Would You Give This Small Business a Bank Loan? - NYTimes.com

In our culture, access to credit is often considered a right or an entitlement. And the big bad banks are often blamed for not helping small businesses. In my opinion, the big banks often deserve that criticism ? but not always.

At MultiFunding, we hear all kinds of interesting stories from small-business owners. Typically, when businesses have trouble raising capital, it takes some work to figure out what the real issues are. Many times, the small-business owners have wasted months trying to solve their problems with the wrong lenders. Other times, the business has a serious issue that makes it all but impossible to finance. In these instances, the banks have good reasons not to lend.

Here?s an example: A hairdresser recently called us to ask for help in getting a loan. She was exhausted, at her wits? end and angry at the bank. She explained that she owned the studio where she worked and that her mortgage loan was coming up for renewal. While she had a lot of equity in her property, she said, the lenders she approached expressed concern because she had a one-woman shop ? and they said they considered this deal too risky for them.

Judging just from those facts, my initial reaction was that if there really was value in her property and if she was current on all of her payments, we would probably be able to help her. I was confident that we could find a Small Business Administration lender that would be interested in giving her a loan. After all, if everything went bad, the lender would end up with a property that was worth about twice the value of the loan.

Once we dug deeper, however, we learned some things about the borrower that created problems. First of all, she was on payment plans with three government entities. This immediately knocked her out of the running for an S.B.A. loan ? you have to be current on all of your taxes before you can benefit from an S.B.A. guarantee. We can sometimes solve this situation by paying off the back taxes with a six- or 12-month merchant cash advance loan before the borrower gets the S.B.A. loan. But in this case the back taxes were too large, more than she could borrow on this kind of loan.

The hairdresser?s second problem was that she had called her mortgage company a few months earlier and explained that she was having a tough time. She asked the company if she could make interest-only payments for a while. This was an honorable thing to do, but it is likely to give any potential new lender pause. And that was now an issue.

The hairdresser did have some options. For example, she might qualify for a ?hard money? real estate loan ? a bridge loan in which the lender takes five points upfront and then charges 12 to 14 percent interest for one year until the borrower can refinance through a more traditional source. While this might be her most appealing option, it would come with significant risk ? the interest payments alone could destroy her business. As an alternative, she could sell?the building, pay off the current note holder, and take the cash. If she took this approach, she would lose the tax advantages of owning her property, but at least she could focus on running her shop and generating cash flow.

If, instead, she decided she wanted to keep her building and eventually find a way to refinance the mortgage, she would need to increase her revenue quickly ? most likely by adding other hairdressers with existing books of business. At that moment, she was simply trying to do too much on her own.

If you are facing a capital crisis in your own business or you see one coming in the near future, I suggest that you try to take two steps back and try to understand what is causing the problem. It is easy to point fingers and blame the big bad bankers, but there is often another root to the problem. And unless you identify it and solve it, your finance problems will only become worse.

Ami Kassar founded MultiFunding, which is based near Philadelphia and helps small businesses find the right sources of financing for their companies.

Source: http://boss.blogs.nytimes.com/2012/07/17/would-you-give-this-small-business-a-bank-loan/

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