I’m a huge fan of small business as you know. But sometimes in order to get your business off the ground, you need to borrow money. I wanted to talk to one of the more serious small business lenders out there in order to really understand how small business financing works. As a result, I contacted Direct Capital and interviewed the company’s representative Alexandra Meyers. My main goal was to understand the dos and don’ts of small business loans. Before we get to the meat of the interview let me tell you a little about Alexandra’s employer.
Direct Capital is a subsidiary of CIT Group and they are a small business lender based out of Portsmouth, NH. Over the last 22 years, they’ve helped over 70,000 small businesses nationwide access the capital they need. They are a serious competitor when it comes to equipment financing and small business loans. They pride themselves on being super approachable and easy to work with. You can learn more about who they are and how they help owners take their business to the next level.
One caveat – Direct Capital lends mostly to companies which are at least 2 years old or more. That said, we can still learn a lot by their insights and experience working with small businesses.
Now, let’s get to the interview:
NF: Why do most small businesses fail within the first six months?
AM: Ideally, you start a business based on several key hypotheses. For example, you may believe your business will fill a market need, that you will be able to operate profitably, that you have ample capital to support the initial phases of the businesses, that you can hire necessary resources to execute on your plan, that you have the time energy to start a business, or possibly that you are a great entrepreneur with tremendous leadership and execution abilities.
Those hypotheses are put to the test immediately when you launch your business and once reality sets in, many business owners quickly realize that they are not up to the test and need to abort their plan. So, businesses can fail early for many different reasons.
NF: Should business owners tap into their retirement funds or borrow from family (to invest in their business?)
AM: Because the failure rate is so high, we’d prefer to see a new business owner minimize the risk and consequences associated with launching a new business while still having a meaningful stake in it. Ideally, you should be able to get off the ground without burdening your future retirement or dragging in money from other family and friends. We encourage entrepreneurs to save enough money to test their business idea and then give it a run with a Minimum Viable Product type approach. There is a great book by Eric Reis called the Lean Startup which speaks to ways that you can really test your business plan without necessarily overburdening yourself with debts or too much investment.
NF: If entrepreneurs need to borrow money for their business, what are good sources?
AM: Accessing traditional bank or alternative financing will be very difficult for a new business idea. You should be borrowing money from yourself after you have saved up for your plan or from an entrepreneurial investor that loves your plan and will be willing to seed you with capital to prove it out. There are also some newer online crowd funding platforms like Kickstarter that could be used to help you get off the ground financially. If you do qualify for more traditional financing, make sure you select the best financing lender.
NF: What should an entrepreneur do before they borrow money?
AM: First, as mentioned above, find ways to test your business plan without a large investment. Once that is accomplished, there are some factors you need to consider. Let me give you a quick rundown:
- You want to narrow down exactly why you need the loan. If you just want one to have some extra money in your bank account, my suggestion would be to reconsider. Business loans should be used to take advantage of an unexpected business opportunity.
- You’ll want to take a good look at your budget. Lenders will want to make sure you can afford to make payments on the loan. Before applying, look at your cash flow: Is it good? If not, how can you fix it? Once you know how much you can afford, ask different lenders about their rates and terms, and find one that fits within your budget.
- Know your credit score. The lenders will generally do a credit check anyway, but being aware of any red flags on the report will keep you one step ahead. Plus, knowing ahead of time what your score is will lead you in a better direction when choosing a specific lender.
- Know the lender itself. Do you trust them? Have they worked with businesses like yours before? How long have they been in business? Do a Google search, check out their website. Trust is a huge factor when choosing a lending source, so keep that top of mind.
NF: Tell me a little about the challenges many single mom’s face in starting a business? Small business entrepreneurship seems to be a perfect fit for many single mothers.
AM: They face all of the challenges of a common startup with the added chaos of juggling their most important job (in our opinion), making sure they are a Mom first. They will absolutely need a great support network. As they say “it takes a village to raise a child” and any single mom starting a business will need to make sure they have tremendous support to get them through the launch phases of their business.
NF: What can single mom’s do to make to reduce the chances of failure?
AM: Be realistic about time commitments and the necessary level of energy and passion that will be required to get off the ground. Start small with your business, achieve proof of concept, and then hatch a plan for scaling the opportunity with additional resources so you can still maintain your responsibilities as a Mom.
NF: Should people in that situation look for businesses they can start without having to invest money?
AM: It really depends on their financial situation. Because there is potentially a lot more at risk in this situation, there should be a high level of planning and a realistic financial exit strategy in the event of failure that does not involve losing everything necessary to support themselves and the family.
Thanks Alexandra…and thanks Direct Capital. I appreciate the honest and frank discussion. I know this is going to help our readers take a good look at their financing before they embark on their journey to being self-employed.
Are you looking for capital for your business? Why? What sources have you considered?