Where Should You Get a Small Business Loan? (Podcast) | Ep. #121

The Hartford

When it comes to growing your business, it often takes money to make money. However, as important as it is to invest in your small business, there will inevitably be times when you don’t have the necessary capital. So, who do you as a business owner turn to for financial assistance? In episode #121, Gene Marks and Elizabeth Larkin offer advice on how to find the best loan options for your small business.

Executive Summary

1:11—Today’s Topic: Where Do I Get a Small Business Loan?

2:29—If possible, try to avoid getting a loan in the first place. Instead, try to finance your business from your own financial reserves or savings.

3:48—One of the most popular sources for loans are your own family and friends because they don’t require a previous credit history.

5:14—If you choose to work with a traditional bank, be sure that it is affiliated with the SBA (Small Business Administration) since they guarantee loans from these banks. The most popular loans for small business owners are 504 loans.

8:32—Retail payment services, such as PayPal, Square or American Express, offer working capital loans based on your business’s cash flow.

9:59—While online lenders, like Kabbage, Cann Capital and Fundbox, make it easy for small business owners to get a loan, they also tend to charge extremely high interest rates.

12:42—You can also get assistance from nonprofits, such as Accion. These organizations will help you find the most affordable option to your problems, prior to providing you the actual loan.

17:44—Gene discusses how “pawternity leave,” or paid time off to train a puppy, is becoming a new benefit among small businesses to attract new employees.

Links

Transcript

Elizabeth: Welcome back to the Small Biz Ahead podcast. Gene, how are you?

Gene: I am doing great, Elizabeth. How are you doing?

Elizabeth: I’m good, so this is the first one we’re recording as a Facebook live, which is very exciting.

Gene: We’re on Facebook live. Hi, everybody.

Elizabeth: Yay, really exciting.

Gene: Mm-hmm (affirmative).

Elizabeth: Today we’re gonna be talking about where you can get a small-

Gene: By the way, a little tour of the studio just while we wait. It’s a small space here that we’re going back and forth on. This is The Hartford logo is behind us, so it’s very, very official that we’ve got. There’s a room that I’m told even behind it that I have no idea what goes on in this room.

Elizabeth: You don’t wanna know.

Gene: Something that we’re gonna have to figure out.

Elizabeth: Something about insurance.

Gene: I’m glad we’re stepping into the 19th century. We’re going video, we’re gonna get this information out in all different platforms and I think it’s really important. Thank you for joining us.

Elizabeth: Thanks for watching. Today’s topic, and I know you love this topic. We’ve talked about this before, and today we’re gonna really tighten it up and give a short, clear answer on this. Where are the best places to get small business loans? If you’re a small business owner, you wanna buy a new piece of equipment or you need to expand your business in some way, you’re looking for a tiny loan or a big loan, we’re gonna tell you several different places to look to get a small business loan, and we’ll be right back after a word from our sponsor.

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QUESTION: Where Should You Get a Small Business Loan?

Elizabeth: We’re back, so Gene. This is one of your favorite topics, and we’ve talked about this before. I just wanna give people, what do you think, three places they can go right now to apply for a small business loan?

Gene: Sure, by the way you should know one of my favorite topics is television shows and movies. This is really not one of my favorite topics, but okay. We wanna talk about finance. First of all, the best place to get a loan is not to get a loan. I wanna make that clear. We are gonna, and I’m gonna give you some suggestions where you can go for certain financing, but really the more you can do from your own cash reserves without betting the farm. I’m starting up a business right now Elizabeth, and I’m financing this through savings that we’ve got from my existing business. That’s the best place to always go. Getting a loan is not always the best choice for-

Elizabeth: Should you go to your personal credit card?

Gene: No, that’s getting a loan. I’m talking about if you have the cash that you can at least put some of it towards whatever venture you want-

Elizabeth: How many small business owners have cash reserves like that?

Gene: You’d be surprised. People have savings. People have built up. People leave jobs. People do side gigs. They’ve got money that they put away. I’m not saying that you bet the farm, you don’t take all of your life savings and put it onto a business, but if you can take 10 or 20 percent of that and give it a shot with a new business, maybe combine that with a loan, it reduces the liability. Loans, long-term you’re paying bank fees. You’re paying interest. They’re great things in the right scenarios, but in a lot of scenarios, you still wanna limit them. First thing off I just wanna say is if you don’t need to get a loan, don’t get a loan. Try and do it yourself, now number … go ahead.

Elizabeth: What if you need a loan?

Gene: Okay, couple different places. The most popular place where business owners go to get loans is their own friends and family, believe it or not. That is the most popular place.

Elizabeth: Is that awkward though?

Gene: Yeah, I would never do that myself, because I just could never imagine being indebted to somebody sitting across from you at the Thanksgiving table. It raises a whole bunch of issues, but having said that, the reality is is that getting credit is not easy. Traditional banks don’t like to lend money if you don’t have a track record. If you’ve got family members that have got the money, a lot of times families wanna help themselves out. Let’s not forget that most small businesses that are in this country they’re pizza shops or they’re restaurants or they’re dry cleaners, or very un-sexy bakeries. They’re family businesses and families get together and do that, so there is nothing wrong with getting money from a family member. It does raise issues and maybe that’s a topic of a whole other podcast, but it is a source.

Elizabeth: You know what? Why don’t we talk about that? Why don’t we talk about that in another episode and just, if that’s an option for you, if you’re a small business owner who has family resources, obviously you wanna work with an attorney. What should the terms of a loan like that be?

Gene: We can have a whole conversation about that, but anyways so family members, number one. If you don’t need to get a loan, don’t get a loan. Number two is if you are gonna get a loan, family happens to be the number one source for most business owners. A lot of times, it’s not. It just has to be, because they can’t get it anywhere else. Okay, now you talk about traditional banks and where you get loans, where a lot of people want to go to traditional banks to get loans. If you are gonna go and try and get a loan from a traditional bank, you really wanna work with a bank that works with the small business administration. SBA loans have had their biggest year ever this past year and with the small business administration, they guarantee loans from a bank. The small business administration does not give out loans themselves unless it’s a disaster situation. They have a disaster relief loan program.

Elizabeth: Oh, yes. Yes, I remember that.

Gene: Their traditional loans is that they work with banks and there are many banks out there that do this, that offer SBA backed loans. If you’re a banker, what that means is is that if the business person defaults on the loan, the government guarantees most of that loan value, so bankers are encouraged to get the money out there and a lot of small business owners that wouldn’t normally be able to get loans the traditional way can get that from a traditional bank through the SBA

Elizabeth: What’s the process for that? You would start at the SBA and say this is what I’m looking for, what banks do you recommend?

Gene: You can do that. Yeah, if you go to the SBA’s website, it’s SBA.gov, you can find what banks there are that participate. You can ask just reach out to your banks. A lot of banks participate with it. Most major banks do.

Elizabeth: Why wouldn’t a bank? That’s a great deal.

Gene: I’ll tell you the reason why. There is some bureaucracy that the bank has to go through-

Elizabeth: Really? With the federal government?

Gene: Surprise. With the government, so sometimes that puts them off. In addition to that, you’re gonna go through the same loan process that you would normally do with the bank and you might even go through additional more steps that the SBA might require as well, so because of that, it creates more work for the bankers. Plus a lot of times, the bankers we don’t wanna deal with the government, we have to learn what their procedures are and we just wanna deal directly with our customers without having the government involved. That’s why some banks won’t do that. I think it’s worthwhile for a bank to invest in it because they can open themselves up to giving more loans out. Now, the other issue with an SBA loan is if you’re a banker, is that you’re loaning money people that you wouldn’t normally loan money to but it’s guaranteed by the federal government and what if that business goes out of business? Then, the bank has to go back to the government to try and get paid back and that’s a headache as well.

Elizabeth: You’re loaning out to higher risk businesses, and then you have to go through the bureaucracy of collecting the money?

Gene: Correct, and then right. God forbid the business defaults on the loan. Then, it’s an issue. Having said that, like I said earlier, it’s been one of the biggest years ever for the SBA back loan program that’s out there. You’re looking for I think its 504 loans, it’s called. Section 504 are the most popular loans that are out there. You qualify if you’re a small business and a small business is anybody employing less than 500 people, Elizabeth which-

Elizabeth: What if you’re a solopreneur? Do you count?

Gene: Yeah, sure. You count, you’re under there. 500 people sounds like a lot. I have 10 people in my company.

Elizabeth: That’s a big business.

Gene: I know, but that’s what the SBA’s rules are, so you can do that. By the way, the SBA has other loan programs to help you if you’re exporting or importing or if you want specialized equipment loans. Talk to a bank and ask about SBA bank loans. It’s a really good option. That’s the third. That’s three. Number one is don’t do it at all. Number two is go to your family or friends or relatives, and number three is an SBA backed loan.

Elizabeth: Okay, number four.

Gene: Number four. There are retailers now, a lot of small business owners are in retail. A lot of them are using retail payment services in your store like PayPal, for example or Square. Those kinds of services offer really good working capital loans to small businesses. They base it based on your cash flow. If you’re running a restaurant or you’re running a retail store and you’re using PayPal, Square, I think American Express might offer something similar, different credit card companies. What happens is that based on your cash receipts you have during the course of the month, they have a formula that they use saying we can lend you out a multiple of that and then they take repayment back based on your cash receipts. 10 percent of the receipts or five percent of the receipts coming in then goes back to paying back down the loan.

Elizabeth: That’s super low risk for them, because they already have all the information.

Gene: That is correct.

Elizabeth: I’m assuming the application process is probably pretty easy as well.

Gene: It’s very easy. They’re already tied into your system. You’re using them to collect credit card services anyway and they basically just take a slice of your receipts to pay back the loan and the interest rates are actually pretty competitive. A little bit more than what the bank would charge, but not as bad as you think. Go to the vendor that’s providing your credit card services. Again, Square, PayPal, American Express, go talk to them. They often offer loan services like that and they become very, very popular, so that’s another source. Finally, I’ll give you one more. Online banking, okay? There are online lenders like Kabbage, is a really well-known one. Kabbage, Can Capital, Lendio is another one, Fun Box is another one. There’s a bunch of them that are out there. Online lenders have a reputation of charging extraordinarily high interest rates and they do, right? Sometimes, these rates can … brace yourselves now. These rates can be like 15 to 30 percent a year in interest rates. You’re like-

Elizabeth: Why would you ever do that?

Gene: Right, who the heck would ever do that? If you do it the right way, these kinds of loans can be really, really helpful. They are short-term loans. A good example of that is I have a client that has a few coffee shops in Philly. He wanted to open up a coffee shop near Ritten House Square. The landlord, there was competition for the space. The landlord was like we need a 20 thousand dollar security deposit in and first and last month’s rent and we need that by tomorrow. The guy just couldn’t come up with the cash that quickly. He went to Kabbage, I think is what he used. Immediately got, within hours they approved the loan for you. Very easy, they give you no personal guarantees as well. They tie themselves into your accounting system. They charge very high interest rates, but you know what the guy did? He got his money, was able to get his space. Over the next 30 days or so then converted it into a more traditional loan, so he wasn’t paying 30 percent interest rate. He paid a little bit more for the month that he added out. Small business owners that use these services intelligently, where they use them for short-term cash flow needs where they know they can pay it off right away or convert it. You have a piece of equipment you really wanna buy right away or a piece of real estate or something where you just need cash and then you know you’ll be able to pay it back in 30 days, those online credit services, they’re really, really good. It’s a billion dollar industry, Elizabeth.

Elizabeth: Imagine being able to get a loan for 20 thousand dollars in a matter of hours.

Gene: Yeah, in a matter of hours.

Elizabeth: Working with a bank – that could take weeks, months.

Gene: Agreed.

Elizabeth: It’s crazy.

Gene: It is amazing how things have changed in the past 10 years. Back in the recession doing that was so tough. There was no capital available and now, there is plenty of capital available and again, I’m not saying you wanna pay 30 percent interest annually, but the equivalent for a month to get that cash, you can secure a great space so you can make some money out of it … makes a lot of sense to me.

Elizabeth: I think you wrote an article for Small Biz Ahead about this and we’ll link to that in the show notes. By the way, anything that we mention in this podcast is linked in the show notes. If you hear something like Kabbage or Can Capital or SBA and you wanna link to that, we’ll have them in the show notes for you. I wanted to bring up a sixth option. We’ve actually talked to Axion before. A micro lender, like Axion, when would you use that and what’s the benefit?

Gene: Okay, and let me tell you, I’ve got my notes right here on my laptop and can I say, it says Axion right here.

Elizabeth: I saw that on your notes.

Gene: I actually made a note to mention Axion. Axion, they’re a non-profit organization that helps businesses get financing. They will connect you with SBA backed lenders and I believe they’re an SBA lender themselves. What separates them apart, Axion and kind of non-profits like them, is that they really get involved with the people that they’re loaning money to. It was a Hartford thing, Elizabeth. We were in Chicago and there was a guy and he had a food truck and he wanted to open up a restaurant. He was selling ribs, anyways so he did something with Axion and he wanted to borrow like 50 thousand dollars for equipment and the people at Axion didn’t just lend him the money. They actually helped him buy the equipment. They sent him to a place where he can get some used equipment and a representative from Axion actually helped him with the negotiations. He wound up buying the equipment for 30 thousand dollars. Axion could lend them a little bit less and he has a little bit less debt that he owed back.

Elizabeth: That’s great.

Gene: Yeah, it worked out really well, so-

Elizabeth: A bank is not gonna do that for you.

Gene: Banks, even the online lenders, they say they work with you. They will, they provide the capital, but a non-profit like Axion does a little, they take it one step above. Great service, great company.

Elizabeth: I’m gonna put you on the spot. Let’s say that you didn’t have your reserves and the Mark’s Groups thought you know what? I need to buy new technology for everyone in the office-

Gene: Oh, no. I’ll give you an example. I’m starting up a whole platform right now. Have I told you about this?

Elizabeth: You have, yes.

Gene: This whole training platform and we’re gonna go live in it this summer and all that. It’s 100 thousand dollar investment, so I’m funding that from reserves and hopefully cash flow coming up and all that. I’ve got that in the back of my mind. What do I do if I don’t-

Elizabeth: Where would you go? Out of these six options? There’s don’t get a loan-

Gene: Right, right. I’m trying that.

Elizabeth: Family and friends…

Gene: Would never do a family or a friend. I couldn’t do that.

Elizabeth: Your sister would just be like absolutely not.

Gene: I cannot even imagine borrowing money from my doctor’s sister who doesn’t know how to balance her check book. I would go the traditional banking route using from the SBA is what I would do. We’re talking about loans. I’m not looking for any partners or investors or anything. It’s equity. For debt, I would go to a traditional bank and I’d be applying for an SBA loan. I think I’d be a fairly good candidate because my existing business has been around for more than 20 years. I’ve got tax returns and income statements to show, and customers and all that kinda, I think I’d be a decent candidate.

Elizabeth: What if you were starting up? Let’s say you’re the Mark’s Group, but you-

Gene: We didn’t have anything.

Elizabeth: Would you be going to an Axion for that?

Gene: Axion might be very helpful, but I’m telling you, if you’re a startup … very, very tough to get traditional bank lending whether it’s Axion or even a bank. If you’ve got no history to show, even in an SBA backed loan situation, it’s doable but it’s really really challenging to do. That’s why we live in a capitalistic society and to start up a business, you need capital to do that. Sometimes, that’s why people go and get investors.

Elizabeth: Okay, so on another episode, we’re gonna talk about let’s say you’re transitioning from a side hustle into an actual full-time business for you. How do you build up your capital?

Gene: Yep.

WORD OF BRILLIANCE: Pawternity

Elizabeth: Okay we’re back and we’re ready to hear from Gene with his weekly word of brilliance.

Gene: Recently, I wrote a piece about PTO benefits. Paid time off benefits that some of them are ridiculous, some of them are not so ridiculous. Some that you should be considering as a business owner.

Elizabeth: Before you start though, I just wanna reiterate to our listeners. This has come up, we’ve gotten so many questions about this. People saying my employees keep calling in sick, but I think they’re going to the beach and we’ve said it over and over again so this is your first time listening, you need to switch to a PTO system. What that means is you combine sick days and vacation days, so you give your people, you get 15 PTO days a year. I don’t care how you use them. That’s gonna cut down on people calling in sick at the last minute.

Gene: This one word of brilliance will only mention one thing that I talked about in this article. I’ll give you the word of brilliance, right?

Elizabeth: Okay.

Gene: The word of brilliance Elizabeth-

Elizabeth: Oh, sorry. I cut you off. Sorry.

Gene: No, that’s completely fine. The word of brilliance is pawternity.

Elizabeth: I know where this is going.

Gene: You’re a dog lover, we know this, right?

Elizabeth: I just heard about this. My cousin was telling me this.

Gene: More and more firms, this is gonna sound crazy. More and more firms are offering time off for pawternity benefits, which means that if an employee gets a new puppy, you can get three, four, five days off, paid time off, to train your new puppy and that is it. In addition to your regular vacation, you like that. Of course you would like that, because you work for a big company. You’d think, that’s fantastic. I can get myself a new puppy and take five days off.

Elizabeth: I would get a new animal every quarter.

Gene: I’ve mentioned this to business groups, like business owners, whatever. I’ll be like, laughed off the stage. They’re like who’s doing that? I’m like well, Elizabeth would like that at The Hartford. There are plenty of other companies that are offering this-

Elizabeth: I will say though, if I were a small business owner, I would not be offering that to my clients, my employees.

Gene: Good to hear. Good to hear.

Elizabeth: If I could take advantage of it, I would definitely take advantage of it.

Gene: Now, you say that you would not be offering it, but the reason why I bring up pawternity and the reason why I wrote this piece for Small Biz Ahead is because maybe we should be as small business owners offering even ridiculous paid time off things like pawternity. This is the world that we’re living in. This is what big companies are doing to attract employees, taking employees away from me. I’m competing against these guys. Maybe I can’t offer five days off, alright. You got a new puppy to celebrate. We’re gonna give you a day off, paid time off to try and train them.

Elizabeth: That’s nice, that’s completely reasonable.

Gene: That goes a long way. It goes a long way, so as ridiculous as it sounds, we as business people have gotta sort of suck it up a little bit and say this is the world we’re in right now. To be competitive, we’ve gotta and that’s what I told the people that I speak to, stop laughing because you’re laughing and you’re missing out on good employees because they’re going to companies that are offering that stuff.

Elizabeth: Yeah, if you wanna get people that are in their 20s, 30s, 40s like you do need to change how you handle PTO for a lot of people because a lot of people, they don’t have the traditional family anymore. They treat their animals like their family.

Gene: It’s very important to people.

Elizabeth: A lot of companies are now giving bereavement for pets, which again if it was offered to me, I would totally take advantage of that. I once went to work the day after my dog died and I was not productive at all.

Gene: I was fine, actually after my dog died. This is a different generation.

Elizabeth: Gene is heartless.

Gene: Heartless.

Elizabeth: Alright, thank you for joining us.

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