7 Ways Small Business Owners Can Borrow Money

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Perhaps they want their business to expand, or maybe they’re just having cash flow issues. Whatever the need is, your business-owning clients often have a love/hate relationship with banks. The reason is simple: Your client needs money. Banks are in the business of lending it. Many people have often felt banks are most eager to lend to those businesses that least need to borrow. Let’s assume your small business owner in the local area needs to borrow money and asks you for advice.

You start by asking questions like: “What do you need the money for?” and “How long?” After more probing, you start to offer advice.

  1. Line of credit. Hopefully, they have one already. It was one of your first recommendations when they became your client. Businesses have notoriously uneven cash flow. A line of credit from the local bank allows them to get money quickly, with the understanding they will pay the line down when their clients pay up. The interest rate is variable and usually competitive. It’s a good short-term solution.
  2. Talk to your bank. They are in the business of making commercial loans. Your client has a history with the bank. They sensibly manage their line of credit. Their payment history is good. If the loan is large, they will likely want to see a business plan. Why does extending the loan make sense? Many banks will not lend to startups because the risks are too great. Here are other ways to win the bank over to your side:
    1. Personal guarantee. The issue with loans to a business is the company can declare bankruptcy, and the owner walks away. Will you agree to personally guaranteeing the loan? 
    2. Secured loan. The most interesting collateral the business can offer is real estate. They would be taking out a first mortgage or an additional mortgage on their premises. This assumes your client owns their factory and isn’t renting a storefront.
  3. Be your own bank. This might work with smaller businesses or ones without hard assets or high overhead expenses. A good example is consulting. Your client reaches into their personal pocket and makes a loan to their own business. This requires paperwork, although it might be as basic as a letter indicating they are lending their business a specific amount on a certain date along with a copy of the check. The monies are deposited into the business checking account at the bank. Their needs to be a paper trail; otherwise, the corporate veil can be at risk.
  4. Borrowing from family members. Instead of applying to the bank for a loan, ask extended family members to put up the money. This might be shared ownership of the business or a direct loan. It also needs to be documented in writing. The most logical reason is the death of the owner or other instances when the business would be wound up. It’s difficult to collect from surviving family members if you have no proof on paper. 
  5. SBA Loans. The Small Business Administration doesn’t directly lend money. Banks are the intermediaries. They shoulder part of the risk for the banks when businesses borrow through SBA programs. For example, 7(a) loans include a guarantee of part of the loan and cap interest rates. The requirements include having a good credit history, the owner investing their own money in the business, and the owner not being past due on debts owed to the federal government. The SBA is also involved in microloans.
  6. Government programs. The most obvious are the Paycheck Protection Program (PPP) loans the government has been making during the pandemic. This program included forgiveness provisions, making the loan similar to a grant. The government has also lent money through it’s Covid-19 Economic Injury Disaster Loan program. Beyond the pandemic-related programs, some states and cities also have lending programs to attract and retain small businesses.
  7. Equipment financing. Your client’s need for capital might involve purchasing specialized machinery for their business. Banks put this into a different category because they are lending against a tangible object. The company selling the equipment may have its own finance arm as an incentive to make the purchase.

Options to Avoid

The easiest options can also be the worst:

  1. Credit card debt. Who hasn’t heard those success stories? A guy starts a business on a shoestring. At one point, they made the payroll by “maxing out all their credit cards.” The rate of interest on cash advances is far higher than on purchases. The average rate on credit card purchases might be about 15 percent, yet the cash advance rate may be over 20 percent.
  2. Answering those e-mails. You get them all the time. “We lend money to businesses.”  This takes you out of the banking sector with it’s various protections. You are borrowing from a private lender. Their ideal client might be the business who can’t borrow from a bank and has exhausted their other options. You know how that ends.

Your client may have more options than they realize.  They came to you for guidance, since you see the bigger picture. It’s another way you show your value.

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