Love-hate relationships can tear you apart.
If you’re a business owner, one of the most important love-hate relationships you will ever have is with your bank. Businesses are at the mercy of their banks from the day they open their doors until the day they shut them – for whatever reason that may be. Few business relationships are as critical to a business owner as the relationship they have with their banker. No one is as invested in a business owner’s success (except the owner) like a banker is. Your success is the bank’s success and your failure is the bank’s failure.
Business owners often go in search for money at the worst possible time – when they desperately need it.
When their balance sheet is showing red, when profits are down, when the pipeline is strong but the backlog is weak, when too many people are on overhead instead of being billable – these are the absolute worst times to go looking for money.
Banks want their customers to succeed but are risk-aversive and overly cautious (but who can blame them)? Their favorite customers are businesses with a proven track record, a clear plan for growth –and businesses that are doing so well they don’t need any money.
But no matter who you are, if you are a business owner, you will need to go in search of money many, many times during the course of your business life.
Many business owners – especially the newer entrepreneurs – really don’t know their financial options. A great summary of these options is in the great book, The 2009-2011 Recession Survival Guide: 414 Actions Businesses Can Take to Weather the Storm and Boost Profits. Written by Michael McDermott, the book takes a daunting topic and makes it very understandable and approachable.
Basically, there are three basic ways to finance a business:
1. You finance personally through your own financial resources.
You own the business. But sometimes this referred to as “stealing money from Paul to pay Peter.”
2. You borrow money.
You have to pay off debt from revenues, but you still own the business and any profits are yours.
3. You take investments from outside parties.
You may or may not have to pay off debt, you share your company with them, and you share profits. Usually you are accountable to your investors.
Before borrowing anything, you must be mindful of the fact that you need to make more money from using the loan dollars than it costs to borrow the loan dollars. And for this column, I am only going to focus on non-investor funding options.
1. Community Banks & Credit Unions
Most small businesses turn to smaller community banks and credit unions for funding. Many of these institutions did not get caught up in the sub-prime lending disaster. Also, while credit scores are important to both large and small financial institutions, community banks are more likely to take a closer look at the business plan. Ultimately though, cash flow is the still the key indicator of a borrower’s ability to pay back a loan.
2. Peer-to-Peer (Social) Lending
This is a form of lending that takes place between peers such as family, friends, or associates.
And there are two types of peer-to-peer lending:
Auction-type exchange where the loan goes to the lender with the lowest interest rate.
Plus also the family & friends model where lenders and borrowers already know each other and where a lending service provider offers a platform to support collaboration, formalize loan arrangements, and service the loan over the long term.
3. Business Credit Cards
Business credit cards have been an essential component of our financing strategy. But choose wisely, and watch the interest rates. Here are three websites that compare credit cards:
A look at SBA loan guarantees:
The SBA does not make loans, but it guarantees a large part of the loan to the lender in the event of default. SBA-backed loans are available from SBA designated banks. You can visit www.sba.gov for more information.
These are some of the places small businesses can go for funding. And I strongly recommend The 2009-2011 Recession Survival Guide: 414 Actions Businesses Can Take to Weather the Storm and Boost Profits, by Michael McDermott, for additional strategies to raise capital.
Marissa Levin’s series on sales strategy and leadership at Women Grow Business.
Guest contributor Marissa Levin is Founder and CEO of Information Experts. Launching a new Women Grow Business series on sales strategy, Marissa was named a 2008 BRAVO Award winner by SmartCEO Magazine (which honors the region’s 25 most influential women CEOs) and recently was listed in Washington’s 100 Technology Titans by Washingtonian Magazine. Describing her true passion as “helping other business owners be successful with their own business growth”, Marissa can be reached through her blog Marissa Levin.
(Image by ArghMonkey, Creative Commons)Google+