Need Financing for Your Business?

Posted on October 27, 2009 by David Gass 2 Comments

I recently read that 87.5% of small businesses plan to seek financing in the coming year. There’s been so much press on how tight small business lending has become, is it really possible for a small business to get a bank to back it?

The answer is a resounding YES. The rules have changed a lot in the last 18 months and you need to be aware of how to navigate through your options to find the right fit.

As early as 24 months ago, it was fairly easy to raise capital. For instance, I started a small business and didn’t even have my business’ bank account set up. I got a call from a bank within a week of incorporating my business. I won’t give out the bank’s name (because, not surprisingly, it’s since been shut down).

This bank was offering me $45,000 at a rate of about 11% interest. It was structured as a line of credit, so I wouldn’t be charged interest unless I pulled money from the line. Of course I said “Sure! Let’s do it”

The bank representative took my information over the phone. Keep in mind, I had no bank account yet, had not filed my documentation with the Secretary of State, and had no business phone number. I really hadn’t done anything yet. The best I could figure is the lender bought the list from the Secretary of State once they processed my corporation. I gave no personal guarantee and never even gave them my social security number.

Within a week, I received my paperwork and a checkbook to start using my line of credit. I was shocked. This company was just throwing money at me with really no recourse if my business failed.

Let me make one thing absolutely clear: THOSE DAYS ARE GONE!

There is still funding to obtain out there, but you have to follow some specific rules. Here’s a rundown of what you need to do:

1. Get your needs documented. You first need to clearly understand what you need your financing for. Do you need to obtain equipment for the business? Do you need operating capital? Do you need to purchase inventory? Build a comprehensive list of what you need the funds for.
2. Can you use trade credit? Odds are much of your start up costs are for equipment for your business or inventory. This is where trade credit is very useful. Almost every manufacturer offers in house financing. They have to move product, so it’s in their best interest to approve financing for you and your business. Granting you financing helps them move inventory. This is true for computers, point of sale systems, phone systems, networking equipment, etc. ALWAYS leverage trade credit whenever available.
3. What can you lease? One of the most commonly overlooked resources for small businesses is leasing. If you need expensive equipment and you’re a small business, you should always consider leasing as an option. In general, leases are much easier to get approved than lines of credit or cash loans. Also, you can get great terms on equipment if you shop around. Again, many manufacturers offer their own leasing options.
4. Personal guarantees. In today’s market conditions, many lenders will require a personal guarantee to provide financing. This is fine, provided the lender will guarantee the loan will only appear on your business credit. If it reports to your business credit, the loan will not impact your personal credit score as long as you pay according to terms.
5. How’s your personal credit score? A lot of small business owners have issues with their personal credit score. It’s important to note, you’re not “stuck” with a bad score. There are things you can do to improve it. Check out credit repair on the internet. There are several companies that can improve your credit score by huge amounts simply by challenging every bad mark on your credit report. Many lenders do not provide sufficient evidence of a late payment or default (or in some cases, even bankruptcies and foreclosures). If the evidence isn’t documented properly, the credit bureaus MUST remove the blemish. Do your research to ensure you’re working with a reputable firm, but invest in restoring your credit score. I’ve seen customers gain over 100 points on their FICO score by doing this.
6. Lease your space. I can’t tell you how often I’ve spoken to business owners that include purchasing the building they will operate in as a start up cost. On one business plan I reviewed, the person needed $5 million to get started. $4 million of that was to purchase the building they wanted. Once I convinced them to lease the space and to lease their equipment, they needed only $50,000 to launch their business.

So there are six tips to get your started. The most important piece of advice I can give you is to be creative. Every small business owner has to bootstrap their way to success. Leverage trade credit and leasing wherever possible. Work on your credit score. Sweat the details getting your funding. Not only can it be done it IS being done by entrepreneurs every single day. You can do this!