Small Business Financing Tips for 2017: Banks, Family and Additional Resources

Small Business Capital Access and Financing Strategies

• Market Trends and Bank of America Data (Fall 2016 Report):

  • Over 50% of U.S. small business owners plan to grow their businesses within the next five years.
  • Bank of America extended $11.6 billion in lending to small businesses in 2016.
  • Approximately 1 in 10 small business owners intends to seek lending within the next 12 months.
  • More than one-third of entrepreneurs have received financial gifts or loans from family and/or friends.
  • Emotional impact of family/friend funding: Nearly 33% feel anxiety/pressure to repay, and nearly 25% feel awkward or embarrassed.

• Traditional Lending Preparation (The "Three Cs"):

  • Banks evaluate candidates based on capacity, collateral, and capital (often simplified to: Will you pay? Can you pay? What happens if you can't?).
  • Creditworthiness:
    • Entrepreneurs must verify all three personal credit reports for accuracy, as errors are common (approx. 1 billion items are reported monthly).
    • Most negative credit items remain on reports for a maximum of seven years.
    • Business credit reports should be reviewed and prepared prior to application.
  • Financial Documentation:
    • SBA loans require a "FICO SBSS" score, which aggregates personal credit, business credit, and financial data.
    • Owners must demonstrate a track record of repayment and ensure the business generates sufficient cash flow to service debt.
  • Collateral:
    • Lenders assess personal financial statements for a "nest egg" or assets that can be pledged if the business fails.

• Family and Friend Financing Protocols:

  • Structural Clarity: Loans must be treated as business transactions, not personal favors; a formal written contract is mandatory even between family members.
  • Contract Specifics: Agreements should define interest rates, repayment schedules, late fees, and consequences for non-payment (e.g., conversion to gift vs. small claims court).
  • Relationship Risks:
    • Ambiguity regarding ownership stakes can lead to disputes over control or free products/services from the business.
    • Owners should never accept loans from individuals who cannot afford to lose the entire principal amount.
    • Success strategy: Establishing clear terms prevents awkward family dynamics (e.g., during holiday gatherings).
  • Exit Strategy: The long-term goal should be to build business credit to refinance the loan through traditional institutions to remove personal relational strain.

• Resource Utilization and Advisory Networks:

  • Small Business Bankers: Act as free advisors to help businesses prepare financial cases, understand credit requirements, and navigate SBA loan pre-screening.
  • SCORE (score.org): Provides workshops and mentorship led by industry leaders to help identify funding options.
  • NAV: Offers tools to navigate business credit and connect with lenders.
  • Small Business Development Centers (SBDCs): Over 1,000 offices nationwide provide free counseling from experienced advisors (former CEOs, bankers).
  • Alternative Funding Sources: Entrepreneurs are encouraged to explore crowdfunding, microfinance, angel investors, and business plan competitions (many offer cash or in-kind prizes).

• Final Strategic Directives from Panelists:

  • David Burch (Bank of America): Preparation is the primary driver of success; owners must practice their business story and anticipate lender questions regarding credit blemishes.
  • Steve Strauss (USA Today): Business funding requires creativity; owners should cobble together multiple sources (e.g., loans, family funds, crowdfunding) and be prepared to tell a compelling narrative.
  • Jerry Detweiler (NAV): Secure financing before a crisis or opportunity arises to avoid expensive, unsustainable emergency funding options.
  • Consensus: "Be prepared, be creative, and build an informal board of directors" comprising bankers, mentors, and accountants.