Many new small businesses run into situations where they have to choose between taking on debt and slowing growth. For those businesses which decide to slow down, turn down orders, or reduce productivity, the choice may be difficult but the execution is easy. For those businesses which decide to continue to grow as Premier Factory Safety has, it can be a challenge to raise the necessary capital. One option is to take on an equity partner, assuming someone is willing to come on as a partner and the business owner is willing to give up equity. But for most, the answer is to use debt.
Unfortunately, getting a loan can be very difficult for a new small business owner. Many business owners first try to take out a loan in their name against a house, car, or simply as a personal loan or line of credit. The process is much easier, the rules much more straightforward, and this is a type of lending which they have dealt with before. Unfortunately, most also find they cannot get a loan in their personal names as they do not have consistent, documented income.
So they turn to business lending. Unfortunately, lenders are still going to want to see consistent, documented income from the business. For some lenders, they want to see two years of profit; for others, it is four years. But with the high rates of failure for new businesses in their first few years, banks have become very leery of dealing in lending with unproven businesses.
That leaves, then, really only one option: SBA lending. This is lending which can be obtained by brand new companies for anything from startup costs to equipment to working capital. These loans are backed by the US Government (like FHA mortgages) and as such allow lenders to take more risk on newer businesses. SBA does have very strict requirements relating to credit, assets, repayment ability, industry, experience, and a business plan, among other things. But as the only option for many small business owners, the restricted lending is better than no lending, at all.
To ensure your business qualifies for an SBA loan, you first want to check the SBA website and review their list of industries which are excluded. Then, you need to ensure your credit is in place and you have acceptable assets to back your loan (assets can be a home, car, equipment, bank accounts, investments, retirement accounts, or anything else holding value). Finally, you need to find a qualified SBA lender and apply.
Something else to keep in mind is that certain banks have credit overlays. These are additional requirements beyond what the SBA requires in order to underwrite and approve a loan. So when contacting your local financial institutions, you should be sure to understand their specific lending policies and how they might differ from the SBA directly.
Ultimately, the decision to either reduce production or take on debt can be a difficult decision to make. But if you decide to use debt as a tool to grow your company, be sure you know all of the programs available to you.