Small Business Owners: Failure To Understand These 7 Business Principles For Better Funding May Doom You

Many small businesses often do not have the capabilities to operate like a big conglomerate firm. The essence of small business ownership usually thrives on collective work and ability to be more resourceful. Unlike a major corporation that has a board of directors, governance in place, with a strong structural systemic approach to maintain excellence after several decades, a small business operation is typically more entrepreneurial and less structured. Due to all the pros and cons that permeates the very existence of many small companies for survival, especially when financing for sustain growth or expansion is needed, it is necessary for some smaller companies to operate by a set of different principles.

Principle # 1) Thy Shall Seek the Best Financing Options that Suit Your Needs

It is critical to know which lending institution is able to offer you the best options to expand your business and keeps you happy. If you are not bankable due to past tainted credit history or past encumbrances against your entity or personally, it could be in your best interest to communicate with lending institutions that truly understand your need. The best rates are not usually the best funding options.

Principle # 2) Thy Shall Appreciate 7(a) Loan

SBA 7(a) is mainly use for business acquisition, real estate investment, and equipment. As a small business owner, if you find yourself down in the dumps for working capital, this is also a great alternative as opposed to force equity. Being a strong owner will pay dividend for better terms, typically maximum prime rate in addition to specified basis points (i.e. 3.75% + 230 bps) will yield you 6.05%.

Principle # 3) Thy Shall Understand Some of the Benefits of 7(a) Financing

Expanding your business can be life changing especially when long term financing will improve cash flow over time.  Typically equity injection is smaller as opposed to conventional financing. Additionally, borrowers may be able to finance up to 90% of the total of their project costs in order to acquire commercial real estate – biggest advantage. Essentially, the cost of capital is minimized. The beauty is in the eye of the beholder because there are no prepayment penalties if terms are less than 15 years. Many borrowers appetite increase once there is no debt covenants in the disclosure. Finally, based on current economic fundamentals, interest rates are very reasonable: (3.75%) +2.25% = 6.00%.

Principle #4) Thy Shall Embrace Modern Technology

With the advancement of technology and many applications (“apps'”) available for small business, it is crucial to think about using technology to help expand your brand and products. A great marketing campaign that is targeted to a specific niche may increase foot traffic, website sales, new customer acquisition and promote stronger cash flow. A great example could be giving away a product within the store at no cost in exchange for five referrals using applications (apps) that are geared towards a specific demographic.  Mrs. Z gets a free pair of high heels that cost $225 – Yikes! However, she refers 5 friends to your business using your special app, and 3 months letter the store makes a profit of $675, that’s a 200 % increase in sales.

Principle #5) Thy Shall Never Ignore SBA 504

Unlike its close friend 7(a) SBA 504 is “only” for equipment and real estate investment. They typically have fixed lower rates that are blended. Borrowers can expect to entertain financing rates between 4’s and low 5’s on specific cases. Even with such fabulous terms, asset classes and the type of businesses are not created equal for superior financing options. For instance, a special use property, like a hotel, that has a restaurant, a spa, a bar, and a small gymnasium  will typically fall into low 5’s to low 6’s. Unfortunately, hotel is just an asset class that many banks and lenders are extremely circumspect about.

Principle #6) Thy Shall Take Care of The Team

There will never be “I” in team and as a small business team building and unison is paramount. Unlike bigger companies where low turnovers do not significantly affect their overall cash low. For small boutique firm, this can be difficult to avoid. Company X is publicly traded, has a set of bylaws, 12,000 employees in 12 countries, and maintains a healthy market cap of $20 billion. Its stock has returned double digits dividend to shareholder for the past 40 years. Mr. Serious Y, after working for the company for 4 years, decided to illegally compromise with some of the products and accounting. He was terminated three weeks thereafter. Consequently, Company X balance sheet, will most likely not affected to the point of damaging its success, especially if Mr. Serious Y was a low tier employee.

Now, Just Enough Company has 17 employees, privately held, operates in 7 states and 2 countries, and made $1billion the prior year. Curious Joe is essential to the growth of the company. Since his second year with the company, he is solely responsible for at least $350 million or more in revenue annually.  He has worked there for 8 years during the 15 years existence of the business. Can you imagine if Just Enough Company was to suddenly lose Curious Joe? The loss could have had major repercussion on the company’s cash flow, balance sheet, and growth margin.  With many smaller companies a recovery from a substantial loss is typically more challenging, as a result, taking care of the team become crucial for a small business thrive.

Principle # 7 – Thy Shall Obey The Law of Essential Documents

Many small businesses fail to maintain important tax returns, accounting ledgers, up to date income and operating expenses, just to cite a few. This lack of documentation many times result in slower underwriting to get the business funded. Since many traditional lenders usually require a mountainous list of documents, such as: leases, asset statements, copy of tax returns, financial statements, etc.  It could be extremely challenging and a time consuming process. For many small businesses, obtaining a bank loan can be near impossible due to the level of documentation. Fortunately, there are alternative lenders that are more than able and willing to work with these business owners to create a more concrete plan to get funded.

By: Ibsen Alexandre


Ibsen Alexandre offers his opinions about real estate finance and investment at www.Refivest.Com and other real estate publications. He can be reached at ibalexandre@refivest.com

The opinions expressed herein are those of the author(s) and do not reflect the view of a particular firm, its clients, any respective affiliates nor any Media Platform. This article is for educational general purposes only and is not intended to be and should not be taken as solicitation to lend.

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