Over the past several weeks, I’ve been getting phone calls asking if I’d like to consider a business loan up to $250,000. Because, of course, you’re going to take on a loan of a quarter million dollars, plus interest, to a complete stranger you’ve never met under the most nebulous of terms.
As annoying as those calls can be, it’s not because there’s no market for it. Businesses often turn to credit to for access to cash when they need it. The Small Business Administration also encourages business borrowing by reducing the risk for lenders. As of May 3, the SBA backed $13.39 billion in loans so far this year through its primary small business lending program.
For Fallon Brooks-Magnus, owner of the Oklahoma-based JollyBird Design (www.jollybirddesign.com), which specializes in both home remodeling and custom design, a combination of financial tools was needed to get her business off the ground.
“We found it very difficult to get any kind of funding without having been in business for two years,” said Brooks-Magnus. “We considered doing a line of credit, versus a startup loan, versus a business credit card.”
These tools yielded mixed results.
‘We went with a business line of credit because we got a pretty good interest rate. In the end, the terms weren’t great and it ended up not being entirely useful to us,” she said, citing that poor credit at the time and a lack of resources to use as collateral pushed her and her staff in new directions. “We had to work hard to create a good product and go from there.”
JollyBird’s experience with the line of credit changed over time.
“Our banker was a personal friend, so he basically let us utilize it how we pleased,” said Brooks-Magnus. After the loan officer changed, JollyBird had to prove its accounts receivable before new funds could be issued, she said. That didn’t work as well for the company.
Rachel Estapa, founder of Somerville, Massachusetts-based More to Love Yoga (www.moretoloveyoga.com), which focuses on larger body yoga, wellness, and body-love and launched in 2015, found that the path to a line of credit had even more obstacles to overcome.
“I knew I’d be a bootstrapper – my family, while supportive, was not able to help me financially. Also, no banks would give me a business loan as I was starting out, so I really had to be smart about the funds I did have,” said Estapa.
“I used whatever funds I had from my day job to fund my side hustle at the time. As it grew and developed more, I was clear about my next goal – go to yoga teacher training. I crowd sourced (via Indigogo) to pay for it and also, got scholarships from my yoga school, Kripalu,” recalled Estapa. “As I increased my revenue, I always took a percentage out to pay myself, operating expenses, tax, and savings. I won a pitch contest with Bank of America and MasterCard for $25,000. From there, I opened a new line of credit with Bank of America, who supported my growth.”
Looking back, Estapa cited the pros and cons of taking on a conventional loan with which to start a business.
“Pro: you get funds!’ said Estapa, pointing out that as your business grows and you show that you’re able to manage smaller amounts of credit, it opens more doors for you. Estapa also noted drawbacks of business borrowing: this money is not a windfall, you need to return the money with interest, and that debt can feel overwhelming, especially if the business is in a slump.
“That’s more a mindset — how you manage your revenue and expenses — but in the moment it can feel like a lot,” said Estapa. “I want to stress that having small, clear steps is much more important than a sum of money. If you’re not clear on how you’ll use it, it’ll get you into trouble.”