By William J. Lynott
Originally published in Massage & Bodywork magazine, January/February 2009.
Credit is the oil that lubricates the machinery of most businesses and professional practices. Whether it’s a loan to buy inventory or supplies, support renovation or expansion, a capital purchase, or as a means to meet operating expenses, almost every business depends on credit at some point.
The upheaval in today’s economy has resulted in a credit crunch that has made it tougher than ever for small business owners and professional practitioners to swing a loan. “I’m not so sure that’s a bad thing,” says Eileen Laird, massage practitioner and author of 101 Things Every New Massage Therapist Should Know (FYB Publishing House, 2006). “It’s so easy to get in over your head with credit that great caution should be used before taking out a business loan.”
Still, there are legitimate and often urgent reasons why an MT may need to apply for a business loan. For those in the know, there are enough options available to make the task a little easier. Money may be tight, but business loans are being made every day to those who know how to ask. If you’re planning to look for a business loan, here are some choices, along with hints on how to greatly improve your chances of coming away with the money you need.
The first place that many therapists turn to when they need a business loan is their local bank. That’s why it’s essential to build a solid business relationship with your bank well before you need to ask them for money. Allowing your bank to become familiar with your practice and how it’s progressing sets the stage for the time when you need to ask for a loan.
For relatively new businesses, most experts like the time-honored system for establishing good credit. “Take out a relatively small loan, even when you don’t need it—say $4,000 or $5,000,” says certified public accountant Tom Normoyle of Huntingdon Valley, Pennsylvania. “Put that money in the bank where it will draw a little interest. Then, a few months later, pay off the loan in full, plus interest. Now the bank knows you, and you have a solid credit history.”
Even after establishing a relationship, some credit seekers meet with frustration when the bank turns down their loan application. Most bankers agree that this is usually because the applicant has failed to come prepared with the information a lender needs to make a positive decision.
“How to find the money to finance an expansion or acquisition is the last thing that many business owners think about when they plan a project,” says James G. Marshall, vice-president, Fulton Bank of Lancaster, Pennsylvania. “It’s best to have a team lined up behind you when you begin to plan a major financial move—and your bank should be a member of that team.”
How should you prepare for a meeting with a bank loan officer? Marshall suggests you come armed with:
• Accountant-prepared financial projections and cash flow analysis.
• Financial statements for your existing practice.
• Information on the background and experience of owner(s).
• Marketing feasibility study for the project.
• Copies of leases, bills, or other financial commitments the bank needs.
“With this information,” Marshall says, “the bank can give proper consideration to your loan application.
If you’re thinking about acquiring a competitor, it’s important to have a clear understanding of the value of every asset in your acquisition target. Banks or commercial lenders are more likely to look favorably on a deal that has already been inventoried and valued by individual asset. Before going to a lender, you should count, confirm, and value every single hard asset you are able to identify, including all operating equipment, furniture, and fixtures.
Attention to details will emphasize your knowledge of what the assets of the target business are worth in the market and why someone should lend you the money to buy those assets.
What Happens When Banks Say No?
When your best efforts fall on deaf ears at your local banks, all is not lost. Following are some alternate sources of business financing that may meet your needs.
Most states have loan programs designed to provide small business financing. “Some of these programs provide loans at lower than market interest rates provided the business will create jobs in the state,” says Donna A. Holmes, director of the Small Business Development Center, Pennsylvania State University. “Some state programs will take a subordinate position to the bank, giving the bank a better collateral position and an incentive to make a loan that they may have otherwise rejected.”
For information on small business financing programs in your state, contact the office of your state representative or state senator.
The federal government also has loan programs available to assist small business owners. The most popular of these is the Small Business Administration’s (SBA) guaranteed loan program that guarantees as much as 80 percent of the loan principal. “This program gives your bank an incentive to lend to a borrower who does not otherwise meet the bank’s lending guidelines,” Holmes says.
Among other SBA loan programs available to small business owners is the 504 loan. Established in 1980, the 504 Loan Program provides long-term, fixed-rate financing for real estate, facilities construction or expansion, or other fixed-asset needs.
If you decide to seek an SBA loan, your best bet is to work through a certified or preferred lender. The SBA’s guaranteed loan process is rather complex, so you want a lender who has experience working with them. To find certified or preferred lenders, visit the SBA website or call your local SBA office for guidance.
The SBA has local and regional offices in every state. You’ll find their phone number in the federal government section of your local phone directory. Or, for detailed information on all SBA programs, visit www.sba.gov.
Small Business Investors
Small business investment companies (SBICs) are private investment firms licensed by the SBA to provide investment financing and long-term loans to small businesses. Some SBICs make only equity loans, others provide debt loans, and some provide both. As a rule, SBICs will require the same level of collateral and credit ratings as banks.
For information on how to contact an SBIC, check with your local SBA office or go to www.sba.gov/inv.
“Your local chamber of commerce or other business group may have some revolving loan funds available to businesses specific to your community,” Holmes says.
“Generally, these funds come from a variety of local resources and have specific guidelines for their use.”
Holmes recommends you begin by contacting the director of your local chamber of commerce to see what help might be available for the specific purpose you have in mind.
When conventional financing options seem out of reach, many small business owners have had success seeking out individuals or commercial lenders willing to invest in a business expansion, either with debt financing or by taking an equity position in the business. When you find an “angel” investor, you’ll probably find that this option is more flexible than a bank loan or government program.
If you don’t know anyone with the economic firepower to fund your financing needs, don’t give up. There is an entire industry of professional investors looking for opportunities to invest in growing small businesses. For more information on how to match up with an investor who might be interested in your situation, or go to www.entrepreneur.com/money/howtoguide/article52742.html.
Be advised, though, that unless you’re willing to give up an equity position in your practice, working with a professional investor is not for you.
When All Else Fails
Depending on the size and economic health of your practice, the only source of expansion money available to you may be what you can dig up on your own. Be advised, though, that each of these money sources carries special risks.
Friends and Family Members
If you have a friend or family member able to help with financing, you may find this to be the easiest type of loan to obtain.
Use caution, however. Most financial experts agree that mixing business and personal relationships can lead to destructive problems in both your business and personal life, especially if you aren’t aware of the pitfalls. If you do take a loan from a friend or family member, make sure that all details are carefully spelled out in a written contract.
Home Equity Financing
If you have enough equity in your home, a second mortgage may provide all the money you need. While the interest rate on this type of loan may be among the most favorable, keep in mind that it also puts you at risk of losing your home if your business falters.
Credit Card Financing
You may have credit cards with lines of credit substantial enough to fund all or part of your expansion plans. While it can be tempting to simply charge everything, this is arguably the riskiest and least desirable of all financing methods, especially in today’s volatile economy. The burdensome interest rates charged by credit card issuers can become impossible to meet if your practice hits even a minor bump in the road. The result could be a severely damaged credit rating—or even the loss of your business.
When you need to raise money for your business, say most experts, a thorough and detailed business plan is the key to the safest and most desirable types of financing. While other conventional sources of money may seem the easiest to find, they are seldom the wisest choice.