3. Things to Consider Before Taking Out a Small Business Loan

The Closet Entrepreneur by Kendra Leah Fuller

By , @Writing2Day

There are many reasons you may be considering taking out a business loan. Perhaps you need start-up capital for your new business or are looking to expand your existing business. No matter what your reason for additional capital, I urge you to tread cautiously before taking out a small business loan.

As entrepreneurs, we are generally optimistic. Optimistic that our start-up will be a success. Optimistic that our business is going to grow. Many of us tend to focus on the positives and only deal with the negatives when they happen. We mistakenly think that we have total control over the destiny of our business. While you may control most things, you do not control all.  Before you take out a loan, I want your eyes to be wide open to the pitfalls.

 

 

You Can Not Control The Economy, Your Competitors, or Your Customers
I remember a conversation with my father when our business was growing full throttle. He asked me what I was going to do if the economy crashed. In my adult life, I had never experienced how a bad economy would affect me personally. My ignorant response was something along the lines of, “Our society is spoiled. People want what they want, when they want it. The huge amount of credit card debt people carry is proof of this. They will still buy our products.” Boy, was I wrong!

What actually happened when the economy took a downturn was that people who previously placed orders over $500 on our website now placed $200-300 orders. People who were placing the required $50 order to get free shipping, now ordered less often and only placed their order when there was a sale. When you sell products online, you are competing with everybody else in the world who sells those products. If your competitors decide to discount their products, you will not be able to continue to sell yours at full price and you probably will not be making a profit if you continually have to discount. At the height of this bad economy, I believe that retailers trained their shoppers to wait for the deep sales.

If the retailer’s sales are down, what do you think happens to the wholesalers? Their sales go down because retailers are not purchasing as much product from them. Try as we might, our business was never able to find multiple brands that sold as well as our bestselling brand. That brand accounted for nearly 70% of all sales in our niche market. When their sales were down, guess what they did to boost them? They decided to start selling retail in direct competition with their retailers. Did this hurt our sales? It was the final nail in our coffin.

You are Personally Responsible for Your Business Debt
No matter if your business is a sole proprietorship or a corporation, as a new/small business you will be responsible for any debts your business incurs. If you have chosen to run your business as a sole proprietorship, you are probably aware of this. If you have incorporated your business thinking you are protected from personal liability, you could be in for a very rude awakening.

As a start-up or small business, if you take out a business loan, you will be asked to personally guarantee that loan – even if you are incorporated. What does this mean? It means that you will be guaranteeing that loan with any personal assets you may have, including your house, land, and any other assets. As a side note, if you do default on your debt, you are better off not having equity in your home. If you have equity in your home, the bank will want that equity.

This applies whether you are taking out a loan from the local bank or obtaining a loan from the Small Business Administration. The SBA does not actually loan you the money, they provide the bank with a guarantee on a percentage of the money the bank loans you. The SBA will want a personal guarantee from you on their guarantee to the bank. The SBA may also ask you to carry life insurance to cover the full amount of all debt, business and personal, that you have. This can be pretty expensive depending on the amount of debt you need to cover.

Projections Are Just That – Projections
Many small business owners keep track of historical sales in order to forecast future sales and growth. This is a great tool, however it does not take into account an outside factor like the onslaught of a bad economy. Before we applied for our SBA loan, we took all of our figures and statistics to our local Business Development Center. The professionals there compiled our historical sales data and came up with the same projections I had. Our lender looked at these projections and agreed. None of us had the foresight to see the coming economy crash and if we would be positioned to outlast it.

Will a Business Loan Help Me Through a Rough Patch?
Maybe and maybe not. If you are struggling to make ends meet, it is possible that an operating loan might pull you through a down time. If you are in this position, I would recommend that you think of this loan in terms of what am I willing or capable of eating personally. Set a limit and stick to it.

As a small business owner, your business is your baby. You have probably put countless hours into its success and it will be very hard to let it go before it gets you in trouble financially. Try not to think of your business from an emotional viewpoint if you are struggling. You may be tempted to max out your personal credit cards in hopes that if you can just outlast this time period everything will turn out alright. You may still be able to meet all of your monthly loan payments and the bank may be willing to loan you more based on your history. It may not be the best decision for you personally to take them up on this offer. What will you do when you have $3,000 a month or more going out in business loan payments that were a drop in the bucket when sales were good but now that you are going out of business, you can not find a 9 to 5 job that even comes close to making those payments?

Lest you think I am dead set against business loans, I am not. They have their place. Just be aware that the downward spiral of a business can be mind boggling and unexpected especially when your business has experienced nothing but exceptional growth. I often wonder if I had been more content to grow my business slower with available capital, not borrowed, if we would still be in business today. What I do know is that we would have been able to ride out the storm much longer without loan payments to meet.

See Related Posts:  #businessplan #businessfinancing #businessstartup #newbusiness

 

Leave a Reply