I’m In Trouble and Need a Loan

Working in the family business as a teenager, it wasn’t uncommon for conversation around the dinner table to include what was going on at work. In fact, more often than not, we talked about business—our successes and challenges.

Like most small business, access to capital was one of the biggest challenges we faced. Most of the time, my Dad was an advocate of considering how to best allocate cash flow to meet those challenges, but sometimes he turned to borrowed capital to fill a short-term need for cash. However, the bank wasn’t any more apt to offer financing in a crisis than it is for anyone else. My Dad would often lament that the bank only seemed to be interesting in making a loan when he didn’t need it.

The SBA (Small Business Administration) does offer small business loans specifically designed to help business owners impacted by a declared disaster—Hurricane Sandy is an example—but there really aren’t many options for businesses struggling with challenges that aren’t covered by the disaster relief loans offered by the SBA.

Remember, lenders are typically very risk averse and don’t like throwing good money after bad. In fact, if he or she perceives your business is in trouble, it’s not unheard of for a lender to call any current loan you might have due and payable immediately—making a bad situation even worse. The truth of the matter is that it’s better to plan for a disaster before it strikes.

I don’t think anyone likes to think about dealing with a serious financial challenge. However, if you haven’t thought about what you’d do in such a situation, and rather wait to think about it until you’re in the heat of battle, it might be too late. A few months back, I spoke with a small business owner who when I asked her about what had made her 20-year-old construction company successful, she replied, “I had a business plan that addressed good times and bad.”

My grandmother used to admonish me to save for a rainy day. Several times I have wished I had been better at keeping her advice. It’s also good advice for small business owners—and is something the previously mentioned small business owner has done very well. She’s made it a point to set aside a little bit of capital each month to bolster revenue in the event of a setback. In addition to saving for a rainy day, here are a few suggestions that might help you get over a crisis:

1. Honestly evaluate the situation: Sometimes things aren’t as bad as they look on the surface. Dealing with a temporary financial setback might be as easy as adjusting spending patterns and accesses any capital hopefully set aside for such an emergency. Before reacting to the crisis, take some time to objectively evaluate your situation.
2. Activate your plan: If you’ve considered this situation and had the foresight to include an action plan within your business plan, now’s the time to put your plan into action. The immediate concern is to replace the income lost—particularly if your rainy day fund is non-existent.
3. Make sure you understand your priorities: I like categorizing expenses on a scale from “Can’t do without it” to “We can survive without it.” Anything in the second category can be eliminated immediately. I know of one business owner, who upon the death of a key partner about the time the economy took a nose-dive, waited too long to make needed cuts and eventually lost the business. The spent all their reserve funds until they were forced to close what had been a healthy business for over 40 years.
4. Be flexible: During times of crisis, you may be forced to make decisions you wouldn’t normally make. You may need to adjust priorities and reset goals that are more consistent with the current business climate.

In addition to the above, if you have a good relationship with your banker, you might be able to convince him or her to give you a loan, but remember these folks are very risk averse and won’t want to give you any money if they perceive it’s throwing money away. Much better to have a line of credit you can fall back on should you need it. However, even this isn’t a guarantee of funds. One small business owner I’ve spoken with had his line of credit pulled back immediately following the meltdown of 2008, taking this option away.

Depending upon the severity of the crisis, you may need to consider throwing in the towel. Although your tolerance for risk might be a lot higher than your banker’s, sometimes a small business owner has to think about the unthinkable. Haven’t been there myself, I understand how difficult it is to announce to your employees that you are closing the doors. I don’t think I’m unique when I say I stuck it out much longer than I probably should have and it cost me a lot more than it needed to.

Financing startup is a challenge to be sure, but financing a business in the midst of a crisis is even more of a challenge. In other words, the time to acquire capital to help your business over a bump in the road is before the bump.