Posted in Entrepreneurial Funding Blog Posts

Using Credit Cards as a Funding Source

Since the dawn of credit card or having the ability to “charge” an account, consumers have flocked to the idea of buy now and pay later. “In the 1800s, during the westward expansion, merchants use credit coins and charge plates to extend credit to local farmers and ranchers, allowing them to forgo paying their bills until they harvested their crops or sold their cattle.” “In 1958 major banks launched revolving credit, which allowed cardholders to carry their monthly balance forward for a nominal finance charge.” (MacDonald & Tompkins, 2017) Thus began amass influx of consumers and entrepreneurs owing more and more debt. So I have to ask, should credit cards be the best option for a small business? What should owners use and not use them for?

I recently had to work on an assignment where it required me to look at the cash management of my business several different ways regarding a line of credit. A line of credit operates similarly to a credit card. The repayment structure and flexibility are almost identical. The credit owner can request a certain amount, only pay interest on the amount they spend, and either make a full payment or make the minimum payments toward the balance. Additionally, credit cards also operate on a 30-day pay, so an owner has until the end of the month to pay. Thus allowing the owner enough to collect their account receivables to pay the bill or operate off of the retained cash but only paying the minimum.

In the Entrepreneurial Finance – Third Edition: Finance and Business Strategies for the Serious Entrepreneur, Steven Rogers and Roza Makonnen stated, “Combined personal and business credit cards are the most common source for business loans.” Even after the financial crisis of 2008, small businesses continue to use credit cards to fund their business expenses. One would think that small businesses would begin to shy away from relying so heavily on their credit to pay expenses but when customers and other businesses are late with account receivables payments, how are they supposed to survive in the interim?

Funding Circle, a direct small business investment site states, “A credit card is a good fit for handling small, ongoing working capital expenses, but if you need to make a big one-time investment to finance a long-term plan, you’re out of luck.” (FundingCircle.com) Small ongoing expenses being, office supplies, travel engagements, membership fees, or small emergency expenditures. On the contrary Funding Circle states, “Larger or more investment-oriented spending like new office equipment, new real estate, or bulk purchases of manufacturing supplies are usually better suited to a term business loan. This is because spending larger amounts on a card ties up your revolving credit load (which also damages your credit score) and comes with greater interest costs — both of which hurt your bottom line.” (FundingCircle.com)

In my opinion, credit cards should only be used for emergency situations or much like what Funding Circle suggested, “small expenditures only.” Mainly because credit cards tend to higher interest rates and if you are unsure about being able to pay the full balance each month; it would not be wise to use for any larger expense because, in the long run, it would cost you a lot more than what the purchase was actually worth. Nevertheless, if you are reluctant to obtain a small business loan or a line of credit because of collateral or personal credit issues, and still prefer to the go the credit route, be sure to shop around for the best annual percentage rate (APR).

Sources:

MacDonald, J. & Tompkins, T. (2017, July 11th) The History of Credit Cards, Credit Cards.com Retrieved via https://www.creditcards.com/credit-card-news/history-of-credit-cards.php

Roger, S. & Makonnen, R. E. (2014) Entrepreneurial Finance – Third Edition: Finance and Business Strategies for the Serious Entrepreneur [Kindle Edition]. McGraw-Hill Education & Amazon Digital Services LLC

Funding Circle (N.D.). Fund Your Business With Credit Cards? 3 Reasons To Consider. Retrieved from https://www.fundingcircle.com/us/resources/3-reasons-business-creditcards/

Posted in Entrepreneurial Funding Blog Posts

SBA Microloan Programs

If you plan to start fairly small in your small business, but still require capital, the Small Business Administration Microloan may be a good option. The SBA provides funds to a designated intermediary lender, which administers the loan on behalf of the federal agency. Microloans slightly differ from the SBA general business 7(a) loans. The application may also require an entrepreneur to complete an educational training component to qualify. Microloans are especially useful for those who need to clean up their finances, in economically disadvantaged areas, and need to grow a business.

The Microloan program provides loans up to $50,000 to help small businesses and certain not-for-profit childcare centers start up and expand. The average microloan is about $13,000 (SBA.gov). Typically Microloans are a lot more popular with small business owners because it allows them to get the capital they need without such a lengthy application process. Much like the 7(a), money cannot be used to pay any existing debt an owner has incurred. Proceeds can be utilized for working capital, inventory or supplies, furniture or fixtures, and machinery or equipment.

Intermediary lenders are non-profits, banks, credit unions, or private lenders. Interest rates and repayment terms depend on the loan amount, use of funds, terms of the financial entity, and needs of the small business owner. However, interest rates range eight to thirteen percent. The SBA’s maximum Microloan term is six years. You’ll get solid loan terms from these lenders, making it possible for you to grow your business and establish better credit. That can help you qualify for other types of financing down the road (Pimentel, 2017).

Microloans also differ from 7(a) in the length of the application and do not have as many requirements. Though, some microlenders do require collateral and a personal guarantee from the small business owner. Depending on the lender there may also be an educational training component that will need to be fulfilled to be considered for lending. Seeking help and assessment from an approved Small Business Center will be your best option when applying for this particular loan.

There are many advantages to using this loan program. However, it does not come without its disadvantages. Advantages being it is a lot easier to qualify especially if an owner has not already secured funding for operations. However, “The [disadvantage] of the microloan is the “micro” part: Funding may not be sufficient for all borrowers.” (Pimentel, 2017) If an owner has a spike in business and needs additional funds that the loan is not provisioned to cover an owner can take a loss because they are not able to handle the demand. Nevertheless, I still believe microlending is still a good option to initially pursue because ultimately the good outweighs the bad.

Sources:

Microloan Programs (2017, September 21st) SBA Loans & Grants retrieved via https://www.sba.gov/loans-grants/see-what-sba-offers/sba-loan-programs/microloan-program

Pimentel, B. (2017, July 19th) How to Start a Business: Where to Find Startup Business Loans 2017 Retrieved via https://www.nerdwallet.com/blog/small-business/start-up-business-loans-for-bad-credit/

Posted in Entrepreneurial Funding Blog Posts

Small Business Administration 7(a) Lending

In continuing with the discussion on funding opportunities, the Small Business Administration (SBA) is a federal agency that provides support, education, and lending opportunities to local entrepreneurs. Startups and existing companies can apply to one of their five loan programs. The 7(a) loan program offers twelve types of loans that cater to the small business owner’s needs. Many of these programs require collateral to be leverage against the business loan. In my opinion, SBA lending programs have both advantages and disadvantages for a small business owner.

“The SBA’s primary business loan program is the 7(a) General Business Loan Guaranty Program. It’s mostly used for business start-ups and to meet various short- and long-term needs of existing businesses, such as equipment purchase, working capital, leasehold improvements, inventory, or real estate purchase. These loans are generally guaranteed up to $750,000. The guaranty rate is 80 percent on loans of $100,000 or less and 75 percent on loans more than $100,000.” (Entrepreneur.com, 2017) SBA lending does not finance loans but guarantees funds received from banks, credit unions, or private lenders.

7(a) Loan Programs:

 

Collateral is required for the 7(a) loan programs, and yes you pretty much have to give away your firstborn. Kidding! Well kind of, “If your business dissolves, you will be responsible for repayment. Creditors will go after you in the event that your business fails to repay the loan. The SBA now requires that all loans it guarantees must also be personally guaranteed by anyone with a 20 percent or greater ownership stake.” (Lagorio-Chafkin, 2010)

The primary 7(a) application forms are:

Applicants must submit a lengthy loan package. The package must include:

  • Executive Summary
  • Business Profile, e., type of business, product or service description, history, annual sales, number of employees, proposed future operations, competition, customers, suppliers, and date of the information.
  • Management experience
  • Description of loan proceeds will be used
  • Loan repayment details
  • Collateral to leveraged (although a few institutions do not require this)
  • Personal financial statements from all owners
  • Business reports from the last three years if applicable
  • Pro-forma balance sheet
  • Projections e., Assumptions showing positive cash flow documented explanations.

Consequently, SBA lending programs have both advantages and disadvantages for a small business owner. There are many options available that can be beneficial to new business, but there are also strict requirements that an owner must meet. Seeking help from one of the SBA counselors (for FREE no less) should be your first step in deciphering which financing would be the most suitable for your business needs. Overall I think going through the SBA is a great place to start when looking to finance a small business. What are your thoughts?

Sources:

Entrepreneur Staff Writer (N.d.) Small Business Encyclopedia: SBA Loan retrieved via https://www.entrepreneur.com/encyclopedia/sba-loan#

SBA’s Permanent 7(a) Loan Programs (2017, September 20th) https://www.sba.gov/category/lender-navigation/sba-loan-programs/7a-loan-programs/permanent-7a-loan-programs

Office of Capital Access (2017, September 20th) SBA 7(a) Forms retrieved via https://www.sba.gov/offices/headquarters/oca/resources/9104

Lagorio-Chafkin, C. (2010, February 15th) “What You Need to Know About Making a Personal Guarantee” The Inc. Magazine. Retrieved via https://www.inc.com/guides/personal-guarantee-making.html

Posted in Entrepreneurial Funding Blog Posts

Funding for Small Business Startups

The difference between a dreamer and an entrepreneur is a plan of action. A dreamer does not have to figure how “the dream” will get financing and sustain through lean business. However, an entrepreneur does. Entrepreneurs have to have a plan of action and implementation. In most cases having good credit and making sound personal financial decisions are foundational requirements. Also being aware of what type of financing option will benefit the business now and what could be considered later, if at all. Over the next couple of weeks, I will be discussing funding options that should be examined by any new or existing entrepreneurs.

So you want to start a business? Here are some preliminary things to consider when getting started.

  1. Make sure you identify your industry of interest. Only knowing a few things about an industry is not enough. Research, research, and research some more.
  2. Pull your all three credit reports. Lenders are not willing to give financing to someone who is not capable of managing their finances.
  3. Start building rapport within the industry. Network with others to see what kind of funding options worked for them.
  4. Have a thorough business plan.
  5. Be willing to start small to build a track record. A history of sales included in your business plan is always more appealing than just having assumptions.

If there was one thing, I could not stress enough, having and maintaining good credit history is imperative. I have spoken with a branch manager from a national bank, a capital loan officer, and a business counselor and all three were very adamant about how not having good credit standing is one of the main factors lenders deny funding. You can have a sure fire way to make money, but the likelihood of lenders or even investors wanting to take a chance on you is highly unlikely. Also, make sure you are up to date on any tax payments. The business counselor told me of a deal between a client and a bank, both parties were ready to sign, but the bank uncovered that the client owed several thousand in back taxes. The deal was killed instantly. Make being in good credit or financial standing one of your top priorities.

It’s important to know that there is no “one size fits all” when it comes to financing a small business. There are several types of funding available, but you must research to find out which one is the right fit for you. Here are eight resources to consider:

  1. Personal Savings
  2. Friends and family/inheritance
  3. Personal loans
  4. Small Business Administration Loans
  5. Angel Investors
  6. Venture Capitalists
  7. Crowdfunding
  8. Grants

Each one has an upside and downside. It will be up to you to determine which one can satisfy the needs of the business and hopefully cause you the least amount of pain.

Financing for a business is normally one of the things that are considered last. Which is typically why a lot of small businesses end up closing shortly after opening. If you are still in the dreaming phase or on the cusp of opening a business, be sure to have a thorough financial plan in place. Be sure to also factor in the unforeseeable such as weather-related catastrophes, a lender calling a loan, or personal life events that could directly impact your business. I hope you stay tuned in coming weeks as I delve further into some of the funding resources that are available.