In 2007, I gave our tax clients copies of The Richest Man In Babylon, a classic book on wealth written by George S. Clason during the Great Depression. Like many books of this nature, Mr. Clason espouses saving and investing money rather than spending and borrowing it. Much like the original audience of this book, current readers find themselves in difficult financial times and must navigate solutions to keep their businesses open.
One solution I have read a great deal about over the last few weeks is President Obama’s proposed Small Business Administration (SBA) $30 Billion loans program. Much like the TARP bail out banks, the government wants to now lend through the banks for small businesses. SBA Administrator Karen Mills, in a recent Associated Press interview, stated small business growth is key for our economic recovery and these loans will help small businesses. One key point Administrator Mills made repeatedly though was that these loans are to be for growing small businesses looking to expand. Further, even though this is a government program, the loans must still be approved by a bank.
As nearly anyone dealing with banks in the last few years has found, many banks are loath to lend. To combat this, this proposed program incentivizes banks to lend to small businesses by lowering the interest rate they pay the government for these loans based on the volume of loans they make. If approved, what this is likely to foster is the situation that already exists, some banks will specialize in SBA Loans and others will not make any.
This solution will likely not work for the business simply looking to make it through a difficult period until sales volume returns to 2007 levels. This solution will probably not work for a brand new business. Make no mistake, this is not a “bailout” program for small businesses like what the banks received, this is a “growth” program for businesses with proven track records.
Regardless if you believe this solution is right for your business or not, any solution you seek will likely require you to have the following:
1.) A vetted business plan that shows your business will produce month-by-month excess cash.
2.) Financial statements, both the business’s and the business owner’s.
3.) Business expertise proven in the current business or a related business.
A point of caution, nearly any loan, but especially an SBA loan, will be secured with collateral. If the business owner personally secures the loan, if the business fails and the business owner declares bankruptcy, this debt may not be eliminated.
The foundational elements of any viable solution for business success are planning, execution and monitoring. When planning, determine what is the minimum amount necessary to realize success and execute appropriately. Regardless of whether or not your business is eligible for SBA or any other type of debt, I would strongly recommend giving non-debt options long consideration before signing up for a loan. If possible, follow Mr. Clason’s advice for building wealth: save money and reinvest it in yourself, let your own money work for you.
