In several recent presentations, I have asked the group of business owners and CEO's if they believe that decisions about how they finance their businesses are emotional or rational. Almost every time, 90 percent of the audience responds that financing decisions are rational: they come down to spreadsheets and dollars and cents.
Then I tell the audience a story of an entrepreneur who had to choose between a one-year loan at a 30 percent interest rate of a 10-year SBA loan at a 6 percent interest rate that required him to put a lien on his house. He chose option one. The same audience members who initially answer that think financing decisions are rational quickly shake their heads at this decision.
And this is exactly the point. Every one of us has our propensity and tolerance for risk. Every one of us comes to every decision we make with our set of experiences and history. Every one of us is at a different stage of our lives and our ventures with various obligations and responsibilities. And these factors influence our decision making about how we finance our businesses.
The entrepreneur who chose the one year 30 percent loan made the best decision for him. For whatever his experiences were, he was unequivocally not going to put a lien on his house. And while the decision might seem completely irrational, it was not for him. Take some time to think about your personal tolerance for risk? How much can you stomach? Be comfortable with where you are and understand it.
My suggestion is that when you are looking for financing for your business, try to come up with two very different choices like the entrepreneur above did. If they are distinct enough, the decision should create some angst as you decide what is best for you. And when you're pencils down, recognize that the decision was a combination of numbers, cents and your own emotional DNA.