The Money Class (20 page)

The best way to keep your FICO credit score strong is to make sure that your total monthly balances are just a small fraction of your overall credit lines. There’s no magic formula to what FICO deems ideal, just that a 10% debt-to-credit-limit ratio is better than 20% and 20% is better than 30%, etc. I understand you may want to tap your credit lines in the early months of getting your business rolling, but you are to never let your balances exceed 30% of your overall available credit lines. Any higher and you could run into trouble being able to pay it back promptly; it may also set off alarms at the credit card companies.

•
A business credit card
. Please be extra careful here. Credit card issuers have actually stepped up their offers for “professional” cards of late. Not because they are committed to supporting small business, but because these cards are not covered by the 2009 credit card reform legislation. So all the important protections you now have with a personal credit card are not covered when you use a business card.

You also need to understand that if you were to fall behind on your business card payments, or default on them, it can be reported to the credit bureaus and will impact your personal credit report and credit score. Do not for one minute think that business is business and personal is personal.

If you decide that a business card is a good deal, I want you to treat it as if it were part of your “personal” credit. My advice that your monthly balances not exceed 30% of your overall credit limits includes your business card. Do not look at your business card debt as “separate” from your family’s credit situation. Treat it all as one pot, so you will not allow yourself to become overextended. Let’s be real here: If you go crazy with spending on a business card it will ultimately cause plenty of financial pain for your family.

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Family and friends
. In the Family Class, I address myself to those who are asked to help a family member in need, but in this case, I would recommend you read those passages (see
this page
) in order to understand the dynamic and what you are really asking of relatives and friends when you ask them to loan you money or invest in your start-up. It is dishonest and manipulative to ask someone who cares about you to give you money if you know they truly cannot afford it. And you should never—and I do mean never—ask anyone to cosign a loan that would put their home or any other assets at risk. Chasing a dream that could ruin a loved one is in no way a dream I can endorse.

•
A bank or credit union loan
. You should by all means sit down with your local bank or credit union and ask them what their loan programs are for start-up businesses. But what you are likely to hear is that they won’t give you a business loan unless you have a year or two of operations under your belt—and you can show you have positive cash flow. You will also likely need a strong credit score and proof that you have money of your own invested in the business, what is known as equity. You will also need collateral for the loan. You are never to use your home as collateral. Absolutely never—do you hear me? It is one thing to lose your business, but do you really want to lose your home at the same time? For that is what will happen if you can’t repay the loan.

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Start-up grants and microloans
. Okay, now finally some upbeat news: There are indeed resources to help small business start-ups. Locate the economic development divisions of your local and state government and ask for contacts that can help you figure out whether there are any government grants and subsidies to help you launch your business. I also highly recommend you find a regional Small Business Development Center (SBDC) that you can consult with. SBDCs are nonprofit organizations—often they are housed within colleges—that provide training and assistance to small business owners of all sizes. Through an SBDC you can learn about the Small Business Administration’s microloan program. The SBA does not make loans directly; rather it offers guarantees to lenders who make the loans. There are many different types of SBA-backed business loans, but most of them require you to have a viable business up and running for a few years. The microloan program is more flexible. In 2010 the maximum loan amount was increased to $35,000; the average loan is about $13,000.

Go to The Classroom at
www.suzeorman.com
:

There you’ll find the link to the SBDC page on the Small Business Administration’s website. Or find local SBDCs at
www.bplans.com/sbdc
.

A FEW WORDS ABOUT MICRO LENDING

Given how picky conventional lenders have been the past few years, I think one of the best opportunities to land financing for a start-up is through a private micro-lending program. Many of these programs are currently run on a local—rather than a national—level. One way to find programs in your region is to do a quick web search; simply type your hometown’s name along with the term “small business micro lending” into your search engine. And be sure to ask around—the nearest SBDC is always a good resource for local micro lenders that specialize in connecting lenders and borrowers in your town.

These micro-lending programs can be a fabulous way to secure a small loan for your young business. But please proceed with care. Each organization has its own rules on qualifying for a loan and provides guidance on how to borrow manageable sums. What’s great is that loans tend to be short-term (two to five years) and at a fixed interest rate. A fixed-rate loan is much better than using a variable-rate credit card to fund your business. But micro-lending loan rates can still be as high as 15% or so. Top-notch micro lenders will be sure to work closely with you to show you your monthly loan payments; it is always wise to borrow less if that means you will have more confidence you can make the payments.

RUNNING YOUR OWN BUSINESS

Managing your business has never been harder. But there is also great opportunity. If you have an innovative product or idea, or can deliver your service for less than other businesses, potential clients will be interested in listening to your sales pitch. When their business is great they are less inclined to make changes; why fix what’s not broken? But in today’s economy, with businesses laser focused on wringing out more productivity and searching for every and any competitive edge, you might actually have an easier time getting new clients.

That said, it would be naïve to suggest this is not the hardest of times for many small businesses.

Here is what you need to consider before deciding to expand or close down:

WHEN TO EXPAND YOUR BUSINESS

One of the hardest decisions any business owner must make is when to take the plunge and expand. We’ve all heard the saying, “Grow or die.” But the stakes are so high right now; overextend yourself in a very challenging economy and you could lose everything. I want to be clear that I am a big believer in growing your dreams. But only if the time is right.

My advice is to always trust your gut. Not your accountant who tells you the numbers look good, or your financial advisor who shows you compelling spreadsheets of what your wealth could potentially be if it all works out.

There really is no such thing as a wrong time to launch or grow a business, as long as you do it responsibly. At the website of
Inc
. magazine is a wonderful slide show of now-iconic U.S. firms such as Walt Disney, UPS, and Domino’s Pizza that in fact got their start during a recession, often with nothing more than personal savings or small personal loans to fund the start-up. Yes, they are huge global firms now, but they too got their start as small businesses. Type “Inc 17 recession success stories” into your browser’s search box and prepare to be inspired.

IF IT DOESN’T FEEL RIGHT, IT ISN’T RIGHT

Doing something because you think you should—whether it is loaning money to your cousin or expanding your business—is not standing in the truth. You are only to take action when you feel deep down in your bones that it is the right and honest move for you. If the thought of expanding your business makes you queasy, you should be cautious. I am not talking about the butterflies that settle in when you are excited or nervous. But if you are waking up at night with worry, listen to what your body is telling you. If your spouse or partner does not think this is the right move, right now, listen to that as well. There is no business that is more important than respecting the love of your family.

I’ve probably turned down ten times as many business opportunities as I have accepted. Not because they were bad ideas. In fact, some of my closest friends and family have told me more than a few times that I was crazy to have walked away from deals that would have paid me quite well. But I have always listened to my gut. If I do not literally feel that a decision is right for me, right now, no matter how much money is involved, I simply say no.

I am all for expansion, but one problem that sinks many expansion plans is an assumption that the next store or the next client will automatically pay off. There is a tendency to forget that if you are physically expanding your operations the expansion comes with fixed new costs, and it may take months, if not years, to earn the extra revenue that fully covers the expenses. Moreover, if your expansion includes hiring more employees, you need to think through how many months you may need to pay that salary—and those benefits—before the new business starts seeing positive cash flow that helps you cover your extra payroll expenses.

None of that is meant as a reason to not expand. But I want your expansion to be lasting. Not a three-month or six-month “mistake” that ends up jeopardizing your hard-won success to date.

How do you know if you are financially ready to expand? For starters, you must have at least twelve months’ working capital saved up to pay for your expansion. This is in addition to the twelve months’ working capital for the expenses of your existing business. In other words, before you expand you must have an extra cushion of working capital to help you pay for the expansion as it gets off its feet.

Given the success of your existing business you will now also have more options to borrow to fund your expansion. Please be very careful. You are never to borrow against your personal assets. So no second mortgages or home equity lines of credit. Losing your business is bad enough; losing your home on top of that would be tragic. Any bank or credit union that will extend you a business loan is indeed going to ask for collateral; likely that will be assets of your existing business. I recommend you sit down with a trusted accountant or financial business advisor and carefully run through all of your financial statements and projections for your expansion. You want to leap only when you feel confident you can land on your feet.

WHEN TO CLOSE YOUR BUSINESS

All business is cyclical. There are ups and downs. Opportunities and setbacks. Yet the down cycle brought on by the financial crisis in 2008 has been especially brutal for many of you, and has not yet fully loosened its grip. When nearly one in five Americans is either out of work or just getting by with a part-time job, any retail business is going to feel the pain. And those of you running a business-to-business operation have seen your bottom line suffer as your clients have scaled back their own operations.

Standing in Your Truth in Business

We are all hoping things get better soon, much better. But hope is not a viable business plan. I can imagine how hard it is to contemplate closing down a business that you started, nurtured, and invested so much hope in. I do not for one minute minimize the frustration and heartache you must feel whenever you stare at the red ink and ponder letting go. But letting go of a business that is no longer able to support itself—and your family—may be the smartest and bravest business decision you ever make. From my vantage point, it takes far more courage and intelligence to walk away than it does to stay. I am asking you to call upon every lesson you learned in the “Stand in Your Truth” class and ask yourself if it is time to let go of a struggling business.

Here are some of my warning signs that you can’t afford to keep a business going. If you have taken any of these steps, or are contemplating any of these moves, please stand in your truth that it is time to close down your business.

• You have begun to use your family’s personal emergency fund to cover your business expenses
  . What will you live on if after depleting your family’s savings the business has still not turned around?
  
• You are tapping into your retirement savings
  . This is a dangerous and costly mistake.
  
• You are tapping a HELOC
  . Losing your business is hard enough. Don’t put your family’s home on the line as well.
  
• You are paying only the minimum due on your credit cards, while adding more new purchases to your unpaid balance
  . That is a hole that will be hard to dig your way out of, and as I explained earlier in this class it will set off a cascade of costly consequences.
  
• You have not paid yourself a dime in six months
  . You are essentially working for free while your debt load increases.
  
• You are asking a family member to cosign a loan or give you money that jeopardizes their security
  . It is entirely dishonest to knowingly weaken another person.