Business Loans: The Last Resort
So I choose to be a slave ... who will put me in bondage?

Whether a new business owner or an experienced one, your funding plan may require business loans. There are plenty of business loan options available to you, but they each come with their own benefits and disadvantages.

Credit cards, an evil taskmaster.

Credit cards are truly an evil taskmaster. On the plus side, they provide easy access to a set amount of funds. On the downside, you’ll pay a hefty premium to access this money. Credit cards often have the highest interest rates of all credit providers, and can reach up to 35% in some places. Truly an expensive source of small business funding.

Even if you secure a low-interest or no-interest credit card rate, this type of financing should be avoided. If you go this route you’ll need to have a budget in place and be certain that you can pay off the balance every month. If you don’t you’ll get hit with that higher interest rate that most cards have.

And it always happens at the worst time. It's when you can’t make the monthly payment because times are tough, that’s when the rate jumps and crushes you. Credit card companies count on the fact that you won’t always be able to pay it in full. That’s how they make their money.

Small bank loans, the traditional taskmaster.

Historically, obtaining small business loans requires a massive amount of time, energy, and preparation on your part. In the current economy, however, it can be even harder to secure this type of business funding.

Lenders are now far more cautious about providing funds without solid security to back up the loan and great financial projections. As a general rule, note that banks rarely provide 100% financing for new business loans; at best, they will often offer only 65-75% of the total cost. They typically require you put in the remaining amount as an equity investment.

SBA, the government taskmaster.

The US Small Business Administration (SBA) doesn’t offer grants to start or expand small businesses, but it does administer several small business loan programs.

It provides assistance for small businesses in meeting their business loan needs. There are strict eligibility requirements in order to obtain this type of small business financing, and, as with applying for a regular commercial loan, there is a lot of paperwork to wade through. This is where a complete business plan is invaluable.

Family and friends (at least, they used to be!)

Turning to family and friends for business funding is a very risky practice. If they lend money to help your business, their vested interest in you and your well being changes, as does the dynamics of your relationship.

Let’s assume that your business is progressing well, and you’re up to date on your loan repayments to your cousin. You decide to spend a weekend away to celebrate your wedding anniversary. Your cousin may be congratulating you on the surface, but privately they’re thinking, “If you still owe me $2,000, how can you afford to blow all this money on a weekend away?”

If you decide to go down this road, you need to be committed to paying back the loan as quickly as you can. You need to know that even if you do pay it back quickly, relationships often change and are never the same again. My advice - it’s not worth it, find another way.

If you borrow from a friend or relative, formalize the small business loan up front. Create loan documents and track repayments so there are no questions as to what was agreed to and done.

Business partners.

A partner can bring equity funding to the table, while you bring the knowledge, skills and labor required to get the business off the ground. This type of business funding doesn’t involve debt, but still has its own risks and bondage. There are many downside risks to having a business partner.

A business partner has their own goals and objectives. These goals can be very different from yours. Your partner may go through a family crisis or divorce, a financial setback, or a major health problem. How will it effect your partnership? Will they need to be bought out? Will if force the sale of the business?

To make a business partnership work, you need clear roles and guidelines established from the outset. This agreement should be in writing and signed by all partners. For every example of a positive and harmonious working partnership, there are two examples of a bitter business breakup, so proceed with caution.

One further warning on business partnerships may be helpful. A partnership can be much like a marriage. The difference though, is that a marriage is intended to be forever, a partnership is not. Business partnerships will end one day. You must have a buy-sell agreement signed by the partners up front.

The buy-sell agreement defines how the value of the partnership will be determined when the partners split up and how quickly the partner leaving will be paid. Don’t neglect this and don’t draft the document yourself. It’s well worth seeking legal help on this one.

Angel investors.

The last type of business funding I will discuss is angel investors. An angel investor generally invests in businesses that deliver a higher return than they would normally receive from more traditional investments. They will often receive a percentage ownership in the business, in exchange for their investment.

Angel investors can be successful entrepreneurs themselves, who are looking to help others to get their own business off the ground, or they can simply be savvy investors looking for a strong return on their cash.

If you’re fortunate enough to find a quality investor in this economic environment, congratulations! Just make sure you set the terms and conditions upfront, and don’t get taken advantage of. Seek professional help to protect your interests. It is well worth it.

A word to the wise.

Remember, debt is slavery! You are leaving the world of the wage slave. Don’t trade one taskmaster for another. It’s called financial FREEDOM when you aren’t in bondage.

Also, the less debt you have, the lower the risks in starting and operating a small business. Give yourself every chance to succeed. If you have to take debt on, have a specific plan as to how you’ll quickly pay it off. You’ll be glad you did!

And last, whatever business funding plan you come up with, seek the advice of others. There is an old saying that says to seek the advice of many, but listen to few. That is to say, use some common sense when evaluating the advice of others. It helps to have the input, but only a small part of it will be right for you.

Get quality input from others, especially those who have been there and done it. But always weigh the advice carefully and make sure you understand it. Only if it makes sense should you go forward with it.

You don’t have to learn the hard way. In my experience most won’t remember this piece of advice - so I’m asking you to be the exception, do it right.

by Steven Schlagel - May 21, 2009

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