Debt Financing with Good Credit

Every business has to struggle to break free from their comfort zone to maximize potential. This requires taking calculated risks and learning new skills. Most small business owners don’t have finance degrees, so a bit of finance phobia is normal. However, to be successful, finance phobia is a fear that will usually need to be overcome. As with most things, after the first time, it’s much easier.
January 2019
Brian Cairns, Shannon Olivares
Donna's Story

“I started my business because I wanted to provide massages.  The business is doing fine and needs to expand, but I don’t want to be in debt.  The banks say I have to guarantee a portion of the loan. What if I can’t pay it off? What happens to my stuff?”

Donna is a delight to be around. She is a licensed massage therapist (LMT) who built her business from a one-table/one LMT studio into a 10-table/15 LMT business over the past 7 years. She had built a very successful formula and brand at this location and had outgrown her space.

She knew she needed to expand, but she wasn’t 100% sure exactly how best to go about it.Ms. Donovan was cautious with her spending. While she was an amazing businesswoman with phenomenal intuitive business skills, she didn’t have any formal business training. So, “banking stuff” took her out of her comfort zone.

How We Helped Donna

Problem: Bank Speak

So, we asked her, “Do you have a finance degree?”. To which, she replied, “No”. So, I said, “Cut yourself some slack, we’ll figure it out”All professionals speak in code. It’s not intentional. It’s just how they were taught. After using it so much, they forget that it’s not the way most people speak. Even when confronted and confused by other professional jargon, they fail to recognize it. A doctor is likely as confused by banker-speak as a banker is by doctor speak.

Solution: Explain the Process

So, here’s what we did. First, we worked with Ms. Donovan to pull together her financial documents. She knew how to pull the reports from Quickbooks, so she provided us with her Profit & Loss Statement, her cash flow statement, and her balance sheet. Then we prepared for her to seek her loan by taking her through the 3 Key Questions: How much do you need? How will you use it? By when do you need it?

Problem: 3 Questions

We made out a budget of all the things that she needed: tables, equipment, computers, rent, payroll, etc. When we added it all up, it came to $100,000. It was a mix of fixed assets (equipment, tables, etc.) and start-up expenses. She was thinking of expanding within the next six month, which was more than adequate time.

Solution: Right Products

With this information, we could explore which options were best for her.  First, since she was profitable, been in business for more than 2 years, and had a good credit score, she was a great candidate for an SBA loan and SBA backed line of credit.

The fixed assets are good for a loan. Why? Because they can be used as collateral. The expenses were better suited for a line of credit. Why? A line of credit is like a credit card. You use it when you need it. Since she didn’t need all the money upfront, why pay the interest on it? She could draw from it as she needed it and pay it back as quickly as she wanted

Problem: Finding the Best Deal

Since Ms. Donnovan had both the luxury of time, great credit, and Woman Owned Business, she was in the driver's seat, even if it didn't feel that way to her. She was an SBA lender's dream. Because of this, she had the chance to get a good deal.

Solution: Evaluating Lenders

Now, this is a critical point. Before you start evaluating your options, you need to ask or read the fine print to see whether they will do a hard or a soft pull on your personal credit.

If it's a hard pull, don't do it. Wait until you submit your final application to do the hard pull. At the time, Funding Circle was doing soft pulls. We used them to get an idea of where the best rates were.  

Once we had a good idea of where best to go, we prepared her application and went with her to the bank. The bank was impressed with her application and she was approved within 10 weeks.
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