For early-stage entrepreneurs, funding day-to-day operations tends to be a perpetual challenge. Options range from personal funds, to support from family and friends, to attracting outside investments, to various borrowing options.
For many startups, borrowing may be the most viable course of action. This can be a scary path, but as Nimi Natan, president and CEO of Gulf Coast Small Business Lending, put it, “If they are aggressive, motivated and believe in themselves, it’s often the only path they have.”
Natan started his company as a non-bank lender focused on Small Business Administration (SBA) loans 10 years ago. Based in Dallas, he now has 60 people on staff and has provided more than $1 billion in funding to fledgling enterprises nationally.
For many entrepreneurs with a limited track record, little to no collateral, and tight revenue streams, conventional loans are not available, hence the focus on SBA funds.
“That’s why the SBA exists, to support entrepreneurs who don’t have access to capital elsewhere,” Natan explained. “These are risky, high-default-rate loans, so the SBA guarantee is critical.”
Loans are made by the financial source, but the SBA, as Natan noted, guarantees a portion of the loan, meaning it will pay off the note if the borrower cannot. This reduces the risk for the lender, but not the borrower.
“Entrepreneurs are often so confident in their business plans that they don’t worry about the risk,” Natan observed. “One of the nice things about the SBA program is that it doesn’t require collateral, but the borrower has to have some equity, even if it’s as little as 10%.”
Guy Williams, president and CEO of Gulf Coast Bank, cautions entrepreneurs not to ignore the risks.
“Don’t borrow money if you are using personal guarantees unless you are really confident that you will generate enough revenue to meet the loan obligations,” he said. “Failure to do so can ruin your credit, which could cause problems in the future when you are applying for a job, renting an apartment or buying a house.”
Williams pointed out some other options for entrepreneurial funding.
“In the early stages, there’s nothing wrong with borrowing from family and friends,” he commented. “That’s what they’re there for.”
Williams also noted that “a lot of people use credit cards, but again, you have to manage the payments or risk damaging your personal credit score.”
Lines of credit may also be appealing, but Williams urged caution here as well.
“A line of credit can be a comfort to a business, but you can actually hurt yourself if revenues don’t pan out. A seasonal line of credit is different. If you have a product that sells at a specific time of year, like Christmas or Mardi Gras, you can use the line of credit for supplies and other costs of building inventory, then pay the line down to zero after the season.”
For entrepreneurs ready to pursue a loan, Natan laid out the initial requirements to start the process.
“You need a business plan, a bio or resume, any business tax filings you have, your personal tax returns, and a screen shot of your credit score,” he said. “We will then provide you with a personal financial statement form to fill out.”
SBA loan terms typically range from 10 to 25 years. Amounts are based on how much capital is needed and how projected revenues will support repayment. If revenues are not likely to begin flowing in the next six to 12 months, funds probably will not be available.
While the whole thing can be a little scary, Natan encouraged businesspeople to give SBA loans strong consideration. He and his team provide valuable support to their borrowers, partially out of a vested interest and partially because they genuinely want to help build new businesses.
“Our culture is to see how we can help,” he said.
Williams was also encouraging: “If you have something you have always dreamed of doing,” he said, “go do it.”
Keith Twitchell spent 16 years running his own business before becoming president of the Committee for a Better New Orleans. He has observed, supported and participated in entrepreneurial ventures at the street, neighborhood, nonprofit, micro- and macro-business levels.
