Borrowing Options to Lower Risk for Small Business
By Kate Raulhauser-Smith, contributing writer
It is the goal of most business owners to grow their business from one year to the next. They want to have larger facilities, greater productivity, and higher profits.
The catch? Growth requires capital.
“ A soft economy creates less willingness to borrow or go into debt.” Said Wally Dunlap of the York County chapter of the Service Corps of Retired Executives (SCORE). Banks charge interest, and borrowers risk their credit rating and the loss of collateral if cash flow doesn’t follow expansion efforts.
A well-prepared business owner, however, has option, Dunlap said. Here a few suggestions:
- Line of credit – Going to the bank, business plan in hand, an owner might apply for a traditional loan for a portion of the expected costs. Dunlap said, and et up a line of credit for rolling expenses, such as inventory. “You don’t pay interest on what you don’t use,” Dunlap explained. “You pay down the principal monthly, and that means less interest overall.”
- Family loan – “There are lots of different ways a family can contribute financially with low- or no-interest loans,” Dunlap said. Often, parents will give a child a portion of their expected inheritance. It’s important to reach an agreement in such situations, especially if the borrower has siblings, he added.
- Lower expectations – Setting the bar high may be good motivation but may entice an owner to make decisions that are too risky. Scale plans back, he said. Build a smaller addition, hire fewer employees, stay with other employment longer than first anticipated. Such cautious decisions will lower the amount of capital needed for any venture while still allowing growth.
- Lease versus buy – Part of scaling back may mean leasing equipment, vehicles, or space instead of buying. There is still a cash outlay, but it isn’t as large, and the commitment generally is more flexible. Dunlap worked with a SCORE client a few years ago who was able to rent a space and all the equipment to open a Thai restaurant. “She rented everything but the vegetables,” he said, an approach that required less cash and has allowed her to grow her business steadily.
- Incorporate the business – Incorporating allows an owner to sell stock, bringing an immediate influx of capital, Dunlap said. There are attorneys’ fees and other costs, but for many owners, it’s worth it, he added. Most small businesses fall under Subchapter S of the laws of incorporation, which allows companies to avoid double taxation on the money that is paid out in dividends. “Incorporating also builds a wall around you as the owner and operator so far as your personal assets are concerned,” he said. That way, if the business is sued, your personal assets will be protected.
Ira Wolfe, president of Success Performance Solutions, works with entrepreneurs to help them get started or make their businesses better. Many are nontraditional businesses, he said, companies that find it more difficult to qualify for bank loans because they propose new concepts or offer intangibles, such as counseling services.
Nontraditional business owners can turn to nontraditional funding sources, he said. Two options he suggests are:
- Venture capitalists – These lenders are generally successful business people looking to invest. “They will share the risk,” Wolfe said, “but they also take a piece of the action.” Depending on the specific agreement, they may also expect to have a say in the running of the business, he added, which is a drawback for some people. “You have someone you have to report to.”
- Business incubators – These enclaves for small businesses provide the space, perhaps services and some guidance in return for a set fee or a share of the profits. Wolfe sees such arrangements as viable alternatives if a good match can be found.
Both men suggest that owners should seek successful, like-minded business people for advice and guidance because they’re the best source for good information in a tough market.