Small Business Loans: Mind the Gap

Small Business Loans: Mind the Gap

by contributing expert Deborah Temple

Let’s be honest.  Owning a small business is not for the faint of heart.  It is hard work, your boss is difficult, and you have to do everything.  It is easy to skip some important steps.  Understanding your financials and small business financing is something that is easy to put off until you need it.  Don’t skip this step!

Surveys show that access to capital is one of the biggest challenges for small businesses and yet there are banks, credit unions and CDFIs working hard to make small business loans.  

There is a gap between the borrower and the lender. 

This gap has created a void resulting in a sharp increase in online lending and while some of those may be good, there are many more that are not good for you or your business.  These are sometimes called Merchant Loans and anyone accepting credit cards may receive offers for quick and easy loans via email. While they may be quick, the payments are drafted daily from your account, and they most often have a triple digit APR, plus fees making them virtually impossible to repay.  

For example: one small business owner I worked with received a $25,000 loan which was quick and easy and really helped.  The daily drafts from her bank account, however, began to take a toll, so she got another loan.  Soon she was paying $10,000 to $12,000 a month (based on sales) taken in daily drafts from her account.  

Another small business borrowed about $50,000 and was paying between $3,000 to $3,500 a week (based on sales) in daily drafts and on the verge of closing. 

Fortunately, both businesses above were able to obtain a small business loan, pay off the merchant loans and reduce their payments by 75% to 85%.  Both were at risk of failing, but now they are still operating and growing.

Meanwhile, many others could not get the refinancing they needed, and their businesses failed.  

How to Mind the Gap

First, and foremost, do not sign any loan documents in which:

• The Annual Percentage Rate (APR) is not clearly disclosed.  These documents may disclose a low rate but,  it is not an APR.  Here is a tool for calculating the APR on Merchant loans.  
• You are asked to pay a fee to get the loan.  Some loans may have a small up-front application fee, but the fee should be clearly documented and you should never pay a fee to ‘get the loan’.  Some lenders will call this insurance. There are also some individuals who will charge you a fee and promise a loan but they are not lenders. Generally, other than an application fee with a reputable lender, you should not pay any up-front fees.  
• Your business account will be drafted daily. 
• You are required to move too quickly to fully understand the small print.  

Do the following instead:

Before you need a loan, build a relationship or some relationships with lenders. Get to know them and the types of loans they make, and let them get to know you and your business.  Be honest, ask questions and share any concerns. They can often refer you to resource partners, trainings, events, etc. Don’t be intimidated – you both want your business to be successful!  

Understand your business financials and you will know your financing need.  Don’t borrow more than you need just to have a cushion.  Borrow what you need when you need it and build a cushion from profits.   

Understand your cash flow – this comes from understanding financials well.  Did you know that just by managing their cash flow, many small businesses can generate the cash they need without a loan or with a smaller loan? 

To mind the gap between the lender and the borrower, bridge it with a trusted relationship, knowledge, and financial management positioning your business for profitable growth.  Everyone wins! 

About Deborah Temple

Deborah has more than 35 years of experience in bank operations, lending and CDFI development and management. Her interest in small business development began while working in private banking and turned into a lifelong passion when she joined Southern Bancorporation in 1992 and had the opportunity to focus on small business development in underserved, predominantly rural areas of the south.

As Director of lending for Communities Unlimited she managed a $12 million portfolio that included water and wastewater loans to rural municipalities, small business loans to start, grow, and transition local businesses and small consumer loans.

Deborah is passionate about entrepreneurship and working with providers and partners to provide access to capital and other resources entrepreneurs need to thrive.

Since retiring in 2021, Deborah has continued to engage in and focus on small business development. She has mentored several entrepreneurs, engaged in training events, participates on loan committees, and is currently facilitating the Arkansas CDFI Network where she is working with partners to develop a new financing model for minority and women owned businesses.