One size small business financing does not fit all

Photo courtesy of Morguefile user Pennywise

Photo courtesy of Morguefile user Pennywise

A couple of weeks ago a colleague and I were talking about the challenges of small business financing when he suggested that most people look at it all wrong. It wasn’t necessarily a new idea to me, but the way he expressed it was new and hit the nail on the head in my opinion. We normally look at financing options in an either/or fashion. Equity funding vs. debt financing, traditional financing vs. alternative financing. As my friend argued, and I suggested on Forbes, we should probably look at all the funding or financing options available as a portfolio of options to access capital depending upon whether or not you’re trying to fill short-term or long-term needs, what stage your business is in, and your ability to access credit.

Earlier this week I came across a piece written by David Paul Morris that was published in the On Small Business section of the Washington Post. He suggests, and I agree; the type of financing a small business owner needs is often dictated by the stage of growth their particular business finds itself in. When talking about the myriad options for financing now available to small business owners, Morris suggests, “The key is to know which avenues are best for your company to pursue. This is largely determined by business size, business credit, and assets available to leverage.”

He suggests three business stages. I’ll use the same three stages as I offer my two cents.


  1. Are you going to be able to repay the loan? As a startup, if the business has no income it’s hard to imagine how a small business owner is going to make the payment that is due next month. Does he or she have another source of income to make the payment? This is particularly challenging for idea-stage entrepreneurs who may not even have a product in place yet.
  2. Can you pull this off? Although they don’t ask it that way, when they ask about your time in business, they’re trying to determine if you have the small business chops to execute on your idea and make things happen.
  3. What will you do if things don’t work out? Lenders don’t want to take unnecessary risks. They want to be reassured that even if things don’t work out, you’ll be able to repay the loan. Mark Twain supposedly once said, “A banker is someone who will give you his umbrella when the sun is shining and ask for it back as soon as it starts to rain.” This is why most lenders want collateral to borrow against. No one I ever talk to wants to take your collateral when you default on a loan, but neither do they want to be left holding the bag if you default.

Morris suggests, “As an entrepreneur, you should use every bit of what you’ve got to get your business off the ground. In the beginning, this often means working long hours without a salary. It also means using your own resources: your personal savings, 401(k), and perhaps a personal credit card or home equity line of credit.”

I’ve done all of the above. Those are the sacrifices most Main Street business owners make to get their idea off the ground.

“After those avenues are exhausted, then you can ask others to invest their time and money,” he continues. “Loans from family and friends continue to be one of the most popular forms of financing for startups and microbusinesses. If you go this route, be sure to make it official: sign a promissory note agreeing to terms of the loan before any money changes hands.”

He also argues that sometimes you can negotiate deferred terms with a landlord or obtain equipment on an interest-free payment plan from someone who believes in you. In one business, I had a very generous landlord I’d known from a previous enterprise, that allowed me to sublet space from him for free. His generosity really made a difference. I will forever be grateful for his willingness to invest in me.

Small business

Once you’ve been in business for a year or two, the loan options available to you increase. Lenders are still interested in the three questions listed above, but hopefully you have an income (even if it’s small) from the sale of your product or service, you’ve got a track record that hopefully shows you can deliver, and the collateral that makes you a viable candidate for a loan.

As your business becomes older, it’s easier to qualify for traditional financing (provided you’ve guarded your credit score), but if your company is only a year or two old or your credit is less than perfect, there are a number of alternative sources of funding you can access. You can also look at some of the new crowdfunding options available to small business owners. Recent changes made by the SEC make it much easier to get funding that way.

In October, the Small Business Administration (SBA) removed fees on loans of $150,000 or less, which I think is a huge step in the right direction—making low-interest SBA loans available to business owners who would have likely gotten lost in the shuffle as SBA lenders pushed upstream for bigger loans.

Medium and large businesses

Although finding the right small business loan is still tough for most small business owners, that isn’t the case for medium-sized and big businesses. While credit has even eased for the largest small businesses, it’s still difficult for the smallest small businesses.

However, if you’re a mid-sized business or a big business, interest rates are historically low “…U.S. banks have increased the total pool of large business loans (defined by the FDIC as loans over $1 million) by 23 percent from 2007 to now,” reports Morris. “Of course, to qualify for the best terms you’ll need sizable business assets and a strong business credit profile.”

Accessing capital to grow and thrive is a challenge for every small business owner. Looking at the options available based upon stage of growth, the type of need, and credit worthiness, is a good idea. I like the idea of looking at is as a portfolio. What do you think?

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