In a recent poll, about a third of business owners, 32%, say they will find it easy to obtain credit over the next year. Another 37% said the difficulty of the credit search will be about average.
The optimism indicates a big change in the lending picture. For the first time since 2008, you might encounter banks and companies that actually want to lend you money, based on the poll by
That doesn't, however, mean you should borrow.
Many entrepreneurs I've interviewed over the years borrowed money for their businesses. Most successful entrepreneurs I've interviewed set very clear boundaries on the borrowing.
It's worthwhile being especially cautious in this economic expansion because of the number of new options in the marketplace. Banks finally are opening their coffers again, five years after the financial crisis. But they won't be the only ones vying for your business. There's been a tremendous explosion in alternative sources of credit and banking platforms -- companies include
Some of the new alternative lenders make borrowing feel more painless than perhaps it ought to be. For instance, Square will pull its repayment out of a company's cash flow until the loan is repaid. Similarly, OnDeck Capital's system helps businesses repay more frequently than once-a-month -- you could get used to that, right?
Recognize that if you're an entrepreneur, you may like to see yourself as a risk taker - and that can cause you to take on too much risk.
There are good reasons to borrow money -- and it is a cheaper, though less glamorous, form of financing than taking on angel or venture investors. But in an environment where credit is expanding, it's important to set limits yourself: nobody else is going to do it for you.
• Startup financing. The entrepreneurs I know -- at least the ones who didn't lose their socks on a new business -- often borrowed money at the beginning, using personal assets as collateral -- but they also set a clear time limit on their business idea from the start.
If it wasn't successful within a year or two, they were ready to call it quits. The last thing you want to do is borrow or continue borrowing for a money-losing business. Credit cards have been the vehicle of choice for self-destructive entrepreneurs; now, the question is whether the new alternative lenders -- some call them shadow banks -- will be.
I recently interviewed Marcos Galperin, the CEO of MercadoLibre, the South American e-commerce juggernaut. He started his company in 1999 -- and held on by his fingernails through the bursting of the first Internet bubble. (He had venture investors)
We talked about how you can believe whole-heartedly in your idea, and still give yourself a firm deadline by which you need to call it quits.
"Be hard-headed but don't be stubborn," he said. "When you make a mistake, you need to adapt. Maybe the idea was right, but sometimes, the time wasn't right."
• Investing for growth. It also makes sense to borrow to invest for a long-term growth effort, but the old rule of thumb is that your operating revenues should be twice the amount needed to cover the principal and interest. That means that if your revenues declined by half, you'd still have enough to meet your debt obligations. If you don't think a 50% decline is possible for your business, talk to a business owner like Bates Kennedy, 66. He lost the four largest customers of his company, a manufacturer's rep business in the textile industry, in 1998-1999. The Greenville, S.C.-based entrepreneur borrowed money to buy a new business, a Batteries Plus franchise that he's since grown to 10 locations. But he knows the simple equation of bringing in enough money to cover his costs, his lifestyle and his debt.
"Where people get into trouble is that they're afraid of selling," he says. "Selling is something to be proud of. If you can talk to other people and tell them your story, you can sell."
Entrepreneurs who are emerging now from the last five years of recession will be cautious about borrowing. If you're a new entrepreneur, you might not have the same visceral fear of being in over your head as those who have struggled for air before. But learn from them to set emotional limits on your borrowing before you begin.
