FLORIDA SMALL BUSINESS DEVELOPMENT CENTER AT IRSC
WHEN THE BANK SAYS NO, WHERE DO YOU GO?
TCBusiness.com 47
BY NANCY DAHLBERG
It’s a growing problem: Small businesses
are getting in over their heads with debt, often
brought on by the use of online lenders
that typically charge higher rates and can
require shorter payback periods than banks
and other alternatives.
Because traditional bank loans are difficult
for many small businesses to qualify for,
more Florida business owners are turning to
these non-bank online lenders, such as On-
Deck, Lending Club, PayPal Working Capital
and Kabbage, to name a few. And a recently
released national survey of small businesses
showed Florida was not alone.
The 3rd Quarter Small Business Credit
Survey by 12 Federal Reserve Banks shows
that 70% of small firms have outstanding
debt. As many as 64% of small businesses are
struggling financially, and say “credit availability”
and “making payments on debt” are
the reasons. To qualify for loans, 58% of small
businesses put their personal assets on the
line using personal guarantees, while 49%
put down their business assets.
Nearly a third of borrowers are turning to
online lenders. That’s a significant jump from
the previous year when only 24% of small
business owners sought funding from such
institutions. The survey showed that medium
and high-risk applicants were especially
inclined to seek funds from these lenders
that often have higher interest rates, whereas
low credit-risk applicants rely on banks.
Indeed, small businesses are drawn to
online lenders because their loans are easier
to qualify for and small businesses can apply,
get approved, and receive the funds in a
matter of days or hours rather than months.
But watch out. Even beyond the higher
cost of the money, many of these loans are
short term and require putting personal or
business assets on the line. What’s more, the
shorter loan terms can play havoc with cash
flow, the lifeblood of a small business.
MAKE CHANGES IN YOUR
BUSINESS FIRST
Consultants at the Florida Small Business
Development Center at Indian River State
College (FSBDC at IRSC) have noticed an increase
in businesses seeking non-traditional
financing options.
Michael Bernard, an FSBDC at IRSC
consultant who specializes in finance and
access to capital, says that when a downturn
in the marketplace occurs a business must
make adjustments to operations to address
and mitigate financial losses. Instead many
businesses begin to borrow from high-rate
lenders to offset losses, which could accelerate
losses and negatively affect cash flow.
“I have seen credit card type rates because
the lender sells the loan based on a
short term. These types of loans are meant
to be a bridge loan – bridging the company
to a more conventional and traditional long
term loan. But distressed organizations
that are losing money can’t meet loan due
dates and are forced to borrow more to
pay one off. So a company can find itself in
deep debt before the owner realizes they
should have adjusted the business model
to address profit and loss,” said Bernard, a
former consultant with several international
accounting firms.
“What we see is a textbook problem for
many businesses - overhead is too high,
the business experiences a sudden drop in
sales, and a shift in marketplace in terms of
pricing. Now the business finds itself borrowing
short term money to address a long
term problem.”
What should these businesses do instead?
“The environment in which the business
operates changes regularly, an owner or
manger must conduct an environment scan
and review financial data regularly in order
to be ahead of market changes. A manager
must conduct regular reviews of inventory,
suppliers, expenses and especially cash. How
about cutting your salary?” Bernard said.
WHEN MIGHT HIGHER INTEREST
RATES BE JUSTIFIED?
Obtaining high interest rate debt may
be OK in some instances, such as if your
company is making money and you have
crunched the numbers and determined
that you can leverage the borrowed funds
enough to justify the high interest rate you
are paying. “Only a few extraordinary conditions
would have to exist for me to recommend
a client take on high interest rate
debt,” Bernard said.
“If the company were highly profitable
and the organization could afford the higher
rate or if the business is newly launched
and requires the start-up capital or if the
owner has exhausted every effort to secure
a traditional loan and needs to the capital
to take advantage of a growth market or a
specific government contract,” he said.
ENSURE THAT YOUR BUSINESS
IS BANKABLE!
It’s difficult to get a loan from a bank —
that’s a reality. Banks typically won’t lend to
businesses under two years old, or ones of
any age with poor credit or businesses that
cannot demonstrate two years of profitability.
Out of 10 small businesses, maybe two or
three are bankable, said Bernard.
SBA loans offer attractive rates but the
underwriting process is no different from
traditional lending processes or requirements,
he said. But once the business
closes a loan, “it creates a lending and credit
history that the business can leverage to
access capital when the businesses needs
to take advantage of growth opportunities,”
Bernard said. SBA lenders offer a number of
loan programs for various uses.
Bernard, as well as other FSBDC at IRSC
consultants, work with client companies
to help them get bankable and establish a
relationship with a banker.
FINANCING OPTIONS
What are some other alternatives to traditional
bank loans?
SBA 504 loan: If you need a loan for real
estate your business will be occupying or
for equipment, the SBA 504 may be a good
option. If you are able to qualify, you can
borrow up to 90%, freeing up cash to grow
your business.
Community foundations and nonprofits:
In South Florida, CDFI organizations including
Bayside Foundation and Accion lend
money to qualifying organizations. However
the process is not quick and there are limits
to how much they will lend. Bayside may
lend up to $150,000 and Accion may go to
$250,000 for qualifying businesses.
Factoring: It works like this. You sell
your invoices at a discount to a factoring
company in exchange for a lump sum of
cash. The factoring company then owns the
invoices and gets paid when it collects from
your customers. This could be an avenue to
take, if necessary, but be careful to select
the right company.
Other alternative financing avenues such
as online lenders, as discussed above, as
well as credit card debt, Accounts Receivables
financing or PO financing may be
appropriate in some situations — but read
the fine print.
There is no magic potion, said Bernard.
The FSBDC at IRSC works with Treasure Coast
business owners and operators to assist in the
process of reviewing financials and operations
to get the business “bankable”.
For more information on the financing
options and loans referenced in this article
or to speak with a Certified Business Consultant
at the FSBDC at IRSC please call —
772.462.7631 or visit www.IRSCBIZ.com. v
Michael Bernard’s consulting experience comes
from his work with several international accounting
firms in their management consulting
departments working with Fortune 500 companies
throughout the United States. He has also worked
for several local and regional accounting firms as
both a manager and principal in charge of their
consulting operations in the South Florida area
before opening his own management consulting
company in Miami.
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