Bank, Family or Savings Account
Who’s the Right Lender for You?
There are many benefits to an SBA loan.They are generally easier to qualify for than more traditional business loans, and there are lower down payment requirements and early payoff options. Beyond that, bankers have experience helping entrepreneurs of all types turn their passionate ideas into viable businesses. In that way, a bank often becomes a great resource for business ideas & networking.
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Bank, Family or Savings Account
Start-up Financing Options and Risk
- HIGH RISK: Putting your personal finances at risk (Personal Savings, 401K)
- MODERATE RISK: Less personal risk for you, but putting other's money at risk (Family Member, Crowd Funding)
- LOW RISK: You only get the loan if you qualify, which means you should be able to afford it (SBA Loan)
According to the U.S. Census Bureau, there are nearly 28 million small businesses in the country – and together they all have a major impact on the health of our economy. In fact, there are more small businesses than medium and large ones. That’s a big deal!
Even the smallest businesses need to borrow money. So where do you start? There are several options:
- Dipping into personal savings
- Utilizing personal credit
- Getting a loan from a family member
- Crowdfunding
- Borrowing against a 401k
- Securing a Small Business Administration (SBA) loan
So, which one is right for you? Tom Dent, senior vice president and SBA manager at PNC Bank, gets real about the benefits of an SBA loan – and when self-funding might be a better option.
Banks Really Do Want to Talk to You
If you’re like a lot of start-up entrepreneurs, you may be focused more on “not failing” than succeeding, and you’re worried that a bank won’t understand your mindset. You might prefer self-financing options because you’re ‘too small for a bank’ or you don’t want to take on ‘official’ debt as you start a business. It’s time to abandon these myths.
“There are many benefits to an SBA loan,” says Dent. “They are generally easier to qualify for than more traditional business loans, and there are lower down payment requirements and early payoff options. Beyond that, bankers have experience helping entrepreneurs of all types turn their passionate ideas into viable businesses. In that way, a bank often becomes a great resource for business ideas and networking.”
More mature small businesses needing loans are also attractive to banks because they are more likely to have a proven track record. For example, if you’re a machinist with 20 years of industry experience and you are ready to open your own machine shop, banks will want to talk to you.
Whatever the stage of your business, the bank will ask you for a strategic business plan that outlines the roadmap of your business – and projects how much money you think you’ll make from investing in the business. If you don’t have a plan, or you can’t show projected cash flow over the next 12 to 24 months, then it’s time to seriously think about other options.
Family and Investors (Might) Want to Talk to You
This is more of a hybrid approach. If you get family members or other investors to help bankroll your business, you’re still going to be accountable to others. How much so is between you and your investors. A venture capitalist will want to see a business plan, just like a bank. Your parents may be willing to invest in you without that level of detail – but think long and hard about how the ups and downs of owning a business together will impact your relationships.
When Self-Funding is the Best Option
Dent notes that in addition to businesses with no real plan, banks also tend to avoid issuing loans to what they consider “high risk” businesses. These include start-ups in industries with high turnover rates, like non-franchise restaurants and retail, or businesses where the owner has little to no experience in their industry.
Take Sarah, for example. She works a corporate gig, but dabbles in jewelry design. She wants to open a side business making earring sets. Since it’s more of a hobby, the bank will consider her business idea a greater risk. And from Sarah’s viewpoint, she’s better off self-funding anyway, because her new business isn’t yet profitable enough to manage the overhead of an SBA loan.
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How Do I Decide?
It's time to go old-school and make a list of pros and cons. Dent offfers these insights into the benefits and risks to help you choose your next move.
Funding
- BANK SBA Loan
- Pros
- You're only responsible for a partial investment.
- SBA Loans are affordable due to low down payments and long repayment periods.
- Attractive terms, like no prepayment fees or balloon payments on many loan types.
- You can keep the lending relationship professional - there's no talking about repayment terms over Sunday dinner like there might be with family members who loan you money.
- Cons
- The long application process means it's not good for time-sensitive credit needs.
- If you default on the loan, your credit will be impacted. You also won't be able to get another government backed loan until you pay it off (like a student loan).
- Pros
- FAMILY Loans and Investments
- Pros
- Loan and dividend payment terms are more flexible, depending on who you're dealing with.
- Many great family businesses have been formed when multiple family members had some skin in the game
- Cons
- For some, business and family or friends don't mix. Only you can decide
- You may lose some control over decision making if your family or other investors want to be more involved.
- Pros
- SAVINGS ACCOUNT Self-Funding
- Pros
- You can't default on a loan.
- You don't have to make regular repayments. You can pay yourself back as you are able.
- Missing a payment won't affect your credit.
- Cons
- It's all your money. Or your investor's money. You bear the entire risk of a loss. Are you comfortable with the posibility of losing your entire 401k?
- It might be difficult to build enough capital to start or maintain the business.
- Pros
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Common Uses for SBAs
- Acquisitions
- Expansions
- Start-ups
- Real estate purchases and renovations
- Equipment
- Inventory purchases
- Franchise financing
- Working capital
- Refinancing existing debt
- Exporting
For more information on managing your business finances and what banking solutions are available to help, stop in your nearest PNC branch, or call PNC 1-877-287-2654 to schedule time with a Business Banker.
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