step toward the achievement of my goal to develop training tools and resources that are easy to grasp and actually work. Small business owners need support and I am just the person to help them.
My book tour has taken me to the streets of large cities such as Boston and Miami, and smaller towns such as Arlington, Cambridge, and Somerville, Massachusetts. I've documented many questions from small business owners about loan financing. In response, I've written articles and developed a seminar entitled, Preparing a Powerful Small Business Loan Request.
Here are three answers to questions that frequently came up during my travels over the last few months.
1. If there is one thing I need to remember when speaking with a lender, what would it be?
If there is one thing I can recommend, it would be the following: Show lenders by your every action that you will do everything possible to repay the loan, and how you plan to fulfill this promise. Don't bother verbalizing this--words mean nothing to a lender. Actions are the most persuasive statement.
Here are some ways to demonstrate to a lender your trustworthiness:
Evidence of repayment of past business loans
Evidence of repayment of past personal loans
Absence of--or no--recent delinquencies
Absence of--or no--recent derogatory information from personal or business creditors
Evidence of timely payments to your suppliers
Verifiable examples of difficult personal and business situations that threatened loan repayment, but you kept your word and paid off your debt obligations
2. I am starting a company. Should I tap into loans from my family members and friends or should I go directly to a bank or another financial company?
Some financial professionals believe that start-up companies should first take advantage of loans from family and friends, while others think that option should be a last resort. Start-up companies are perceived to be higher risk, and lenders frequently shy away from lending to new companies, particularly those whose industries are considered to be risky.
Should you decide to seek loans from family and friends, consider creating legal documents to detail the terms of a loan or find a lawyer who can help you with this task. It may be wise to make arrangements for automated loan payments instead of dealing with check writing on an on-going basis.
It's important to know that payments on loans from family and friends do not allow you or your company to build credit history. If you decided to take advantage of loans from family and friends, find a company, such as Circle Lending, that can help you streamline the legal paperwork, automate payments, report your payment history to credit bureaus, and provide other loan administration services.
If you have both options (traditional lenders, and family and friends' loans), decide which option is less expensive, less time consuming, and will benefit your company in the long-term. Summarize pluses and minuses and make a choice.
3. I like using credit cards to finance my business, but my financial advisor tells me not to. How can I persuade him that credit cards are not a bad idea?
I agree with your financial advisor. Business credit-card debt is quite easy to secure and increase; however, the moment you slip and send your payment late, the promotional rate will quickly turn into the 20% plus default rate with a variety of punitive fees. At that point you may be struggling to keep up with interest payments with little chance of repaying the principal.
There are examples of successful business financing with credit card debt, but those small business owners used credit cards on a limited basis and as a temporary source of financing. Credit card lines are similar to line of credit loans--short-term financing vehicles. But, unlike lines of credit, they are usually much less forgiving when you make a mistake. I have seen small businesses fold under the burden of credit card debt too many times to soften my opinion about credit card financing. If you decide to use credit card debt as a limited financing tool, I urge you to read the credit card agreements, particularly focusing on rate and pricing structure, provisions in case of default, and your rights and responsibilities. Do not fall into the 0% interest and $0 fee promotional trap!
Do you have a question or concern about small business financing? If so, e-mail me at firstname.lastname@example.org. I'd love to hear from you. Like Tom Cruise in Jerry Maguire crooned: "Help me help you!"