The 3 Most Common Financing Questions That Entrepreneurs Ask
One of my highest honors is working with business owners and entrepreneurs to help them think through their best options for financing their business growth. Today, I want to share three of the most common questions I get and how I respond:
1. Do I need a line of credit for my business?
Every business needs a safety net. Not all companies can afford to set one aside. If you have one of those companies, try obtaining a line of credit from a bank as a method of insurance for your business.
Even if you don’t have immediate plans to use the credit line, it’s helpful for rainy days or if your business deals with seasonality. Consider it peace of mind if your gets tight. You never want to be in a position where you get stuck with expensive loans because you need money in a hurry.
Ideally, lines of credit should only be tapped to cover short-term expenses that you’ll be able to repay reasonably quickly.
2. Getting a loan through a bank seems like a pain. Shouldn’t I go online and get it done quickly?
By securing an online loan, you’ll invariably have liens placed on your business. That affects your ability to refinance, and creates significant cash flow pressure because your monthly repayment will be high (thanks to exorbitant interest rates).
Many online lenders are less established than traditional banks, so there’s a higher possibility that they’ll go out of business. Dealing with a loan from a defunct entity is not something you want to do. And keep in mind that online lenders aren’t always subject to the same regulatory authorities as brick-and-mortar banks; there’s a higher possibility than usual that your financial details get hacked.
Also, the loan terms will be less favorable (you’ll probably deal with things like pre-payment penalties), you’ll get little to no counseling from the lender, and you’ll likely need both good personal and business credit–not to mention, a few years of experience in business to be approved.
To sum it up: No, I don’t think you should get an online loan.
3. Should I consider the SBA when looking for a loan?
SBA-backed lenders offer loans of up to $5.5 million at reasonable interest rates; counseling and educating, and with generous repayment terms that can be used in a variety of ways. Examples include buying a business or building; refinancing existing debt; or obtaining inventory or equipment.
The SBA doesn’t make the loans itself. Instead, it provides government backing for loans made by partner banks, credit unions, and other financial institutions. Those guarantees reduce lender risk, as smaller businesses with limited track records aren’t typically lender targets and might not otherwise qualify for a loan.
SBA loan interest rates vary, as of now, from 7.25 percent to 9.75 percent — a far cry from the 20 percent or above alternative lenders, including many so-called “internet lenders,” will charge companies that can’t secure traditional financing.
So yes, they’re worth considering.
