Ask the consultant: Advice on small-business debt options?

  • Updated: April 29, 2012 - 12:08 PM

question

I work at Lutheran Social Service of Minnesota, and we give free expert advice to consumers regarding personal debt (balancing budgets, debt options, scam avoidance, etc.). We often have clients who own small businesses and need advice on business debt options. What expert advice can we pass on?

LINNEA STEPHAN

LUTHERAN SOCIAL SERVICE OF MINNESOTA

WWW.LSSMN.ORG/DEBT

answer

The debt options available to small businesses depend in part on a.) the legal organization of the business, b.) the availability of assets to be used as collateral and c.) the potential for future cash flow to pay back the debts.

If the small business is a proprietorship, then the owner and the business are legally the same. So you may have to be willing to take out personally signed debts from your bank or credit union that are secured by your own personal assets in order to finance your business needs indirectly.

If your organization is more of a corporation, then asset-based lending might be possible in the name of the corporation. This could include financing alternatives such as leasing an office and other types of equipment rather than buying them outright. Another alternative is factoring (essentially selling) your right to collect on your receivables due from your customers so that you can receive cash now rather than waiting and collecting them yourself over time.

In the end, the best place to start to find the right options is your local banker, who is more than willing to sit down and talk with you.

However, the "secret" ingredient to a successful loan application is convincing your banker that you will have enough cash flow in the future to pay it off. If you can't do that, then debt financing is not for you.

David O. Vang is a finance professor at the University of St. Thomas Opus College of Business

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