Short on Cash? Get a Bank Loan?

Cash (& bank credit) are kings in times like these. If credit is tight, your business needs money, customers are slow to pay and bills are piling up, then get and preserve cash.

It's a tough time to be in business.  We read that fewer people are spending, there is less disposable income and getting a loan is tough. Perhaps revenues are down, cash is dwindling and the economy is still lackluster.

It's time for a reality check.  They come in many forms: check register balances, stern talks with CPAs, bankers, and significant others. But is everything revealed in the numbers? It is hard to deny what financial statements tell business owners. If there is a loss in any period, we probably already know it from cash flow issues such as vendors waiting longer than usual for payment from us, or our Invoices getting paid slowly by our customers. So, what to do if cash is really tight?

We have many options ranging from the least expensive and restrictive to the most: self-funding, friends and family loans, bank loans, Angel investors, VCs and the mother of them all, the IPO. For now, we'll assume you already have your own and some friends and family money in your business, so today let's look at a bank loan.

First off, we're all in this together. What affects those at the top eventually trickles down to those of us closer to sea level.  When the Fed Rate is close to 0% as it is now, that is the best possible rate for large institutions to lend money between themselves.  At such a time, it follows that our lending rates should be low too.  We are "riskier" borrowers (a debatable topic considering recent events) so we have to pay a premium to the Fed rate bringing our bank borrowing rate to Prime (which is 3.25%) plus a point or so.

Banks have become much stricter in their qualification process of borrowers as a result of the mortgage mess.  As a small or medium-sized business, you will almost certainly be asked for a 'personal guaranty'. That means that even though you are funding a business that might be incorporated, something you've done to specifically separate business from personal, the bank will still ask you to sign personally to let them use your personal assets to settle any debt if you have a business inability to pay.  I always encourage business owners to ask not to sign this and the banks rarely comply.  Especially today, banks want even more collateral (separate personal real estate attachments) in addition to personal guarantees for businesses that look like they are losing revenues.

Before you commit yourself to borrowing money, assess whether your Sales slump is due to reduced, temporary consumer spending or if this is an ongoing trend in your business that signals an irresolvable business issue.  The Fed chairman tells us that, "Financial markets remain quite strained and credit conditions tight".  That means that even if you can borrow money today, you may not be able the next time you soon need it.  And your cash shortfalls may not be over.  It's important to know the root cause of this instability.  You may be too close to it to even see it.  Ask others who have that insight.  There are marketers, coaches, business consultants and other informed counselors who can help you see the forest through the trees.  You certainly don't want to put good money in after bad in this environment.  It hurts to cut your losses and move on but if you get that message repeatedly, do it.  You may be saving more than just your business.

If you have given your business model the critical eye and you can honestly say you're just hit with the economic woes of today, then get that temporary financing loan. If the bank gives it with a fair rate, take it.  Knowing you may not get another shot to go back to the well, spend the proceeds thoughtfully.  This means follow your budget - a topic for another time.