The 4 Dangers of Borrowing Money the Wrong Way

We all know that small business lending is down. Still, despite the lending challenges facing small business owners, there are loans being approved and, although it’s never easy nowadays, qualified small business owners are getting approved for many different forms of financing to start, build and grow their businesses.

Here’s the question: Are you getting the right loan and borrowing the right way so you do all you can to ensure that you can get the next loan you’ll need for the continued growth of your business?

Some entrepreneurs think that the only goal of borrowing is to get approved or just to have some form of financing they can use. But it’s bigger than that. It’s actually common for businesses to grow and then to need additional capital to propel themselves to the next level. It’s also common for things like debt and credit mistakes to stop them from qualifying for that additional capital.

Here are the four biggest dangers of borrowing money the wrong way when building a business:

1. Allowing Lenders to Take Too Much Collateral With a Loan

This one can be a bit difficult if you’re not familiar with choosing the right bank to work with. Here are some questions to ask yourself:

• Can you borrow the money you need without pledging any collateral to the bank? Some banks require collateral on all loans;  other banks will extend certain types of loans or lines of credit without any collateral requirements.
• What is a reasonable collateral request based on the loan you’re requesting? If you’re looking for millions of dollars for a large expansion, you’re not going to get it without collateral. However, if you only need $50,000 or $100,000 for working capital or financing some receivables, you’re an established business and you’ve got good personal credit, then you may be able to get that financing without needing collateral.

You will need to work with a good person at the right bank, but you get the idea.

2. Not Being Committed to Maintaining (or Improving) Your Personal Credit

Although bank financing is challenging to get, it’s always going to be the cheapest form of funding your business. There are “alternative” financing options galore but it should always be your goal to get your business to be “bankable.” In other words, you want to be able to obtain your loans and lines of credit from a bank.

As a small business owner, your personal credit is normally one of the key ingredients in the underwriting process to see if your loan request will be approved. If you have excellent credit, maintain it. Don’t let yourself get “too busy” to pay your bills on time. Don’t use your personal credit cards for  business expenses – this is possibly the biggest credit mistake made by small business owners. If your credit needs improvement, then be proactive about improving it. Your business will thank you.

3. Not Knowing the Impact of Your Loan on Your Budget and Cash Flow

We would probably all agree that excessive debt is never a good thing for any business. But what impact does the loan have on your budget? There are two important factors here:

• Use the funding you obtain for RGA (revenue-generating activities). If you grow the business with your loan or line of credit, then you’ll probably be able to justify the impact the loan has on your budget and cash-flow.
• Keep in mind that cash flow is usually more important than interest rates. In other words, if you can extend a loan from a three-year repayment period to four or five years in exchange for a little higher interest rate, consider what lower payments mean to your budget and cash flow. If that saves you $150 a month in the form of a lower payment then it may be your best bet. If you end up growing faster than you project and your cash flow is excellent, you can pay that loan off at an accelerated pace. However, if your growth is slower than you expect or you have tight cash flow, you’ll be glad you extended the terms.

4. Choosing the Wrong Loan for Your Purpose

Do you need a loan or a line of credit? Based on your credit, business, industry, collateral, revenue, profit, etc., do you know what your borrowing options are? If you understand what your options are, you can choose the loan solution that’s best for you.

I recently worked with a printing company that requested a factoring facility but they actually qualified for an unsecured business line of credit from a bank. That meant a lower cost, no UCC lien against the business, and no notification to their creditors about selling their receivables to a third party. Although they qualified for a lending solution that was “better” than they thought, it’s probably much more common for small business owners to think they can get bank financing when they really are not “bankable.”

My conclusion brings me to my two favorite words in business: knowledge and execution. Know your borrowing options (most small business owners don’t) and then execute. Period. Get your funding, use it for RGA, and keep living the dream!

About the Author

Tom Gazaway is President of Hawkeye Management, a firm that specializes in unsecured business credit lines for small business owners. Through their pre-qualification process and detailed analytics, they match small business owners with lenders who will issue business credit without collateral. Tom also blogs at The Small Business Lending Blog.

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Management: Meetings, Marketing, Money

Things, life, business – they don’t just fall into place. We have to manage things to make what we want happen. Three of our small business experts give some quick advice on how to:

• manage your meetings so that you don’t waste time,
• manage your marketing so that you pay only for what you need, and
• manage your money by cutting costs on export sales.

The goal is to move your business forward by solving a core problem for your core people — and that takes management.

Manage your meetings so that you don’t waste time

In “How to Successfully Manage a Meeting and Track Deadlines,” John Mariotti gives us three things that every meeting needs as well as a simple plan for making sure that “stuff” gets done afterwards. When it comes to a meeting, words get their values from the actions that follow. What did you promise in that meeting (assignment)? When did you promise it (deadline)? Did you get it done (follow-through)?

We meet to accomplish specific things and not just run the clock down, but how do you help members of your team see the big picture about their impact in the meeting and in the company? And how do can you motivate them to make the most of their time? John says, “One of the most effective ways to create the appropriate sense of urgency for making and meeting commitments agreed upon in meetings is to calculate the monetary value of delays.”

I used this technique for years (it doesn’t work on everyone, but it worked on me and it worked on my team).  As a manager of a nonprofit, I found it helped each team member to understand the value of our training sessions and our meetings, and motivated staff to show up on time.

Manage your marketing so that you pay only for what you need

Maybe you don’t need to hire a marketing expert (and maybe you do). In “6 Reasons You Don’t Need a Full-Time Marketing Person,” Ivana Taylor lays out the benefits of not having a marketer on staff. Ultimately, it’s a matter of logistics: Should this person be an employee or an independent advisor, and why? Ivana says, “Believe me when I tell you that unless you’ve made the decision that you are in the marketing business, you don’t need a full time marketing person.” And if you decide to employ a full-time marketer, then work with a contractor first, because “working with advisers before you hire full-time employees will help you make better hiring decisions.”  This way you will know what to expect and be able to set realistic and effective standards.

So what about your business? How is your marketing? According to Ivana, “Most small businesses fall into these two categories; one with a marketing system and one without.” Where do you fall?

Manage your money by cutting costs on export sales

Laurel Delaney, in “8 Ways to Cut Costs on Export Sales,” gives six quick tips to help you build up your export business including “selling to new countries or territories.” But mostly Laurel shares eight ways to lower your export costs so that there’s strategy behind each action instead of a panic response based on your fears about the economy. She says, “If you use a price-reduction strategy merely as a knee-jerk reaction to a rough economic climate, it won’t work over the long haul. You must develop an export action plan that supports a process.”

Laurel suggests that you focus on:

1. Production location—“Shift your production to a nation with lower costs.”
2. Payment methods—Ask your bank for the terms you need.
3. Transportation expenses—Ask questions to discover better options.
4. Internet communication—“Communicate constantly…to stay front and center with your customer base and your all-around fans.”

Keep this in mind: Whether you’re an exporter, online, local shop or service based, business is business, and focusing on these areas can help any small business strategically manage  costs.

Success is in the details, so pay attention, make a plan and put it to work as soon as possible.

About the Author

Jamillah Warner (Ms.J), a poet with a passion for business, is a Georgia-based writer and speaker and the Marketing Coordinator at Nobuko Solutions. She also provides marketing and communication quick tips in her getCLEAR! MicroNewsletter.

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