Retailers, Be Careful Borrowing

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If you’re planning to expand the physical space of your pet retailer and you need capital to do it, a Small Business Association (SBA) loan is an obvious thing that comes to mind.

I know about this; I got an SBA loan once. I owned a small business, and I needed the capital—or at least I thought I
did—so I went to my bank, and they told me they’d do the loan through the SBA.

Hmm. Why would that be? SBA loans exist to help small businesses who would otherwise have trouble getting access to capital, right?

Well, yes and no. The SBA doesn’t lend you money. The SBA refers you to a bank and the bank lends you the money. What the SBA will do is guarantee the loan under certain conditions and up to a certain point, meaning that if you don’t pay it back, the bank can be made whole.

So the SBA helps small businesses mainly by protecting the banks, who would otherwise be skittish about lending to some of the businesses who apply for loans from them. But that cuts both ways. If a bank is nervous about your credit history, your revenue streams or your balance sheet, the concern really comes down to the likelihood that you can’t handle debt and you shouldn’t be taking it on.

In other words, if you don’t qualify for a loan according to the usual standards, but someone “helps” you go into debt anyway… was that really help?

That is all for you, the bank and the SBA to work out. They’re just questions I would recommend that you ask yourself. In the case of a store expansion, the likelihood of growing revenues after an expansion probably presents one of the stronger cases for qualifying for a loan.

But understand: Just because your loan is SBA-backed, doesn’t mean you don’t have to qualify. You do, and there’s no shortcutting the process that’s required.

The SBA shared with me some of the steps that are necessary for small business owners who want to qualify for SBA-backed loans.

They want to see your business case. Just telling them you need more space because your customers are demanding more pet products is not going to get the job done. For existing businesses that want to access SBA-backed capital, SBA lenders need to see a detailed business plan that not only shows how the money will be used, but also how the use of the money is expected to enable the revenues necessary to pay the loan back.

You probably already have a business plan, but you’re going to need to update it to account for this stage of funding. So don’t just dust off the one you wrote five years ago and show them that; you’ll be turned down if you do.

Borrowing more means the plan has moved into a new phase and that needs to be reflected.

They want to know who is on your management team. Why? Because you can have a great plan on paper but the wrong people could mismanage it to the point where all the money disappears. Be prepared to share the backgrounds and expertise of your management team, especially the finance people.

If you’re just a small pet store and you do most of this yourself, then you’dbetter be prepared to show them what
you’ve got.

They want to see your financial statements. Revenue, expenses, profits over time, a pattern of positive growth—
all that is crucial in demonstrating you’ve got a solid, well-run store that will put the loan money to good use.
Oh, and if you don’t have that positive history, then you’d better make a compelling case for how you’re going to put this money to good use to turn it around. But either way, you can’t avoid the need to prepare and present very detailed financial statements.

A business credit report from Dun & Bradstreet is also a plus because it shows you’re responsible. If you’ve already applied for a DUNS number, it’s easy to get a report. If you haven’t, do it now before you start thinking about applying for an SBA loan.

And needless to say, pay your bills so that report is a positive one.

It also helps to do a business valuation so you can give the lender some sense of the value of the store they’re investing in. You’d have to do that if you were selling the store, and the value of your business is just as important when you’re asking someone to lend you money.

Finally, the financial statement should also include a forecast of future growth, along with some solid backing for why you believe the forecast is accurate.

There are other ways to seek financing, of course. You could sell a portion of your business to a new partner/investor. You can crowdsource. You might not think expanding a pet store would be a big item on GoFundMe or Kickstarter, but you would be surprised.

Generally speaking, though, there’s no getting around one fact. You will have to accept some sort of debt-related obligation if you can’t finance the expansion solely out of existing operating revenue. And don’t feel badly if you can’t—most can’t. That’s just the nature of retail.

And having to go through all this, while it surely isn’t fun and definitely wouldn’t be your first choice of how to spend your time, is not a bad thing at all.

It forces you to test your belief that an expansion really is right for your store, your employees, your customers… and
you. A lot of people think they need to grow because it just feels that way, but if that’s really true then the numbers
should bear it out.

By the way, I paid back that SBA loan in full. But I should have never taken it out. The growth I wanted to finance with debt wasn’t really in my best interests, but it wasn’t until I was knee-deep in the process that I realized that.
Maybe a debt-financed expansion is right for your business. Either way, I hope you’re smarter than I.