Small business loans is actually a challenge nowadays. Imagine I offered you a million dollars saying I want to invest in you. Where would you put this money.
Your business for a 1 K should you say no no. I don’t want your money. Now in this post we’re going to take you through understanding whether or not you should seek financing for your business.
We didn’t talk about where you are and your business journey what your risk tolerance is. And I’m going to help you figure out if now is the right time to grow and scale your business by borrowing money.
I’ve been in the media over two thousand times myself. And we turn thoughtful entrepreneurs into media celebrities add up my influence dot com.
Now this post series I’m creating could be one of the most life changing post series you’ve ever watched.
If you’re in business for yourself now I’ve created seven figure a year companies in the past and I’ve also failed in business like a lot.
Now we’re in the position with my newest company where I’m exploring whether or not to seek capital investment.
Now in my first post I really laid this out. So if you want to understand my journey a bit better. And the struggle I have with the idea of business debt or bringing on an investor.
Please go back and watch that post. It’s short and we’ll really give you some valuable context that I think you’ll identify with and also share a pretty strong case why as a consumer and small business loans advocate I feel that I have a moral imperative to bring you along with me in this journey.
There’s just so much confusion about how to fund the business and quite honestly there are a lot of sharks out there who are not looking out for your best interest.
My hope is that by being very transparent about my journey and our journey you’ll gain some insight and start taking action on your next steps to growing and scaling your business.
I respect where you are in your journey and I’m committed to serving in any way that I can.
Small business loans how to do?
Finally I don’t have all the answers and every business is different. So I’m really relying on you to comment below and let me know your questions about this journey.
I’d absolutely love to dig in and help you grow your business and impact. So this video is largely based on a book by one of my friends and mentors me Kassar a me is the founder of multi funding and is a regular contributor at Inc magazine online and a regular speaker at Inc events where we originally connected many years ago.
So his book is called the Growth dilemma and I believe it should be required reading for anyone toying around with the idea of scaling their company faster by leveraging productive debt.
Now, in my previous post, I talked about my journey as a bootstrap. So, I want you to know that you can start a business with absolutely no debt. I’ve done it before, but of course knowing how to take advantage of a small business loans.
I also know that having an infusion of capital can allow you to take advantage of opportunities that might otherwise be outside your budget.
Now those opportunities would be designed to help you gain a return on investment and we’ll go through some math in this post to help you decide or keep it on cruise control.
So let’s go back to my original question at the beginning of this post and I’ll actually let me ask the question since it’s actually his question that he asks.
So if I gave you a gift of a million dollars today that you didn’t have when you woke up this morning and you could not use the money to go buy a beach house or a fancy car you can split the money but you either had to invest it in your business or a mutual fund of your choice or something that you did not control.
How would you divide the chips. Josh Yeah. So I would probably if it were a million dollars I would probably do what you call safety and the safety net.
I would probably put two hundred thousand in the safety net and then eight hundred thousand in to the business.
And another reason why I would do that is I would look at a million dollars and go I don’t know if I can. What would I spend all that money on. I don’t have an answer for that.
So let’s just say that what return would you expect from the investment in the business and what return would you expect from the investment in the mutual fund.
Oh yeah. The return in the business would be it would be enormous. I mean at a minimum like 20 or 25 percent.
OK. And what let me tell you why I ask this question of the core theme of the book. So as entrepreneurs took a 20 dollar bill out of pocket there’s three things we can do with it.
Limiting Risks When Investing In My Business
We can reinvested in our business which we often do without realizing it. Yeah we can and we should be taking some chips and putting them on the side for a rainy day.
Core trees don’t grow to the sky forever. And we’re going to spend some. Time we’d like to do.
We have to live our lives. We do it. This is not necessarily very organized. Also, I would argue that if you were indeed 800 or 400 or 200 or 600, whatever that number is, whether you are going to invest in your business today. These values would be very low, requiring a small business loans.
And you thought you could get a 25 percent return on it and you could go borrow that money at 7 or 8 percent. Why aren’t you using leverage in a positive way to help you grow your business.
Right. Right. And that’s the question that when you ask that. It’s ever been it just it becomes very clear.
And I think that it’s it’s fear. You know that’s the only thing. Now if you’d like to watch my full interview with me you can click on the link in the notes below and you can watch that interview.
So now let me ask you the question Are you a 100 percenter or are you a safety net or what percent would you stick into a for a 1 k and what percent would you invest into business growth.
This is an important question to ask. You heard my answer and I believe that if you don’t have the guts to invest in your business.
That’s a good indication that you may not be wired for that level of risk. Or more likely it’s just not good timing. In other words maybe your business isn’t scalable at this point.
Your confidence is generally a good litmus test on whether or not to move forward with funding.
Now even if you’re feeling like taking on debt is way too risky right now. That’s awesome.
Best rates for small business loans
That means we have a little time to play with. Now, in my next articles, I’ll cover exactly what you have to do to go to an institution and get the best rates for small business loans.
If you want to invest in growth in the future, you can get much more favorable terms because you will have a rating. of impeccable business credit.
I will tell you right now the concept I just mentioned right there blew my mind when I learned about it.
Also I should share that if you enjoy owning a lifestyle business and you’re earning enough to pay your bills enjoy some vacations and save money for the future a big capital investment is probably not necessary. Life is good.
Now I will tell you and we’ll get into this in a future video. Every business owner should have access to a low cost line of credit.
Every expert I talked to for this series agrees on this one fundamental point. And when I’m about to share is very important the time to establish this line of credit is when times are good and you don’t need the money because if you seek a line of credit when times are desperate you’re probably going to get hosed.
I’ll make sure you hit subscribe because I’m going to share more on this critical strategy in a future post.
The next thing we need to look at is Are you a tortoise or are you a hare no tortoise entrepreneurs are more likely to be cautious and less likely to take risks. Their goal is to pursue gradual growth over a spread out timespan.
They don’t think about their business in the short term. For them it’s a long term venture requiring patience and persistence.
They’re not thinking about the next quarter or round of financing they will do what it takes to strengthen their company for the long run.
Their business is their baby and they won’t give it up easily. Now according to a me debt financing tends to be the preferred form of funding for this kind of entrepreneur.
Now typically investors are more excited about backing hairs than they are tortoises so often the only choice for a tortoise is to borrow money. Now that’s not necessarily a bad thing.
Armey shared with me that debt financing is less risky than granting equity positions to investors which means selling a piece of the business and thus losing some control over it.
I. Am a tortoise. Now. In the book the growth dilemma. We also learn about hair entrepreneurs who want to grow as big as possible as quickly as they can. Now that generally means equity financing.
Money that could come from venture capitalists angel investors private equity or other sources. Now I may be wrong and I would love your comments below on this but in my experience investors are really only interested in finding unicorns.
Now admittedly I’ve only talked with a handful but because we’re more of a service oriented business add up my influence I’ve been advised that we would be better suited for taking care of our own growth and then maybe down the road we could entertain acquisition offers in the future once we’re a bigger force to be reckoned with now personality wise Ami shares that hair.
Entrepreneurs often want to quickly build multiple ventures in their careers and then sell them. They are more passionate about the process than the real entity they are building. To achieve this kind of success, you have to double up for small business loans.
Their goal in life is multiple exits. The game is to get in and get out. They would never put up their own house as collateral for their latest venture because they’re not that emotionally tied to their company.
So if this describes you consider heading to Silicon Valley or someplace else with a great startup investor scene and spend your days networking and pitching and you may just find your ideal investment partner.
Now another consideration is the current stage of your business journey. ALIMI describes four different stages. Are you a grower a glider a speed bumper or an Exeter.
How to increase your market share and profits
Now most entrepreneurs are growers. They spend their days considering new ways to grow their market share and profits. They would likely take most of the million dollars and invested into their business gliders on the other hand are happy where they are.
And if you were to offer them the million dollars and they saw a really big opportunity well they might invest most of it there. But they don’t likely feel an intense pressure to do so.
They’re happy speed bumpers have hit a rough patch in their business. It happens in my work with Tony Robbins business mastery audience of which I’ve taught an online event to one thing that we commonly hear from Tony is to build your business for winter because it’s inevitable you could lose a key employee gain some sharp competition.
The market could dry up on you are so many other things now. Hopefully if you’re in the speed bump phase you’ve done some work ahead of time. If not now is the time to get very serious about how you’ll solve this inevitable problem.
Keep watching this series. I gotcha. Finally Exeter is just one out. There’s probably no point in taking on any risk. Now the next thing to consider in regards to taking the money is your risk tolerance. Now Amy points out three categories.
You’re either risk averse risk neutral or risk flexible. Now the best way to find out where you are is to take a mes quiz which we’ve linked below.
Now I happen to be pretty neutral which means I’ve got a pretty good stomach for it but my wife is a little bit more risk averse so that means we were risk averse and that’s generally how it works amongst couples or partners.
Now, for you, risk-averse people would tell me that conventional lenders are likely to be the best sources of finance if you really want to grow, because risk-averse people are likely to approach business conservatively.
But still I would say that the best small business loans we find in the respectful banking institutions.
Their overall financial practices may be best match with an SBA approved lender which is what a company multi funding does. And I have a link to that below as well.
Now although painful for risk averse entrepreneurs who really want to grow. Another possibility is self financing. This entails using your own money to invest in the company where personal assets are used as collateral for outside funding.
Some examples include securing a home equity loan or home equity line of credit otherwise known as a hillock. Now you can also borrow against your life insurance.
You can use your individual retirement account your IRA for short term interest free loan and you could borrow against investments in securities or you could even use personal savings.
Now I will chat with others in future videos that would urge you to avoid using your personal credit when the business credit strength is able to sustain itself. I’ll even share how to grow your company’s credit worthiness to better keep things separate.
Stay tuned for other financing options
However for funding mechanisms like low cost SBA loans you can expect that you will need to personally guarantee the loan. Now for risk neutral entrepreneurs like me you’re likely open to other funding options.
If the right opportunity presented itself. Now this might include higher interest accounts receivable factoring or digging into lines of credit for short term opportunities in which you can easily pay back the credit after the opportunity is realized. Risk flexible entrepreneurs are not reckless.
They just really really love taking advantage of every opportunity. And they’re not afraid to personally guarantee credit because they believe in their business and have some confidence that the business can make good on any credit.
A personal guarantee is an individual’s promise to repay business debts by the way. Now this often comes with collateral such as business assets or a lean on the business owners home.
Now a means shared with me that financiers appreciate those kinds of leaves because they showcase an entrepreneur’s confidence in his or her business. Lower the for the lender. And you can generally get much more favorable conditions including a lower interest rate and a 10 year term on the coveted SBA loan.
It’s now time for the final Test in the growth dilemma and that is what is your growth aspiration. In other words how fast do you want to grow. And what is your stretch goal. Stretch goals are challenging but they’re not beyond the realm of possibility.
While reputable lenders won’t steer you toward anything that makes you uncomfortable discomfort can be useful for you to look beyond your limits. If only slightly your growth aspirations may still be conservative or you might want more aggressive or even Rocketship growth. You get to decide and this is absolutely going to inform you on the type and amount of funding.
So. Now that you know who you are. Here comes the fun part. What happens if a business owner wants to grow. But it’s a you know it. But they want to grow.
But maybe you know it’s they’re not certain that this is it’s what they’re thinking of doing is really risky to them like they or it ends up. Maybe it’s just a bad decision when it comes to growth you know. Are there instant Joe.
Is there a litmus test to say listen you want to grow. That’s a given but your reasons should grow. For growing should check all these boxes or your plan for growth should check all these boxes.
Is there any test for that I like to see a first of all what’s the profit growth it’s going to generate. And I’d like to see a best case and worst case and a medium scenario.
So we’re all missing tools for growth. I want to grow. Maybe I need to invest in a salesperson in Southern California. I’m making an app. That’s going to cost me to test it or experiment with it to find out if it’s really working.
Give it the time. Two hundred thousand dollars I’m making it up. If I borrow two hundred thousand dollars to do it. If I could I do it out of cash flow.
That might be a big hit. If I borrow two hundred thousand dollars to do it and I’m going to have a monthly payment of twenty two hundred dollars a month for ten years.
That’s the worst thing that could happen. How. Can I afford that comfortably. The best thing that could happen is that. Two hundred thousand dollar investment would generate how much profit.
Over how much time I need to understand that. And then I need to look at a scenario in the middle. And then I have to decide if I’m comfortable with the rules.
No you don’t have to get into total analysis paralysis which clearly I am. Sometimes people do that. Yeah but where people often get stuck is they think about the two hundred thousand dollars coming out of this year’s cash flow.
Yes absolutely. And it’s better in my opinion to think of that two hundred thousand dollars coming in monthly hits over a period of time.
Okay so as opposed to thinking of a two hundred thousand dollar liability. Really we’re just talking about a two thousand dollar a month liability.
Well it depends how you manage your business like your household budget. Yeah. Or are you going to use leverage in a positive way to help you grow your business.
And not all your investments are going to pan out tomorrow going to work. I have to tell you that what images presented really changed my mind in a huge way when I consider personal debt.
I would look at twenty thousand dollars in debt as a twenty thousand dollar liability with business however.
We’re talking productive vs. consumptive debt and if we’re properly capitalizing our business we should be willing to invest in growth opportunities.
Now I’ll have more videos on this topic in the future. Before we get to the math and I share where we’re headed I asked me about an SBA loan vs. a line of credit.
Our use of funds would be to invest in sales and growth opportunities for capital investments and growth me cautioned against the use of a line of credit.
Hello Cs are fantastic for short term debt where you know that you can pay them off within 12 months but he warned that lenders are notorious for requiring a zero balance at some point annually.
So we’d like the flexibility to not have to zero out our balance within 12 months. It may happen but it may not because I don’t know I felt uncomfortable relying solely on a line of credit.
Now you might find that an LLC is perfect for you. Make sure you keep watching this series because I’ll take you on my journey around acquiring an LLC as well.
And remember every business should qualify for when. When times are good. So regarding the amount of the loan if I’m stretching just a bit to make sure that I’m focused on aggressive growth I want to make sure that I have a strong case for use of funds.
Now based on my personal credit time and business debt to income ratio and our business income we can qualify for a one hundred thousand dollar SBA loan.
Why SBA. Because it’s a lot less expensive than alternative lenders or a non SBA guaranteed lender.
You can also choose terms as long as 10 years which will make sure that payments are easy to make.
Thankfully I do have good credit. It hasn’t always been that way but if you’re not currently at 660 or above Don’t worry. There are plenty of other options or you might decide to focus on improving your credit before taking on a business loans.
Now remember for accounting sake we’re not looking at this as a one hundred thousand dollar liability. The monthly liability would be our payments and that’s what we need to pay attention to.
So a one hundred thousand dollar loan over a 10 year term at 9 percent interest. Well our monthly payment would be one thousand two hundred sixty six dollars and seventy six cents.
So here’s my big question. If I have access to one hundred thousand dollars in capital can I take advantage of opportunities that will increase our income.
By more than one thousand two hundred sixty six dollars and seventy six cents. I can tell you that once I looked at the numbers that way the decision became pretty easy.
Right now I’m shouldering the vast majority of our client acquisition work and it’s pretty time consuming. I’m great at some aspects of it but other areas I’m terrible and that is costing us a lot of potential income.
And more importantly it’s holding my company back from expanding our mission and helping some really great business owners.
Now some entrepreneurs can’t use debt to fund their businesses expansion because the company doesn’t generate enough cash to enable them to make the payments on it.
Others shouldn’t use debt because the returns their business can earn on borrowed money are less than the interest rates on any loans they can get.
So if you currently don’t have strong income a record of business growth. Oh shoot and strong personal credit.
You’re probably going to have to pay more for borrowed money and that makes it harder to get the numbers to add up.
So as of right now we’re actually leaning toward getting one hundred k. Now I admit it’s still pretty scary. But thanks to help from experts like me and many others who I’m going to introduce you to in this video series.
I feel like we’re in good hands now. If you feel confident you know what you need to do to grow your business you have a strong case for expecting a good return on your investment.
You can borrow the money to do it and you believe the expected return is higher than the cost of capital.
What’s holding you back. I’ve got a link to a me’s Web site and a test you can take to determine your own entrepreneurial profile below.
Also going to tell you that the upcoming videos in this series are going to help you understand this concept of acquiring capital in a way that will probably rock your world.
Now naturally I need to tell you I’m not your attorney and I’m not your financial advisor but I hope that through my journey I can help inspire you and bring you clarity on your own business growth journey.
If it’s time to launch your business in a big way and I can help you overcome that fear I consider it an honor. Also I should say that if you feel that I’ve helped you.
Please let me or others know that I helped inspire you to connect with them. I’m a big believer in giving value. And if I end up getting any referral bonus from it it allows me to continue answering questions and teaching on this subject.
Thank you so much. Finally hitting share and letting others know about this project would be the highest compliment you could offer without you. It’s just me researching writing and teaching to an empty room.
Together you and I can impact business owners that may be unnecessarily struggling or may end up trapped in a bad loan shark deal paying 40 percent interest or more.
Please help me curb this practice. I have a moral obligation to help advocate for small business owners and I can’t do it without you know in my next video. I’ll be chatting with Gerri Detweiler from NAVCOM and we’re going to learn all about the world of business credit.