fewer covenants, which also helps flexibility.
When it comes to new loans, your first stop should almost always be the loan programs backed by the U.S. Small Business Administration (SBA). Many businesses incorrectly believe they are ineligible for SBA-backed loans – that they’re only for true mom-and-pop businesses. That is most definitely not the case. The best-known SBA program is called 7(a) and provides working capital. It’s effective because it offers loans of up to $5 million, with 10-year repayment periods and interest rates in the 7-8 percent range. And the benefits are even greater now because of the new COVID Relief Act. At present, borrowers will receive a waiver of all guarantee fees – typically 3.5 percent of the loan’s value – and you can get up to $9,000 a month of principal and interest reduction for the loan’s first six months. Even better: The benefit is not taxable. Note that these benefits end on September 30 – or earlier, if funds run out.
One non-financial note: Consider
revamping your product mix for the time being to include non-core products. One food service supply client bolstered its revenue streams by focusing on janitorial supplies. This also ties in nicely with the asset-based line of credit approach.
What to Avoid It’s also important to consider what not to do financially. Unless you’re truly desperate, avoid short-term financing options, such as those involving internet- based lenders. Yes, you’ll get your money quickly, but the interest rates will be so high and the payback period so quick that you risk getting
“If you’ve weathered the storm, you can expect business to rebound (people have to eat!) and even increase over previous levels as new restaurants and food providers
emerge. ”
—Ami Kassar CEO
MultiFunding
caught in an endless cycle of short- term debt. Avoiding high-cost debt in any
structure is always crucial: Cash remains king and allows you to retain optimal liquidity. While low-interest rates are always desirable, don’t obsess over relatively small differences in rates. For example, the asset-based line of credit mentioned earlier might cost a percentage point or two more than the regular line of credit, but that shouldn’t be a deal-breaker because of the added flexibility and liquidity you gain.
And if, despite the pandemic, your company is seemingly sound financially and has good prospects for the latter half of 2021, be cautious when it comes to taking on equity partners. Beware of what I call the Shark Tank myth – that a company must take on investors if it wants to grow.
Entrepreneurs often worry needlessly about debt, but with a proper loan you’ll be repaying it in bite-sized pieces (just think about how your car and home payments are manageable). Say you take out an SBA-backed 10-year $350,000 loan
at 8 percent interest; the monthly payments are $4,200. For most businesses, that’s doable. Remember that if you take on partners, you’re losing control of a chunk of your company. If the newcomers’ views are different than yours, that can become a huge problem. Consider that venture capitalists will want to justify their investment (and quickly) and push for returns of 10 to 20 times their contribution. That just may not be feasible. And it’s not unheard of for company owners to get pushed out of the company they founded. It’s better to instead hold onto your equity in case an exit strategy is needed.
Reasons for Optimism Finally, remember to remain optimistic looking ahead. If you’ve weathered the storm, you can expect business to rebound (people have to eat!) and even increase over previous levels as new restaurants and food providers emerge. Market share increases are possible, too, since acquisition
opportunities should abound. January February 2021 61
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