There are more than 16 million businesses in the United States, but the vast majority of them are quite small, with few employees and under $500,000 in annual sales. While large companies have many options for funding their operations, mini enterprises face an uphill battle when seeking credit. Especially in the first few years of operations, most traditional banks won’t even look at small companies, leaving entrepreneurs with narrow sources of finance. If someone’s personal loan request isn’t secured by substantial collateral, he will probably have to rely on his personal credit or friends and family who may help him out. Here are some more details of the business lending landscape and how you could navigate it.
Banks, even SBA lenders, are very selective
It’s not the banks’ fault. Because of extensive regulations and overhead, regular banks can’t profitably lend to small businesses while complying with strict government rules for ensuring that very few loans go bad. The industry’s inability to support young businesses is a real problem for the economy, and the government tries to minimize this issue via the Small Business Admission (SBA). In addition to offering various free educational resources, the SBA has loan-guarantee programs which allow banks to make somewhat riskier loans. Thanks to the SBA, it’s possible for even new businesses to borrow large sums at affordable rates when backed by equipment or real estate. And those with good management and business plans can get significant unsecured loans to help fund inventory and payroll after just a year or two of operations. However, some requests are beyond SBA’s purview. What are the other options?
Credit cards and business Band-Aids
If you have good credit, you can qualify for a business credit card and by finding one with a promotional rate, you can access some of the required funds at a low cost. But to get the full amount, you may be tempted to shop the “alternative” merchant lenders who aggressively market their wares to small businesses desperate for cash. With the appeal of rapid turnarounds, niche merchant funders like OnDeck and Kabbage (and many frum hard money lenders) lend against business receivables and credit card swipes, using loopholes to circumvent legal restrictions against usury and muscular collection tactics. While it’s possible for those with pristine credit to get affordable loans through these nonconventional means, many businesses end up paying punitive rates of 30–50% or more. Using merchant finance is like slapping a Band-Aid on a gaping wound: it may temporarily slow the financial bleeding, but if the underlying cash-flow issue isn’t quickly addressed, the company will become infected and die. You should be very hesitant about using a quick but risky funding fix.
Try finding f, f, and g
Most small businesses are financed by what banking insiders call the three f’s, or friends, family, and fools. Unlike bankers, friends and family are well situated to identify company founders with the will and savvy to build a thriving business successfully. Even if they are a bit skeptical that they will be repaid, relatives and buddies who can afford to may take a calculated risk and loan beyond what typical business terms would dictate. Beyond a personal connection, while usually only fools would lend unsecured money to strangers, in the frum world we can replace the third f with the g, as in gemach. While unsecured lending is lifnim m’shuras hadin, many gemach loans are made anyway in the interest of respectfully helping Yidden with parnassah. (EPI deserves special mention, having lent many millions in gemach business loans over the years.) But despite Klal Yisrael’s amazing generosity, since so many people seek gemach loans, they are not easy to come by, and, very possibly, you will have to rely on your own resources to grow your company.
When “no” means “no”
If you can’t find anyone willing to lend you money, perhaps you need to go for it alone and drain your savings and home equity to build your financial future. However, you also need to consider that maybe your grand plan isn’t as good as you may think. While entrepreneurs need to jump many hurdles on their paths to success, they sometimes overrate the value and interest in their product. Just because you like your product doesn’t mean that there’s a market of like-minded people who will pay you to produce it. Whether friend, gemach, or banker, perhaps they are doing an entrepreneur a favor by not lending an entrepreneur money for an endeavor that will ultimately fail, causing him much personal and financial distress. While hearing “yes” is always exciting, sometimes “no” is a much better answer.
Money is often a poor crutch
Sometimes, business owners think they have a money problem when in reality they have a management or sales problem. Even if a company offers a fantastic product, someone has to be drumming up and filling new orders continually. When sales are too low, an entrepreneur may begin an expensive advertising campaign but really should be picking up the phone and asking customers for business. Similarly, some companies spend fortunes on expensive customized software to help track orders when what they need is a better process or warehouse manager. With a lot of thought and a bit of creativity and courage, the best business solutions are often the cheapest.
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