Spring 2006 issue of Horizons

THE LIFE CYCLE OF YOUR BUSINESS

Starting Your Business

Navigating the Options of Financing for Your Business

Tonja B. Hilton, CPA

As a small business owner, your most difficult task is finding the money to operate your business. Taking the necessary steps to prepare for a small business loan can minimize the difficulty. The other important factor is to learn all the neces- sary terms used by lenders so you don't agree to something that will not be good for you or your business in the long run. Loans are so common that you probably are familiar with the mechanics, but nevertheless it makes sense to review the basics. In general, a loan is based on a simple idea: some- one gives you money and you promise to pay it back, usual- ly with interest. The success or failure of your business can hinge on borrowing money sensibly - you want to borrow enough that your company can reach its potential but not so much that you have severe difficulty paying it back. Start on a shoestring. It can be a mistake to pour too much money (your own or otherwise) into your business at the beginning. A fair number of small businesses fail in the first year, so raising and spending a pile of money for an untest- ed business idea can lead to much grief, especially if you're personally on the hook for borrowed funds. Consider starting as small and cheaply as possible. T YPES OF L OANS You have many loan options for your business. For small ventures, friends and family members are sometimes willing to help. For sophisticated or mid-sized businesses, banks, credit unions, and savings and loans may be willing to lend you money. A few key items to remember are that, no matter what, all loans should be documented with an agreement that has stated terms, an interest rate, repayment terms and remedies for default. This statement will not only protect you as a business owner, but in those cases where you are bor- rowing from family and friends, it specifically lays out the facts and circumstances so problems don't arise in the future.

for the loan. Examples of unsecured loans or arrangements include: • Credit cards • Unsecured lines of credit (as received unsolicited in the mail) • Friends or relatives With a secured loan, assets are pledged to secure payment in the event you are not able to pay. Loans for your business may be secured by business assets, your personal assets or both. Examples of secured loans or arrangements include:

• Computer lease • Home mortgage • Equipment loan • Car loan or lease W HAT ' S IN A GUARANTEE ?

A lender may also require that someone co-sign or guaran- tee the loan. This means the lender will have two people rather than one to collect from if you don't make your pay- ments. When asking friends or relatives to co-sign or guaran- tee a promissory note, make sure they realize that your guar- antor does not have to come up with the initial outlay of money to provide to your business. Should you not be able to repay the loan, be sure the co-signer understands that they're risking their personal assets to repay the lender. Many times guarantors also are compensated by the business for signing such an agreement with the lender because any time they want to borrow money, this guarantee must be disclosed and may weaken their borrowing ability. If you've organized your business as a limited liability entity, such as a corporation or an LLC, the lender will probably ask you - the business owner - to personally guarantee the loan and/or pledge your personal assets to guarantee repayment. Because small businesses have high failure rates, lenders feel more comfortable if business owners have a personal stake in repaying the money. Be aware that guaranteeing or personally co-signing your business's loan circumvents your limited liability status. All of your separate property, and pos- sibly either half or all of any property you jointly own, could eventually be seized if you default on the loan.

Some credit is granted on an unsecured basis, such as cred- it cards. Unsecured means that there is no collateral granted

17 • spring 2006 issue