Getting a Business Loan in a Struggling Economy
You may also wish to visit my blog published in March 2010 – CLICK HERE
The recent 18 months of economic upheaval has affected many facets of business. People are more reluctant to spend money, they are not buying as many large ticket items as they used to, and banks are more reluctant to give out loans for businesses.
So many people come to me asking for advice on where they can turn for money when it’s difficult to get business loans. The advice that I offer is what is listed below.
1) Securities-Based Lending
One of the best places that a business owner can turn to for business loans in a bad economy is securities-based lending. It’s a form of business loan that is very inexpensive, because the business owner is borrowing money either from themselves or from the partners that they have. For example, if a business owner has had success and they have put money away in an account that they have for investing, they can money as collateral to borrow against. This can allow some flexibility and means that original funds don’t have to be taken out of the company.
Note – the terminology for this varies from country to country but the basic approach is the same.
2) Friendly Capital
Friendly capital is another option when someone is trying to get a business loan in a bad economy. This basically means that the business owner borrows money from family members and friends who believe in the business owner and their business. It’s important for the business owner to let their lenders know that it could be a while before they are able to repay the loan. It’s a good idea to draw up a contract to make things legal and acceptable to all the parties who are involved. Essentially, what I explain to my investors is that they can have their return back as a balloon payment (capital plus interest at the end) or on an interest only basis – where the interest is paid back monthly over the loan period with full capital being paid at the end of the agreed term.
In these times when interest rates are very low, borrowing from friends or family who are only getting a very low return in the banks can be an extremely resourceful way to raise seed capital.
3) Trade Credit
Finally, the last thing that a business owner can do to get a business loan in a bad economy is through something called trade credit. This is when a company agrees to give another company services or goods and allow them to pay later. Many companies do this in order to snatch up customers and ensure that they are going to have business from the customers in the future. This is a situation that is a winner for both parties – the company offering the credit gets more customers and the company who is getting the credit has a little more time to pay. This is similar to a balloon payment structure. It can also be used for property refurbishments where materials are paid for later on.
Although it can seem like its almost impossible to get a business loan in a bad economy, there are three ways listed above that can help a business when it’s going through hard times and needs a little boost. For those who are looking for a business loan in a bad economy should look at all their options and see what they can do to get the help for their business. There is always help for those who are willing to take the time to look for it; it’s important to exhaust all the possibilities there are.
The key phrase to remember is all this process is Other Peoples Money – always look at the return on investment for both you and the lender and get things in writing.
