In a sweet Inception-like game, I wrote this post which was originally published on The Money Mix. It’s all about how we’ve used small business loans to advance our business and personal finances, and it’s packed with actionable intel. Let us know your thoughts in the comments below!
“One hundred fifty thousand on the build-out, two hundred seventy-five on the business, and another couple hundred on the goodwill…” It was like a sick and twisted math problem, circa 1st grade, just adding up all the small business loans we had taken out. Was I stressed and burnt out, and (in an honest moment) just a little terrified…?
I was.
But, at the same moment, I would also admit to feeling as professionally “alive” as I had ever felt in the past. There we were, a married couple in our early thirties and now business partners.
We had just signed the final documents to take ownership of our new dental practice and immediately begin construction on a brand new office (not by choice but out of necessity). There were 5 employees, a mountain of debt, an underperforming practice, and a major fork in the road.
Our lives and the lives of our new Team (as I call them) would profoundly change depending on which arm of the fork our journey would lead to.
Success – or – failure. There was no middle ground.
Our success would mean dramatically increasing our business’ profitability by enticing hundreds of new patients, hiring more staff, building an incredible culture, and ultimately making a positive mark in our community.
Our failure, on the other hand, would be some version of the opposite.
The one variable that we couldn’t change at that point was the bet that we had made on ourselves; the risk we were taking. Hundreds of thousands of dollars in the form of many small business loans were now hanging over our heads, and one way or another – it was time to start paying up.
But we didn’t just fall into this situation haphazardly. We made a series of calculated decisions to assume these risks and to travel this path.
Why?
Well… Scared money don’t make money – sometimes you need to take a few steps backward to leap forward.
How Small Business Loans Can Skyrocket your Wealth
Let’s take a look at some of the most common benefits cited by people when they take out small business loans. After that, I’ll clue you in on what we hoped to gain and what we learned in taking out a series of different loans. Then to wrap up, I’ll discuss what we wish we’d known back at the beginning.
How small business loans can benefit your business
1- Hiring quality people
We were recently faced with a unique (to us) situation. Our business had started taking off but the income and revenue hadn’t quite caught up. So there we were with an ever-increasing demand and an equally increasing stress level of our then-current employees.
It was a tenuous situation at best, and if we hadn’t made a move to bring more folks on board, we could’ve lost great people or had to turn away business… Neither of which were on my list of desired outcomes.
We decided to take a calculated risk on the ability for our new folks to help generate revenue in a quick timeframe, but if that’s not possible – taking a small business loan to fund hiring while revenues eventually follow along can be a great option.
Calculated growth is a great thing and sometimes you need a shot in the arm (in the form of a small cash influx) to start building positive momentum.
2- Improving your resources and infrastructure
When we took over our business, it existed in a (frankly) dilapidated old building. We had mostly older technology and equipment and definitely old pictures hanging on the wall.
The whole scene was kind of depressing… Except for all the young, vibrant, or excited faces we had in our group. At that time, my wife (our doctor) was 30 and our staff ranged from 24-28. It was a stark contrast with the run-down medical building our business existed within.
We tried like hell to secure a long-term lease in that space because moving is soooo expensive, but luckily for us – I couldn’t get the landlord to agree to pretty much any proposal we had. In the 11th hour, we were forced to find a new space and build a brand new office.
I don’t know about the current state of your savings account, but ours didn’t have an extra $500,000 just lying around.
So there I went back to our banker selling the promise of increased revenues due to our new space, exciting equipment purchases and the efficiencies they’d allow, and ultimately requesting an additional loan to make it all possible.
Take this sample size of 1 with a grain of salt, but it’s been 1 year since our construction and move were completed, and we’ve already increased revenues 100% year-over-year. The facelift, most assuredly, had a lot to do with that.
3- Boosting your cash flow
Do you know what one of the worst business-owner feelings in the history of the world is? Thinking that you can make payroll next month but not being even 75% sure.
We had worked incredibly hard to find and keep the best quality Team, but no matter how much they loved working for the company or liked us as people – they weren’t about to work for free… And I couldn’t blame them at all.
Cash flow is king when it comes to running your business, and whether you need the cash for payroll, the electric bill, or to pay your suppliers, one way or another – you’re going to need it.
I was surprised to see the term “working capital” in our original loan documents, and even asked our banker and trusted advisors if we’d actually need the ‘extra’ $30,000. I didn’t want to pay the interest if we didn’t have to and I thought our personal savings could get us through until revenues picked up.
Our most trusted advisor cautioned me, “You can really never have too much cash in your business. Worst case scenario, you pay that portion back early, but I think that in 6 months you’ll be glad you have it.”
You want the truth?
…We probably wouldn’t have survived without it.
4- Researching and launching a new product
Not necessarily in my area of expertise as we sell a healthcare service, but if your business is product-based, those products don’t just appear out of thin air. They take time in the concept stage. They need researching, testing, and iterating (is that a word??).
The point is that fine-tuning your product takes time, and time = money, my friends.
Sure, once this product flies off the shelves, you should recoup your investment, but you need a product to sell in the first place. And if you don’t have the cash on hand to make that investment – a small business loan can be just the blessing you need.
5- Stockpiling your inventory
Hey – you’ve researched, tested, iterated, and sold the bejeezus out of that product… Congrats!!
But now you need to buy more, and maybe place a larger order this time around.
After you recouped your initial investment, paid your staff, landlord, marketing team, banks, …, and the electric company, I don’t have to imagine that you may be wondering where all those “profits” ended up.
Although you don’t want to make a habit out of defaulting to just calling your banker, taking out a small business loan when it makes sense can be the exact move you need to make.
Business ownership is all about balance
And the balance we’re looking to strike, in these situations, is that perfect amount of debt relative to current and future income. When the numbers make sense and your business is likely to benefit from taking on additional debt, it’s a win-win.
You benefit from the influx of additional cash to get over whatever hurdle that remains in your way. And the bank benefits off the interest you pay. Like it or not – without paying that interest, your business is likely to stagnate and could ultimately go under. But with a strategic “few steps backward”, can you then take that “giant leap forward.”
But the banks aren’t going to just shake your hand and say, “Well here you are. Enjoy our cash!”
If only it were that easy…
No, friends. Now you need to put on your business’ best dress, have that hair just so, and make sure to make the best first impression, because lending these days is a little harder to come by than it was pre-Great Recession.
What banks look for in an ‘attractive’ business loan borrower
1- Have cash saved up
I was shocked.
Strike that.
I was flabbergasted in discussing our first small business loans with many bankers and they all told me we needed tens of thousands of dollars saved up in order to take out these loans.
My response:
“If I had the money, I wouldn’t be asking you for it.”
But, I learned in time that that’s not how the small business loan game works. Not only do you need the requisite 10-20% down (equity in your business akin to equity in your home mortgage), but also you need to show ample cash on hand to weather economic downtimes and to just pay the overhead for a while.
So save up until you have enough money on hand to be ‘attractive’ – then save some more.
2- Have an excellent credit score
We’re talking both personal and business credit here, and while we had some leiniency on our business’ score, our personal ones were painstakingly examined.
Just like most other loans, the banks want to be sure that their money is in the hands of someone who is likely to pay it back.
If you’re looking to boost your credit score, here are the 5 essential steps:
- Pay consistently and on time
- Don’t use all the credit you have available to you
- Show a good history of responsible borrowing
- Don’t take out lines of credit without absolutely needing them
- Make sure your debt-to-income ratio is in line
3- Be prepared to tell them exactly how your business will benefit from this loan
Part of being an attractive borrower as a business is showing that your business is likely to make money as a result of taking these funds.
And in order to show the bank how you’re going to make money, you’ll likely need to produce a business plan.
This document can detail any aspect of your business including products or services, leadership, staffing, marketing, financial plans, and any other details that can show you’ve thought this business thing through.
If you can tell the bank a story that’s reliable, believable, backed with data and facts, and they agree with you, then you’re one step closer to taking their money and advancing your business.
4- Make sure you ‘need’ the loan in the first place
So let’s say you’ve gone through the trouble of making yourself an attractive borrower. You’ve saved up enough cash, have a soaring-high credit score, and your business plan is impecable…
Make sure you need this cash influx in the first place. Sure, it’s always nice to have extra working capital or a sizeable rainy day fund, but if you can get there in the short term without paying interest – that’s a more favorable option.
So just be sure you absolutely need this loan in the first place. Otherwise, you can save yourself a bunch of time and some interest down the road by simply staying the course with what you have.
5- Take the leap and offer collateral
If you (like us) are in the camp of ‘those who actually do need the loan for growth’, it’s time to push your chips to the center of the table and gamble on yourself.
In the 1500s, Hernan Cortes landed in Veracruz with his army to begin a massive conquest. Rather than keep the ships they came in on – just in case – he ordered his men to have them burned…
There was no retreat. No quick return home. Cortes had grand plans and he needed 100% commitment from his troops to make it happen.
So burn your proverbial ships (which is probably offering your assets and personal savings as collateral) and forge onward in this bet you’ve placed on yourself. Because from here on out – you’ll need 100% commitment to achieve the success you desire.
