Here is a secret: Debt is not your friend
It’s almost impossible for startups to get loans. If you are a tech startup with a working prototype, you might be able to convince an angel investor or an accelerator to give you money to further develop your business. If you are a main street small business, it’s basically impossible to get a loan pre-revenue. In fact, you have to be at least 6 months in business with $100K annual revenue to convince a loan shark to give you a 100% APR loan that is expected to be paid back within 6 months. In other words, nobody lends to startups. If you are just starting out, you have to use your savings, borrow from friends and family or use credit cards to fund your business. In recent years, you can also use crowdfunding sites like Kickstarter, Indiegogo or Kiva Zip to get your company off ground. But it takes a lot of hard work and creativity to create a successful crowdfunding campaign. Starting up a business is hard.
However, if you have a successful Small business that have made it beyond a few years loans are easier than ever to get. It may seem like your only possible solution but think twice before you get that loan. The problems that we’re starting to see in the small business lending market, to me, are extremely troubling,” Michael Barr, former assistant secretary of the US Treasury, said at the August 10 launch of the Small Business Borrowers’ Bill of Rights, a list of fundamental small business financing rights created by a coalition of lenders, brokers, marketplaces and other small business advocates. “And they are, in some respects, reminiscent of some of the problems in the subprime mortgage sector that we saw in the lead-up to 2008, though obviously on a smaller scale.”
Without Much Regulation, Confusion For The Borrower And A Bonanza For The Lender
Borrowers often don’t understand how expensive their loans are. Jay Goltz, a small business owner and author of “The Street-Smart Entrepreneur,”researched seven such lenders for the City of Chicago. Mentioning advice he heard that small business owners should read the fine print, Goltz says, “There is no fine print! I have an accounting degree and I’m good at math, so I can figure out that they’re charging you 80% to 150% interest. Most of the people that they’re [marketing] to have no clue.”
For example, one lender may loan a business $10,000 with a monthly payment of $2,000. “People who don’t understand math will say, ‘$2,000 times six is $12,000. I get $10,000, so that’s 20% interest.’ No, you only have the money for six months. Therefore, you have to double it. Because APRs are for 12 months. This was only for six months, so now 20% interest is 40%,” he says. “Oh wait, there’s more. They didn’t lend you $10,000 for six months. They start taking the money back from you right away,” he says, referring to the fairly common practice of requiring payments immediately, as OnDeck and many others do. “So you didn’t own $10,000 the whole time, so double it again. Now you’re at 80% or so — 76%.” It costs banks roughly the same amount of money to process a $100,000 loan as it does a $1 million loan, so small business loans are less profitable than those to larger businesses.
If possible avoid debt and work on paying off debt. Reduce expenses. Create and look at financial reports so you really know where you are. Remember sometimes you can not earn your way out of trouble. Get advice and mentoring. Improve productivity and “Work Smarter.” Click below to see how we can help with improving productivity in ways that impact your bottom line.