The fact of the matter is that the lessons are usually in the failures.  Bill Gates himself said that success is a lousy teacher.  Now, don’t get me wrong, I’m not suggesting you look to fail for the sake of learning lessons.  The failures will come along the way to success in business and in life so IF you want to start, build, or grow a business, just be prepared for some failures along the way.

Build for the long-term.  Invest in yourself and your business.  Be a student of your craft.  Become an expert.

I personally think it’s hard to argue that two of the most important ingredients of business success are leadership and credit (both personal and business credit).  Cash, education, and having good people around you might round out the top five.  You don’t need all of these ingredients to succeed in business but I’m not sure you could find me a successful business owner that didn’t have at least some combination of these necessary ingredients.  Having as many of these ingredients as possible will help you weather your storms.

Our company has some clients who are real estate investors.  As of the date of writing this article, it is arguably one of the best times ever to buy real estate.  Some would argue that we’re in the midst of the best time ever to buy discounted real estate.  They’re not making any more land and the population continues to grow.  There will certainly be peaks and valleys along the way but, bottom line, real estate over time increases in value. To that end, we all need a roof over our head.  So you do the math and tell me if real estate is a good or bad long-term investment.

Again, any good thing can get messed up and done the wrong way but we’re not talking about a business that’s already seen its best days like some industries (like manufacturing and industrial businesses perhaps).  I do not think it is a business for everyone but it is certainly a good business for someone who will treat it like a business and not a weekend hobby.

I say all of that to say that even in a great industry, at a great time, with a bright future, it’s easy to find reasons “not” to buy real estate right now.  Watch the news, talk to a former investor who was “speculating” and lost everything, or try doing it on your own without good mentoring.  All these will discourage you if you let them and fear will jump into the driver’s seat and a year later you will still be in the same place you are today.

For today’s serious real estate investor there are deals, deals, and more deals out there.  So, as a good friend of mine likes to say, ”whatchu gonna do?”  It’s all in the action.

Think about it like this, if you do 100 deals you’re going to have some that make money and some that don’t.  But you’ll certainly have more winning deals than losing one’s unless you don’t learn from your mistakes and repeat the same mistakes that caused you to lose money.  Will you get discouraged if your first deal doesn’t make you the money you wanted or planned on?  Most people throw in the towel if things don’t go as planned – fear gets the best of them.

I recently heard a story from a real estate agent who took a new client into a property that was inherited by heirs of an estate.  The client was a new real estate investor who was looking for a “fixer-upper.”  The sellers (the heirs of the property) were in another state and had no interest in real estate and simply wanted to liquidate and have nothing to do with managing a vacant property.  The house was structurally very good and was in a good neighborhood but it was outdated.  The sellers were “negotiable” on the $95,000 price (which was already aggressive since the sellers just wanted to unload it).  The estimate to replace the wood paneling, drop ceilings, install new kitchen cabinets, new carpet, and update the bathroom was about $25,000.  The houses in that neighborhood sell in the $200,000 – $250,000 range because it is a solid area with good schools and low crime.  Because of the condition of the property (mainly the bathrooms not working well) the agent said it would not qualify for FHA financing so they were targeting an investor to buy it.

When the agent took the new investor through the property he seemed concerned about what he would find after they took off the wood paneling and pulled up the old carpets.  He told the agent he would “think about it” and get back to her.  When he called her back 3 weeks later to go “look at the property again” the agent informed him that it was already sold.  Apparently, it was put under contract for $90,000 and then went to settlement 2 weeks later with the end buyer being an investor who paid $105,000.  The buyer was a seasoned real estate investor who bought the property from the person who got the contract for $90,000 (the wholesaler).  The wholesaler had sold other properties to this investor and because of their good relationship, the property was purchased without the buyer doing an inspection.

Which one of these businesses are you?  There’s the tire kicker who was obviously motivated by fear who wanted to “look again” after 3 weeks, the wholesaler who got the property under contract for $90k and made a quick $15k, and the final buyer who paid $105k and will easily make over $50k in profit or equity from the deal (after some good, honest hard work and labor of course).

Fear is a great crutch.  You can lean on it whenever you need an excuse.  The problem with the crutch is that if you lean on it forever you may never do without it.  It’s like a security blanket if you don’t wean off of it.  How many of your decisions are influenced by fear?

Who’s the CEO of your business?

Fear Photo via Shutterstock

From Small Business Trends

Fear Factor 201: Who’s your CEO?

According to Webster’s Dictionary, the number one definition of fear is:

“To be afraid or feel anxious or apprehensive about a possible or probable situation or event, “I fear she might get aggressive.”

Fear.  It can be a good thing.  It can be a bad thing.  It can also live and grow and appear at opportune times in the life of a business owner and, when it goes unnoticed and when it is not recognized and purposely silenced, it can be the worst of all companions.

In our daily dealings with business owners (both new and established businesses) there are many manifestations of fear that we are able to witness.  The fear of making the wrong decision.  The fear of losing money.  The fear of this and the fear of that…the list goes on.  But if you boil it all down to its core there’s one main fear that all of us have felt, experienced, and deal with almost daily and that is the fear of failure.  That’s it.  The fear of what happens if “my” business fails?  None of us like to fail.  What will our friends say or think?  What does this mean for my family?  How will it affect my future?  Will others think less of me?

The Fear of Failure.  Fear can become your CEO if you’re not careful.  In fact, fear will become your CEO if you don’t face up to your fears.

Steve Jobs.  Bill Gates.  Michael Jordan.  Muhammad Ali.  Henry Ford.  Jack Welch.  Read what some of them have said about fear.  Do some Internet searches.  You’re not alone.  They all have or had the same fears that you face.

What does fear do?  It does many things.  In fact, in extreme cases, it can lead to things such as obsessive-compulsive disorder.  Spend 5 minutes reading about Howard Hughes in his later years if you want to see an “extreme” illustration of anxiety and fear.  However, that’s not most of us.  There’s an extreme that knows no fear and there’s the Howard Hughes extreme that becomes reclusive and lives out his days in isolation and in hotel suites afraid to touch anything.  Most of us live somewhere between these two extremes.

To feel fear, anxiousness, and apprehension is 100% normal.  What you do about those feelings is what separates us…that’s what separates the men from the boys so to speak.  Fear’s biggest manifestation is paralysis.  Because I’m afraid of failure I do nothing.  It’s “safe” to do nothing.  I can’t fail if I don’t do anything.  I honestly think that, often times, it’s the “doing nothing” that allows people to sleep at night.  Why?  Because we end up doing the same thing today that we did yesterday and our world doesn’t change.

It’s predictable.  We can “plan” and “control” our days and our lives so much easier this way.  There’s no “X” factor because tomorrow will be the same as today and yesterday and there’s comfort in that.

My question to you is simple, is that what you want?  If it is that’s fine.  There’s nothing at all wrong with that.  Here comes the famous if/then statement…if you want predictable…if you want the same thing tomorrow that you had yesterday…then “maybe” running a business is not for you.  It may not be what you’re looking for.

However, if you still want to forge ahead with running your business then I think we all know what we have to do with the bully who keeps stealing OUR lunch.  Face up to him.  Look fear in the eye and recognize his role in your decision-making.  It’s time to recognize that some, perhaps many, of our decisions are motivated by fear.  We cannot…let me repeat that…we cannot build or run our businesses if fear is in the driver’s seat or if we’re afraid of making a mistake.

I personally have a growing business and I can assure you that you WILL make mistakes.  I’ve made many mistakes…whew, if I added up the mistakes, that would be a long list.  But we’ve made many more good decisions that have helped us to grow.  And we’ve learned and we continue to learn from the mistakes.

Quotes from Michael Jordan:

“I can accept failure.  Everyone fails at something.  But I can’t accept not trying.”

“I’ve failed over and over and over again in my life, and that is why I succeed.”

Stay tuned for part 2 – Fear Factor 201.

Fear Photo via Shutterstock

From Small Business Trends

Fear Factor 101: Is Fear a Factor?

It was August, 2010 when the stuff kinda hit the fan as they say.  That’s when Wells Fargo had to shell out $203 million after losing a lawsuit over their deceptive overdraft fee policies.  It’s a little known trick called reordering or high-to-low resequencing.  It basically means that a bank will settle out each day by ordering each of the transactions in a descending order from largest transaction to smallest.  It may not be a big deal, but what if you became overdrawn on your account?

You were out and about on a beautiful Saturday afternoon and bought lunch, grabbed some snacks, picked up a new shirt for work, saw a great deal on some shoes, and then capped it all off with a cappuccino/latte/espresso (as expressed by a non-coffee drinker who prefers his caffeine in the form of multiple diet cokes).  But that was all in preparation for buying that new 50 inch plasma TV that’s on sale at Best Buy.  You know payday is on Monday and your account is a little tight, but even if the purchase at Best Buy puts you a couple hundred bucks in the red you figure the overdraft charge is only $35 plus you get paid on Monday…heck, it’s the weekend and maybe you won’t even get hit with the $35 fee.

Well, think again.  Try $35 x 6 for a total of $210 in fees!  It’s because the bank calculated the largest transaction (the plasma TV) first and then all those other transactions – even though they happened sooner – after the large transaction so by their calculations every transaction that day was subject to a $35 overdraft fee.

The Wells Fargo decision by Judge William Alsup got additional attention simply because of how outspoken Alsup was.  He called the Wells Fargo practices “gouging and profiteering.”  He didn’t stop there and went on to say:

“Internal bank memos and e-mails leave no doubt that, overdraft revenue being a big profit center, the bank’s dominant, indeed sole motive was to maximize the number of overdrafts.”

Then we’ve seen other banks settle class-action lawsuits like Bank of America who settled in Nov. 2011 for $410 million on this overdraft issue and Chase in Feb. 2012 for $110 million.  Eileen Smith covered the topic well in a recent article about TD Bank’s charges.

In fact, here’s a list of banks currently involved in lawsuits over excessive overdraft fees.  There’s a decent chance your bank is on the list.  Of course, the penalties are basically a slap on the wrist when you consider the profits that have been made on overdraft fees.  It’s estimated by the Consumer Financial Protection Bureau (CFPB) that banks made between $15 billion and $22 billion in 2011 from overdraft fees.  That’s down from much higher estimates in previous years.  According to American Banker, Chase made $500 million a year in post-tax income from high-to-low resequencing.

How would you feel if your financial planner or accountant treated you and your money like this?  You would leave him/her in a heartbeat and never let someone like that manage your money again…and why is this behavior from a bank somehow acceptable?

So where are we now with all of this?  It’s a good question.  There are obviously many class-action lawsuits in the works and the practice of reordering debits or high-to-low resequencing has been illegal since July, 2011.  The CFPB announced in late Feb that they are investigating banks’ deceptive overdraft practices.  I’m sure the banks will find other ways to generate that precious fee income and they’ve obviously been exploring with ideas already as we’ve all been hearing about.

It may be time to join the growing army of small businesses who are leaving the big banks for smaller banks and credit unions.

Banker Photo via Shutterstock

From Small Business Trends

Have A Checking Account With A Big Bank: Buyer Beware

The jobs report that came out today said that unemployment is at a 3 year low of 8.3% – according to the Bureau of Labor Statistics – and that we added 243,000 private sector jobs in January.  Not sure about you but I like that.  The market was looking for 150,000 new jobs so expectations were exceeded. I realize it’s not the 4.5% unemployment we had in 2Q 2007 but it’s also not the 10.0% we had in 4Q 2009 so we’re heading in a better direction.  And, yes, I agree that we have a long way to go but I like the current trend.

What else am I (cautiously) optimistic about?  Small business lending is slowly beginning to come back.  About 15 months ago we heard from Bank of America that they planned to hire 1000 people primarily dedicated to the small business sector by 2012.  Citi announced some impressive “results” – and, by the way BofA, you get more cool points for results than you do for intentions!  Chase has also recently announced some great strides in the small business lending “results” category.

I agree with my friends and colleagues who contend that it was the local banks and smaller banks who helped us through The Great Recession with their SBA-backed lending efforts so I mean no slight to them when I say I’m happy about the direction of lending in the big-bank category.

So while the Negative Nancy’s are rolling their eyes at me and the Positive Peggy’s are ready for the big celebration here’s why neither of those extreme’s is the right place to be.  8.3% is still too high and we want a lower unemployment rate.  Additionally, since we live in a global economy where ripple effects cross borders and can circle the globe, the larger concern is how the European debt defaults will impact both the world and the US economy.  Greece is close to a likely default in the next month or two and some of their neighboring countries are looking at the same issue on the not-too-distant horizon.

Let’s not forget the global impact that was felt by our own US subprime mortgage defaults that have all occurred just in the last 5 years.  Wasn’t it Ben Bernanke or Alan Greenspan that said, “It’s a global economy, dude?”  Okay, maybe not but you get the point.

If the trend of lower unemployment continues like it has for the last 6 months then we’re all likely to be happy.  Housing is still not good but can you imagine what would happen if more people get back to work and then those same people buy or refinance their homes since rates are at historic lows and then that creates more jobs in banking and lending and the unemployment percentage continues to decrease even more?

That’s one reason the Fed is keeping rates low – let’s call it the New Fed Stimulus Package or the NFSP…what do you think?  I like how William Dunkelberg from the NFIB summed it up “The market was looking for 150,000 jobs, and we got 257,000.  We’ll rejoice, and hope for another good month next month.”

Job Photo via Shutterstock

From Small Business Trends

Cautious Optimism For Small Business

Before we talk about the “good news” let’s do a quick history lesson about how we got here.  Some would say it started with the secondary mortgage market.  As mortgages got closed, lenders were able to sell their mortgages on the secondary mortgage market and wall street turned them into mortgage bonds.  As real estate prices increased and mortgage rates decreased and profits were flowing through wall street the “appetite” for these mortgage bonds increased.  Then you join that with deteriorating underwriting criteria along with a staggering number of sub-prime loans to non-credit-worthy borrowers and we’ve got problems.

But how did this happen?  It happened because the ratings agencies (Fitch, Moody’s, and Standard & Poore’s) were giving the same grade to the pools of sub-prime mortgages as they were to the “prime” or “A-Paper” mortgages so these bad mortgages flowed through the system just like any other mortgage.  As the defaults hit certain levels, the investors who shorted mortgages by buying insurance against the bad mortgages were able to cash in – this is where you Google search “who is John Paulson” or you could try “what did AIG do wrong?”

History lesson almost over – but what happens next?  It’s called TARP or the Troubled Assets Relief Program.  TARP is where Uncle Ben (Bernanke) drew on the lessons of The Great Depression of the 1930′s so we didn’t repeat our mistakes.  The Fed actually turned a recession into The Great Depression in 1929 by letting the money supply contract very sharply which caused prices to fall and inflation to hit.

Secondly, they let the banks fail and thousands of banks actually failed.  TARP was a conscious effort to let the banks recover first because if the banks fail then we all fail and we propel ourselves into a much worse economic climate.  TARP was an infusion of capital into the top banks – yes, it’s 100% true that it was “unfair” to the smaller banks – in an effort to get them to continue to lend (or at least to not totally shut down their lending).  Interestingly, tax payers made money on TARP but, of course, that hasn’t been talked about in the “occupy” movements.

So here we are a few years after TARP.  Fortunately, The Great Recession did not become a depression.

According to CardWeb, $4.5 billion was extended to small business owners in 2009 by Citi.  Then they increased that to $6 billion in 2010.  Then they pledged to lend $24 billion to small business (defined by them as businesses with less than $20 million in annual revenue) over a three year period from 2011 – 2013.  Citi announced last week that they are ahead of pace on their goal of lending $7.0 billion in 2011.  They finished the calendar year very strong after a slow summer and ended up lending $7.9 billion in 2011 to small businesses.

I agree that there’s a lot more to be done.  However, if we put mistakes of the past aside, this is one lender who is showing us progress and who intends to continue to lend at a much more generous pace than we saw in 2008 and 2009.

Lending Photo via Shutterstock

From Small Business Trends

More Signs of Increased Small Business Lending

So here we go with our next set of startup debt financing options:

SBA Loan – We’re all familiar with SBA loans and I know they have a bad name with some but, if you’re a startup, don’t discard this option.  Brock Blake is the CEO of Lendio, a free small business resource that should be utilized by any small business owner looking for capital.  According to Blake:

“SBA can be a great option for startups looking for capital.  One of the most important requirements is strong personal credit. With good credit, it’s likely that a startup could get approved for a loan up to $35,000 through the Community Express or Community Advantage loan programs. For larger loan sizes, the business owner will need a combination of strong credit, industry experience, collateral, and a thorough business plan.”

Home Equity Line of Credit or HELOC – I realize this isn’t 2007 so there are not nearly as many HELOC’s being handed out.  However, there are still people who either own their homes free and clear with no financing or they have a lot of equity.  People who have been downsized after several years in the workforce.  Others have inherited a property from parents or grandparents and now they have options to borrow against their new home.  So, despite the fact that approximately 30% of homeowners owe more than their homes are worth, there is still a large army out there with equity.  If you’re part of the silent “equity army” and you’re looking for a HELOC then you may be wise to look at the smaller banks and credit unions since the lending challenges and issues at the big banks are well documented.  Lastly, even though HELOC’s are not nearly as prevalent as they once were, they belong on the list of options.

Peer to Peer Loan aka P2P – I’m still amazed that, with all the requirements involved in being a lender and the burdensome requirements of the SEC, that we still have lenders who are willing to offer small loans like the P2P lenders.  So on one hand they are great.  But if you visit the websites for two of the largest P2P lenders, Prosper and Lending Club, you’ll quickly learn that these loans aren’t cheap.  With closing costs and high APY’s this is not your bank loan with minimal closing costs and a reasonable interest rate.

However, there are tens of millions of dollars of loans being issued through these networks and the default rates are rather minimal.  So they have created models that work.  The downside is that loan amounts are pretty low on average.  Lending limits are usually $25,000 to $35,000 and the average loan sizes that are being approved are much lower than those limits.  You’ll almost always get better terms on a credit card which allows you to use the funds over and over again instead of only once like a loan – and you may be able to get a larger credit limit as well.  P2P loans may not be cheap and they do have their downsides but these are a good fit for the right person.

Contract Financing – This is a relatively new financing option that allows business owners to capitalize on a contract that is either existing or in the beginning stages of negotiation.  Kris Roglieri is the founder of Commercial Capital Training Group and the President of a national commercial finance company who has used contract financing for many clients.  Roglieri explains it like this:

“By having a contact, some lenders can immediately monetize a portion of the fixed payment stream from the contract to fund the small business in order to perform on the contract. This method allows the business to grow effectively and is a far cheaper debt option compared to giving up equity to a lender or investor.” 

The credit of the borrower and financials of the new business are not a factor in determining whether or not a business can access capital from their contract.  Roglieri points out that:

“The underlining factor in a lenders decision to monetize a contract is solely done on the issuer of the contract and their credit worthiness.  Ideally, the business provides a unique technology or service to an investment grade company and has a fixed contract over a period of time.”

So the bottom line is to know and understand what your options are.  After all, how can you make the best decision if you don’t know what your options are and which one or which combination is best for you?  Be sure to check out Part 1 too.  I realize that not every option is here but we welcome your comments.  So to all my fellow business owners keep living the dream!

Home Equity Loan Photo via Shutterstock

From Small Business Trends

8 Ways to Finance Your Startup with Debt: Part 2

I have split these 8 solutions into two parts based on the likelihood and value factors.  Simply put, likelihood just asks the question, “How likely is it that this type of financing can be obtained by a higher percentage of people?”  Value is all about how much value would each form of financing bring to business owners who utilized this form of financing.  So let’s get started.

Here are the 4 most likely forms of debt financing for small business startups:

Credit Cards
This is absolutely, positively, without doubt the most common form of financing for small business startups.  Additionally, credit card financing – when it is done right – is arguably the least expensive form of financing.  From a benefit perspective they also do not require collateral like many other forms of financing.  The problem is that when credit card financing is not done correctly – and normally it is not – you will hurt your credit profile, pay too much in interest, you will not properly separate your personal & business credit, and you’ll likely miss out on some good tax benefits.

ROB’s
Technically known as Rollovers as Business Startups – are only an option for people who have saved up some adequate retirement funds.  It’s also much more risky than most other forms of financing.  This is a very popular form of financing for new franchisees.  The downside is you’re risking your future basically since you’re tapping your retirement savings.  The upside is that you can access a sizeable amount of capital if you have a nice nest egg waiting for you.

Trade Credit
Maybe it’s not as popular but it is very common.  Examples of trade credit – which is also referred to as vendor credit – would be a line of credit at Staples, or Dell, or any other company where you need to purchase their goods or services for your business.  There are many forms of trade credit where you can obtain loans and lines of credit that are revolving in nature…meaning the balances are not due in full and can be spread out over several months or several years.  However, the most common “terms” attached to trade credit are Net 30.  So there is not the same value or ability to finance nearly as much since you’re only delaying the purchase by a month or maybe two.

Equipment Financing
Most startup companies need some type of equipment.  Ideally, if the goal is to use your capital in the best way possible, you wouldn’t use a working capital loan or line of credit to purchase equipment.  Sometimes it is necessary but, often times, you can get a loan or lease specifically for your equipment and then leave your cash, working capital loans, and credit cards available for other uses.

With over 15 years of small business lending experience, Kris Roglieri is the Founder of Commercial Capital Training Group and President of a national commercial finance company.  According to Roglieri:

“In the last 4 years, the number one characteristic of defaulted loans or leases in a lenders portfolio were companies that had less than 2 years time in business so most lenders only finance companies that are more than two years in business or their underwriting requirements are very tough and stringent.  If you’re seeking to finance equipment as a startup you should have good personal credit, some experience in your industry, and hopefully at least 6-12 months of liquidity.”

In Part 2 we’ll discuss the other 4 most common debt solutions for startups.

Credit Card Photo via Shutterstock

From Small Business Trends

8 Ways to Finance Your Startup with Debt: Part 1

The bottom line is that it’s hard enough if you’re a small business owner in need of capital (or might be in need of capital in the future) so if you’re a husband-wife team, a family-owned business, or a partnership of any kind then these are the 3 key tips you’ll need to plan for (or respond to) if you want to have the best possible chance of getting your funding.

#1 – Think about the loan you will need in 2-3 years NOW! This is advise that comes from the perspective of being able to borrow money more efficiently after you get the business going.  There are many credit mistakes that I’ve seen husbands and wives and partners make over the years.  Some of the mistakes are minor and others can be more costly and limit your borrowing capabilities as you grow your business.  Borrowing money for your business is like anything else.  You can do it the right way or you can do it the wrong way.  You need to think about whether you want to “co-sign” for your mortgage(s), car loans, and credit cards.

You may both need to be part of the mortgage for qualification purposes but that is rarely necessary for car loans and credit cards.  When there is only one PG (personal guarantor) on your credit cards then you get the best of both worlds.  From a credit perspective, all your accounts are considered “trades” or “trade lines.”  So your credit profile is really just a compilation of all the individual trade lines therein.  If you could choose which trade lines you wanted on your credit report then imagine what that could do.  If your spouses credit cards are old and have low balances then you’ll want to be an authorized user on those credit cards.

On the other hand, if the credit cards are less then 2 years old or have high balances in relation to their credit limits (high utilization) then you do not want to be an authorized user on those accounts because that trade line would hurt your credit.

#2 – If you or your spouse/partner have “less than perfect” credit then fix it NOW! I realize that a lot of people get frustrated with credit scores and how credit works.  It’s actually not as confusing as you may think it is but instead of focusing on what may not make sense, let’s focus on how to work within the current banking system and how to have success with your loan requests given the current credit & lending terrain.  If you or your partner don’t have the credit profile and score that will help you get approved for financing then it’s simple.  Fix it.

There’s only 2 ways to improve your credit profile.  You can either add some good stuff or remove the bad stuff.  The problem is that most credit repair companies are…ahem…not good.  Find a quality individual or company and hire them to improve your credit.  The National Association of Responsible Credit Repair Advisors (NARCRA) is a good resource to find a credit professional.  You can improve, repair, or fix your credit if it’s not good but it’s unlikely you can do it yourself.

Technically, there’s nothing a credit repair agency can do that you can’t do yourself…but you could also represent yourself in court instead of hiring a lawyer.  Would you do that?

#3 – Strategically determine how you share the ownership % of your business! 50/50 Ownership or 80/20 – I can’t tell you how many times I’ve seen businesses who needed $50,000 – $200,000 to take their business to the next growth level but there’s one “minor” problem.  One owner has good credit and the other owner has poor credit…so the bank said no to their loan request.  When determining the ownership % of your business it’s a wise idea to keep in mind that most banks – for most loan requests – require that anyone with 20% or more ownership in the business be included in the credit and underwriting portion of the loan request.

In other words, their credit gets checked and if they have bad credit then you don’t get approved for your loan.  If you have bad credit and your spouse has good credit then it would be wise to consider making your spouse the majority owner.  You’ll probably want the spouse with the good credit to be the 85% or 90% owner since that puts you in the clear with most ownership requirements from most lenders.  This all sounds easy if you’re starting a new business but what if you’re an established business and you’ve already established the ownership at 50/50?

Just make a change.  It’s a simple addendum or revision to the articles.  Just ask your business consultant, corporate formation consultant, or attorney and they can help you if you don’t know how to make this change yourself.

As a husband/wife team there are some great ways to properly separate and utilize your credit profiles so you can maximize your credit scores and position yourselves in the best possible way to get your financing.  As always, consult with your business consultant, lawyer, and accountant but remember that they work for you.  Most people resist ideas and strategies that they are unfamiliar with and there’s a good chance that if these advisors haven’t presented these concepts to you then they probably are unfamiliar with them.

Marriage Photo via Shutterstock

From Small Business Trends

Credit and Financing “Insider” Tips for Husband and Wife Teams

• Slow your growth
• Damage your brand
• Make the difference between a profit and a loss
• Cause your business to fail

At the very least you’ll slow your growth or limit yourself from being able to handle the curve balls that are part of business life cycles. It’s also important to state the obvious, which is that we’re only talking about debt capital solutions – borrowing money. We are not going to discuss equity financing mistakes made with VCs, angels, private equity firms and so on.

The credit and lending landscape has not only shrunk from the levels we were seeing in 2005 and 2006 but has also become less consistent and is constantly changing. That means you must be prepared for a variety of factors that can be frustrating, even if you’re working with an expert individual or company in the small business finance arena.

In fact, companies like Commercial Capital Training Group and Compound Profit are capitalizing on the huge need for trusted advisors with expertise in the small business credit and lending space by offering career and training opportunities to individuals looking for a new career opportunity as a small business loan broker. There is such a need that both of these companies are swamped with new trainees.

Bottom line: If you have a proper understanding of your borrowing options, that should create realistic expectations. And if you have those two key components, then you’re halfway there.

These are the five biggest mistakes we’ve seen since the onset of the credit crisis in 2008:

1. Using Personal Credit Cards for Your Business

According to the Meredith Whitney Advisory Group, 82 percent of small business owners use credit cards as a “vital part” of their overall funding strategy. The problem is that most small business owners use their credit cards the wrong way.  They either use personal credit cards or they use business credit cards that actually report to their personal credit report.

Capital One and Discover Card are two of the most popular business credit cards that report their activity to your personal credit report. As a result, they are really no different than using personal credit cards as a funding tool for your business.  When you use personal cards instead of the right business credit card, you hurt your FICO scores, damage your credit file and miss out on the chance to separate your personal and business credit.

We have seen hundreds of small business owners in the last year who needed  extra funding to grow their business and were unable to get it for one reason: because of the impact of using personal credit cards, or the wrong business credit cards, for business.

2. Using Borrowed Funds the Wrong Way

Once you’re approved and you get your funding, as soon as you high-five the nearest person, it’s time to make sure you use the money properly.  It’s tough enough to get funding nowadays, so don’t go spending it without a plan. (We’re  talking about “working capital” funding here. If you get real estate or equipment funding, that’s great, but there’s usually no discretionary funding left on the table for you to spend.)

We talk about Revenue Generating Activities (RGA).  Make sure a good percentage of that loan or line of credit is used to generate additional revenue to grow your business. I like a combination of short-term efforts (a marketing or ad campaign or perhaps a series of trade shows to build exposure and develop key relationships), long-term efforts (building your brand, social media initiatives, building business credit, etc.) and perhaps some “my situation” needs.

An example of “my situation” needs would be to pay down personal credit cards (if you didn’t read this article in time) so you can increase your FICO scores and then obtain additional funding.  Another example would be to give yourself a small salary for a few months while you transition into a more full-time role in the business or to pay yourself back from monies you already spent on the business.

3. Pledging Excessive Collateral With Your First Loan or Line of Credit

Small business lending is constantly changing, and small business owners often think the lender is crazy for saying no, for offering a higher-than-acceptable interest rate, or for failing to live up to their expectations for any other reason. Add all this up and you’ve got a perfect storm.

As difficult as it may be when you’re not working with an experienced small business lender or consultant, try not to give the lender collateral if you don’t need to. And certainly don’t let the lender take an excessive amount of collateral, or you’ll have trouble getting the next loan when that huge, game-changing contract comes your way that will grow your business exponentially.

4. Doing Your Own Research and Getting It Wrong

My guess is that if you were charged with a serious crime you probably would not decide to represent yourself or defend yourself in court. So if the credit and lending landscape is so challenging, difficult and ever-changing then why are you trying to figure it out on your own? We learned a dangerous lesson in the days of easy mortgage money, when websites where you can choose from a long list of lenders and offers became a popular way to find mortgage loans.

The principle behind these sites is that if you talk to enough mortgage companies, you can figure out what the best loan is for your situation. Never mind that you may have no idea about hidden fees, teaser rates and the “bait and switch” tactics used by lenders and brokers, and you’ve never had any training on credit, HUD-1′s, and how to read the 50-plus page mortgage closing package. Despite all that, you’re smart enough to make the right decisions–without professional help–about the largest debt you’ll ever create. I know you’re an exception to the rule but for most “other people” that’s problematic.

Most banks approve less than 10% of the loan applications they get from small business owners. Many of the 10% don’t get as much funding as they need or must give up a lot of precious collateral in order to get their funding. You do the math. Will you be one of the very few who gets everything they need from the bank without pledging an excessive amount of collateral? Do you know where to turn to get the best possible funding after the bank says no? Most small business owners need a good advisor. Even with assistance, getting financing is still a challenge, but at least you’ll be in good hands.

5. Not Treating Your Personal Credit as the Asset it Is (or Not Making it an Asset)

It’s real simple.  You’re a small business owner so you’re going to sign on the dotted line when getting financing.  Yes, to my friends who build business credit, I have Staples cards and gas cards, and a Dell line of credit that did not require a personal guarantee, but those are exceptions and have limitations. We’re talking about the majority of loans and lines of credit that business owners are looking for.

Your personal credit is part of the underwriting criteria (always, for bank lending solutions, and often, for non-bank solutions). Your personal credit is either an asset to your business or a liability.  If it’s an asset, then preserve it and maintain it – and use it the proper way.  If it’s a liability, then do something about it. Find a credit professional who can help you. Please don’t find another mortgage flunkie who now does “credit repair” in addition to three other jobs. Find a professional who can guide you and turn that liability into an asset.

These are some common mistakes we’ve seen small business owners make. We’re all going to make mistakes, but I hope some of my mistakes and some of what I’ve seen will help you make one less bad decision and one more good decision while you take a step in the right direction to start, build or grow your business.

From Small Business Trends

5 Credit and Financing Mistakes That Will Hurt Your Small Business

Here’s the question: Are you getting the right loan and borrowing the right way so you do all you can to ensure that you can get the next loan you’ll need for the continued growth of your business?

Some entrepreneurs think that the only goal of borrowing is to get approved or just to have some form of financing they can use. But it’s bigger than that. It’s actually common for businesses to grow and then to need additional capital to propel themselves to the next level. It’s also common for things like debt and credit mistakes to stop them from qualifying for that additional capital.

Here are the four biggest dangers of borrowing money the wrong way when building a business:

1. Allowing Lenders to Take Too Much Collateral With a Loan

This one can be a bit difficult if you’re not familiar with choosing the right bank to work with. Here are some questions to ask yourself:

• Can you borrow the money you need without pledging any collateral to the bank? Some banks require collateral on all loans;  other banks will extend certain types of loans or lines of credit without any collateral requirements.
• What is a reasonable collateral request based on the loan you’re requesting? If you’re looking for millions of dollars for a large expansion, you’re not going to get it without collateral. However, if you only need $50,000 or $100,000 for working capital or financing some receivables, you’re an established business and you’ve got good personal credit, then you may be able to get that financing without needing collateral.

You will need to work with a good person at the right bank, but you get the idea.

2. Not Being Committed to Maintaining (or Improving) Your Personal Credit

Although bank financing is challenging to get, it’s always going to be the cheapest form of funding your business. There are “alternative” financing options galore but it should always be your goal to get your business to be “bankable.” In other words, you want to be able to obtain your loans and lines of credit from a bank.

As a small business owner, your personal credit is normally one of the key ingredients in the underwriting process to see if your loan request will be approved. If you have excellent credit, maintain it. Don’t let yourself get “too busy” to pay your bills on time. Don’t use your personal credit cards for  business expenses – this is possibly the biggest credit mistake made by small business owners. If your credit needs improvement, then be proactive about improving it. Your business will thank you.

3. Not Knowing the Impact of Your Loan on Your Budget and Cash Flow

We would probably all agree that excessive debt is never a good thing for any business. But what impact does the loan have on your budget? There are two important factors here:

• Use the funding you obtain for RGA (revenue-generating activities). If you grow the business with your loan or line of credit, then you’ll probably be able to justify the impact the loan has on your budget and cash-flow.
• Keep in mind that cash flow is usually more important than interest rates. In other words, if you can extend a loan from a three-year repayment period to four or five years in exchange for a little higher interest rate, consider what lower payments mean to your budget and cash flow. If that saves you $150 a month in the form of a lower payment then it may be your best bet. If you end up growing faster than you project and your cash flow is excellent, you can pay that loan off at an accelerated pace. However, if your growth is slower than you expect or you have tight cash flow, you’ll be glad you extended the terms.

4. Choosing the Wrong Loan for Your Purpose

Do you need a loan or a line of credit? Based on your credit, business, industry, collateral, revenue, profit, etc., do you know what your borrowing options are? If you understand what your options are, you can choose the loan solution that’s best for you.

I recently worked with a printing company that requested a factoring facility but they actually qualified for an unsecured business line of credit from a bank. That meant a lower cost, no UCC lien against the business, and no notification to their creditors about selling their receivables to a third party. Although they qualified for a lending solution that was “better” than they thought, it’s probably much more common for small business owners to think they can get bank financing when they really are not “bankable.”

My conclusion brings me to my two favorite words in business: knowledge and execution. Know your borrowing options (most small business owners don’t) and then execute. Period. Get your funding, use it for RGA, and keep living the dream!

From Small Business Trends

The 4 Dangers of Borrowing Money the Wrong Way