Is Inflation Out of Control Or What?
As I write this entry, we're on the cliff of the next economic recession. The Feds have raised the Federal Funds Rate exponentially within the past year or so, and we're beginning to feel the effects of these actions in making money more expensive to borrow. And I mean everything is costing more (gas, housing, cars, etc.). Now, let's turn our attention to small business financing (specifically start ups and early stage businesses) and see how this doesn't encourage confidence in getting a business loan.
Now is Not The Time to Play Around With Borrowed Money
When I've had the urge to play a hand or two of Poker Texas Hold Em, I'll typically go into a hand with a predetermined amount of money that I'm ok with losing. Beyond this, I'll fold in a heart beat depending on the strength of my hand in conjunction with the calls and raises. In other words, you have to be able to know when to hold them and when to fold them (here's my shameless Kenny Rogers plug)
Oddly enough, many small business owners don't know when to fold... I don't know... maybe it's because they're not Poker players. Here's what I mean. As a small business owner who has yet to make any real money (take the last year you earned a W2 income and double it), who hasn't hired at least one or two employees (either part time or full time), and at least earned between $100,000 to $150,000 in gross sales, then you're doing yourself REAL BAD if you obtain a business loan. Here's why: why create stress and worry for yourself about making monthly loan payments (principal and interest or even interest only) at high interest rates and you're barely holding the business together? Your time is best spent in creatively thinking and taking action of ways to earn more profit and sales with the resources you already have.
Don't Fall For the New SBA Hype
I'm a huge fan of SBA loans for small businesses. Both the 7a and 504 programs; I think they're great and deeply needed. Within the last several months, the SBA has relaxed their lending standards for small businesses with the stated goal of increasing more loans to businesses that traditionally haven't had much access to capital. Again, I support this much needed change, but cautiously though. Business funding like most things in life typically work out well for those that have discipline and foresight in terms of managing and growing their businesses prudently and diligently. However, just as the recent PPP and EIDL fraud has shown, there are many out there that are just looking for a quick way to access money for purposes that aren't focused on managing and growing their businesses. Not here to hold anyone's hand or keep them from doing what they've already made up in their minds to do, but I offer some guidance in this regard: similar to marriage, it's easy to get in ,and hell to pay to get out. If you do decide to obtain a business loan for your business, make damn sure you've done your homework first. Ask yourself:
- How will I pay this loan back if the business doesn't make it?
- Am I willing to work at W2 job just to payoff this business loan?
- Am I willing to give up whatever real estate or personal property I may have pledged to get the loan in order to pay it off?
- Am I willing to be on the hook personally or someone I may have added to the loan as a guarantor be on the hook to paying the loan off?
- Can the business really grow and make enough profit to pay me and my employees a livable wage while at the same time covering all other operating expenses, taxes (local, state, and federal), and loan payments? If so, how much margin for error do I really have?
Before jumping headfirst into a business loan commitment, make sure you do the math, and make damn sure the math adds up right.
Until next time...