Home buyers may have been stupid (or dishonest) and banks may have been stupid (or dishonest), but either way (or both) the mortgage crisis has spilled over in to other banking areas making the threat of a credit crunch likely.

According to CFO Magazine “Recent studies and reports from lenders show that small businesses are either having a harder time getting credit or struggling to pay off their debt.” To some large extent, that is because banks simply don’t want to take the risk of lending. In fact, over the last year, SBA loans to small businesses are also down 18%, a sign that even the government is reluctant to invest in a market which it thinks may end up with high default rates.

If you’re a business owner with an outstanding business or home equity loan, here are some action steps you should take:

• 1. Stay informed about the health and stability of your bank. If they get into trouble, it may roll downhill.
• 2. Understand that if slowing economy weighs on this year’s performance, your financial statements for year-end 2008 may worry your banker. If your 2007 performance was good, now may be the time to set up a line of credit—just in case.
• 3.Understand and obey all the terms and conditions of your borrowing agreement. If your bank has routinely allowed you to violate loan terms in the past, such as failing topay down your line of credit annually or borrowing from another financial institution without permission, don’t assume it will fly in the future.
• 4. Understand how and why lenders make their lending decisions. Understand how they value your collateral and what financial targets they expect you to hit.
• 5. If your financial situation is weak, especially if you’ve had two years of losses, Be CAREFUL. During the last credit crunch many banks overreacted and started calling in loans without listening to reason.
• 6. Establish and maintain a strong relationship with your banker. Make sure your banker, and a at least a couple of his or her associates, knows you by name. A knee-jerk reaction on their part is far less likely if they know you.
• 7. If you’re uncomfortable or unfamiliar with issues in items 1-6, seek professional help. Someone who really understands what’s going on can help before things get critical.

When all else fails, many are forced to credit cards for financing. If you are forced to leverage your credit cards, be sure read the fine print. One late payment and you could find yourself with an interest rate that’s almost guaranteed to cause a default.

Insufficient capital is one of the greatest risks to a company.

Falling home values could mean trouble for home owners too. And that’s true of individuals too. We recently received a notice in the mail that our home equity line of credit has been reduced by $120,000. If we’d been fully borrowed on the line, we’d have had to come up with the difference between the old value and the new value in a hurry. We hadn’t used it at all, but if we had we could have been in a world of hurt.

With a little advance planning you can weather the trough of credit availability that the next year or two may bring.

We’ve compiled everything we’ve learned from 25+ years as a banker, investor, venture capitalist, and entrepreneur into an all new and up-to-date eBook. Finding Money—Secrets of a Former Banker includes information about small business loans, raising money from angels and other private investors, venture capital, government loans, grants, preparing a business plan or financing application, and other money management advice. Finding Money is available for immediate download. Order your copy today.

If you’re starting or growing a small business you undoubtedly need money to turn your dreams into reality.

You have two basic options:

• You can borrow the money and incur a debt, a debt you’ll have to repay; and/or

• You can raise money from investors (called equity capital) by trading their money for some ownership. They won’t want any fixed payments, but they will want to earn a good return on their investment in a short period.

The right mix of debt and equity varies from industry to industry and from business to business, but here are the basics about each option:

Small business debt financing typically comes from credit cards, home equity loans, banks, government loan programs, and private lenders (in that order). A loan is generally cheaper than giving away part of your company in the long run, and it’s usually easier to obtain. The primary advantages of debt financing are that you don’t have to share your financial success with anyone, and you don’t have to share control. There’s a reason we’re called independent business owners! The disadvantage of debt is that lenders require regular monthly payments of principal and interest regardless of your profitability–just like your home mortgage lender. When you’re just cranking up, or if things aren’t going well later, don’t expect a lender to cut you some slack.

The most common sources of equity financing are friendly investors–people who know you, love you, or like you; angels–individuals who invest in businesses because they believe they can make good money at it; and venture capitalists–organized investment funds run by seasoned investment professionals. Selling stock on the open market is another way of raising equity, but it’s prohibitively expensive and an unrealistic alternative for all but a handful of fast growing small businesses. Unlike lenders, investors are willing to gamble on your success. They don’t expect an immediate return on their money, because they are betting on a huge success down the road. As owners, investors also share in the risk of failure, a common fate for fast growing businesses. To make up for risks they take, professional investors only bet on opportunities they feel can return 20 to 30 times their money in five to seven years. So, if you’re starting a small business to basically earn a living, you can forget venture funds as a source of funding–an ‘angel’, maybe; friendly money, perhaps; but not venture capital.

The obnoxious, dollar-sign clad, self-appointed guru who touts free government grants on TV is misleading at best. “Money for nothing” made a good song title, but entrepreneurs still need to sing for their supper. And while there are some government assistance programs that target women and minority businesses, that assistance very seldom involves coughing up cash.

To summarize, then, if you finance your company with debt and you’re successful, everything you make is yours after you pay off the debt. On the other hand, equity capital may allow you to grow larger or more quickly, but you’ll have to share the wealth and some control with investors. That said, if the concept of sharing bothers you, consider the words of the richest man in the world, Warren Buffet: “It’s better to have a part interest in the Hope Diamond than to own all of a rhinestone.”

Almost 30 years of experience running small companies and helping entrepreneurs raise money leads me to the following conclusion. If you bootstrap your initial years with credit cards, home equity loans, money from friendly sources, and perhaps a small bank loan, you’ll be happier and more successful in the long run. Once you have a couple of years of success under your belt, you’ll be able to attract more money, at a lower cost–both in terms of interest rates and the amount of control you lose to investors–than if you’d reached out at start-up.

In the end, whether you finance your business with debt or equity the solution has to be one that fits your company’s as well as your own needs, wants, personality, and financial realities. By financial realities I mean the Golden Rule applies: Those who have the gold rule.

We’ve compiled everything we’ve learned from 25+ years as a banker, investor, venture capitalist, and entrepreneur into an all new and up-to-date eBook. Finding Money—Secrets of a Former Banker includes information about small business loans, raising money from angels and other private investors, venture capital, government loans, grants, preparing a business plan or financing application, and other money management advice. Finding Money is available for immediate download. Order your copy today.

Small Business Loan Program Wins a Stay of Execution For 2009

Unbeknown to many, Uncle Sam’s been scheming about how to eliminate some small business loan programs. Makes sense I guess. At the mouth of a recession why not strangle the largest supplier of jobs in the U.S.?

Fortunately, Senator John Kerry’s Small Business & Entrepreneurship Committee was on it. They not only salvaged several loan programs, but they secured an extra $100 million to boot.

The 2009 SBA budget will allow for increased loan oversight (not a bad idea in these recessionary times), reduced fees and will support microloans, contracting assistance, Small Business Development Centers, Women’s Business Centers, veterans outreach programs, and technical assistance programs, and others.

“Small businesses create more than two-thirds of all new jobs, yet by refusing to fund important small business programs the Bush Administration has starved entrepreneurs of the resources they need to grow their firms,” said Kerry.
The White House sought to eliminate microloans and the Microloan Technical Assistance program from the budget. The Committee said the $31 million loaned through the program in 2007 helped more woman and minorities in small business than any other program.

A couple of new small business loan initiatives also received funding: New Markets Venture Capital, and New Markets Technical Assistance—each receiving $5 million. They are aimed at promoting businesses and job growth in low income areas.

Click here for more information about the 2009 small business loan program budget.

For more help on small business loans, angels and other private investors, venture capital, government loans and grants, preparing a business plan or financing application, and other money management advice, check out our all new, fully revised eBook, Finding Money—Secrets of a Former Banker.