MBA2414 Q&A Wednesday: Are there any short term loan options to get us over a hump?

0:08Heyo! Welcome to the$100 MBA show because your business needs you at your best. That's why we deliver practical business lessons. I'm your host, your coach, your teacher, Omar Zinhome. And today is Q &A Wednesday where we answer a question from one of you, one of our listeners. Today's question is from Justin. And Justin asks, are there any short-term loan options to get us over a hump? We're in a bit of a tight situation with our business and need a small but short-term loan to get us over this tough situation. Do you have any recommendations, any advice? Thanks. Justin, thanks for asking the question.

0:45By the way, if you want to ask a question, just go ahead and email me at omar at 100mba.net. I'll make sure to answer right here on Q &A Wednesday. And I'm very happy that Justin asked this question because of what it tells me. I have seen this so many times, not only in my own business, but in businesses of my own friends, colleagues, other entrepreneurs that I've helped. And the situation might seem pretty innocent, pretty normal. Businesses go through tough times. How do we weather the storm? Can we weather it with just a short-term loan to get us through this hump? But in my experience, nine times out of ten, this is a huge red flag.

1:24And getting a loan is going to make the situation worse. So in today's lesson, I'm going to give my advice to Justin on what to do in a tight financial situation. What are some alternatives? What are some ways to get around this and survive and get through this tough time? And just in case Justin's one of those 10 % people, people that actually can make good use of a short-term loan, I'm going to give a few options there as well. Let's get into it. Let's get down to business. One of the things I talk about on the show a lot are margins. You've got to have good margins in your business. Great if you can.

1:59Because these margins are going to save you through tough times. The business, your business, your market, the economy is never going to be the same. It's going to go up. It's going to go down. It's going to kind of live in the same place for a while. And your margins are what are going to allow you to weather all the storms. When you make significantly more than what you spend, that surplus, that profit is what allows you to have a safety net and allows you to have a bit of runway, allows you to kind of dip into your own bank when things are tough, when you need to get over a hump. Too many businesses, too many startups try to spend every dollar they make.

2:38They think that they need to grow at all costs. They think that if they have any profit, any margin at the end of the year, that's a bad thing. I should have spent it. No, it's okay to have profit. In fact, it's the whole purpose of a business. I start here because this is the position every business should be in at all times. They should be in the plus. They should have margins. They should have a rainy day fund because believe me, it will rain. And you don't want to be in the position where you're hat in hand, where you're desperate for a quick influx of cash to keep your business going. This is not a good position to be because it's very hard to get money when you need it most.

3:20That's just how the world works. That's just how banks work. That's just how investors work. That's just how it works. When you don't need the money, they're happy to throw it at you. And the reason why I'm talking about profit margins and having a healthy business and having some rainy day fund in the bank is because when your business is healthy and things are great, and I'm sure at some point Justin's business was in that position, this is when you think about how do I get a loan? How do I get money short term if I need it? And in this position, this is when you go to banks and you say, hey, look at my business.

3:56Look how good it does. Look at the margins. Look at the profit. look at the cash flow, the revenue stream, they're going to be like, this is great. How can we help you? We'd love to do business with you. When you're in a healthy position, you can ask the bank for a line of credit. This is kind of like a virtual credit card where you can take money from the bank, borrow it and pay it back. There'll be some interest, but you don't have to touch the line of credit. Just having the line of credit is good to have. Why would you touch it in the first place if you have the rainy day fund, if you have profits, if you have money in the bank?

4:29But the line of credit is your insurance policy. It's the loan waiting for you whenever you need it. And many banks are happy to give businesses lines of credit and pretty healthy ones. Now, I'm saying this because if you're listening and you're not in Justin's position, you're actually doing okay and your business is doing all right and you're making profit and you're, you know, maybe even just have good cash flow and the business is running well, this is the time to ask the bank for a line of credit. Don't ask for a loan. You don't need the money right now because you don't want to be paying payments.

5:03You just need to have the accessibility to borrow at any time. So whenever somebody asks me this question that Justin asked right now, what do I do? I need cash quick so I can weather this storm right now. My first response is you're thinking about this totally wrong. Your number one goal right now is to get back to the profitability space. Why do you need the money? What are you spending it on? Is it just you're running costs? If so, it's time to cut. This is painful, but you know what's really painful? Your business going out of business. Your whole goal should be to get to the point where next month you're making a profit.

5:43You are in a healthy position. So this means looking at every single thing your business spends money on, office space, employees, vendors, suppliers, everything, okay? Look at every deduction that happens on the bank account, the card, whatever, and everything is up to negotiation. First thing you do is you go to your vendors, you go to your suppliers, the people that supply whatever you need to provide your product or service. If you're in software, that might be Amazon Web Services or it might be software subscriptions like help desk software like Intercom or email marketing software or whatever it might be.

6:25If you're in the physical retail space, it might be your rent. It might be your electricity bill. It might be the person you buy your products from or buy the supplies to make the products. You've got to go to your vendors first. Why? Because they have your interest in mind, meaning when you win, they win. If you stay in business, you continue to pay them. If you're out of business, they lose a customer. They don't want you to lose. So it's in their interest to work with you. So you could just go to them flat out and say, hey, I need some relief. Can we work something out? Can we discount my rate?

7:05Can we get me on a better plan, on a better service, negotiate a better contract? The first line of defense should be lower the amount of money you spend with them. Get a discount. If that doesn't work, maybe you can commit to a longer term, like I'll commit to the next year or two, but have less to pay every single month. This is sort of a form of a discount, but you're actually giving something up as well, that flexibility and freedom. But that's fine because you're going to be spending less. If all else fails, ask for some payment plan, some grace period. So for example, let's say you have some big bills you got to pay.

7:43Say, hey, can we break up these three bills into six payments instead of three payments? And you're going to do this with every single vendor. OK, next, you're going to go and look at your workforce, your employees, the people that you work with, your team. This is often the most expensive expense on your P &L. Now, you don't want to fire people or let go of people or lay off people unnecessarily, but you need to make sure that everybody is pulling their weight to make you money, to bring you out of this slump. If there's somebody on the payroll that is not directly contributing to your bottom line, to you bringing in cash, you're going to need to let them go.

8:25It's that simple. If they're not making you money in this situation, this equals them losing you money. And this is hard. This is why entrepreneurship is hard, because you have to do hard stuff like this, where you got to make hard decisions and say, hey, this person is just not making the business money right now. I can't afford to keep them on the payroll. You can ask them to take a leave of absence with no pay. You can ask them to take a break, a sabbatical or let them go altogether. This is tough, but you got to do it to keep your business afloat. I want to stop for a second because I know we're talking about some tough stuff to do, but the reason why this is tough is because we're going to make some changes so that this is not a temporary fix.

9:10This is a permanent fix, a long-term fix for your business. I don't want you to be in this situation again in three months, in six months, a year from now. Oh, I need another loan. I need another investor. I need some cash to get me over this hump. No, we want to get the business in a position where it's very healthy, it's making great margins, and your costs are down. Lastly, you want to look at the things that you just don't need to run the business. Things that might be kind of nice to have, but you should just cut out for now. This could be perks, company cars, maybe some fancy stuff in the office.

9:44This could be even retreats and sabbaticals and types of big parties and get-togethers you do with the team. Get your team together and say, hey, we're in a crisis. You've got to get them involved. You've got to tell them the truth so they can be alert. They can get to get your team together and tell them the truth. We're in a crisis. We need to work together. It's in their best interest to know so they can be alert, so they can work harder, so they can help you get out of this hump or get out of this slump, I should say. But the point here is get them involved. Don't try to protect them and not say anything and say there's going to be some cuts.

10:21We're not going to have Pizza Fridays anymore. We're trying to save money here and there so that we can weather the storm. Be transparent, be honest, and work together. Now we talked about expenses. We've got to make more money. We've got to bring in more money. Because yes, you could breathe a little easily when you're spending less, and maybe you're at the profitability margin right now, but let's get real comfortable and make a bit more money so that we can have more of a margin and more profit. Go to your best customers, ask them to commit for the next year, charge them up front. Cut deals with the people that love what you do.

10:57Give them extra services. Sell them extra things that they might need. Provide additional products or solutions. This is not a time to spend on creating something new or building something from scratch and trying to sell it to them. No, sell them existing things that they may need or more of the same. If you have a reoccurring subscription, whether it's a course or community or a software, if they're on a monthly plan, give them a good reason and incentive to upgrade to annual, whether it's a discount or bonuses or whatever, so that they can give some money up front and get you through this situation.

11:37now with all the things i shared with you the strategies the techniques the tough stuff you got to do this could help you get through this situation and relieve you a little bit of the tightness of you know the hump that you're going through but again the plan here the whole point of this is so that we don't have to go through this again we want to make permanent changes in our business to stay profitable we cannot we cannot we cannot fall into bad habits we can't keep spending when we don't have the money. We can't continue to invest in things that don't bring us a return. Business is about making a profit.

12:10I can't say this enough. Too many people are trying to fulfill some fantasies, some dreams, some goals about their business, which is fine and all, but if it doesn't make you money, it's going to kill your business. This is the thing. Cash is oxygen to a business. And if it doesn't have the cash to pay its bills and then some, because things will go up and down, like we said, then it's not going to survive. Now, there are some situations where you just need an injection of cash, or maybe you've already done all the cuts and you can't cut any more, and you need a short-term loan. Here are the options I recommend.

12:45There are some business-focused loans that are 12 months, 24 months maximum for small amounts, 20, 30, 40,$50 ,000. They may be available, but they'll be at a very high interest rate, especially now. You've got to be careful about the terms of this loan. Who's liable if you can't pay the loan? Are you liable personally or is the business, whatever the business goes out of business, are you good or will you be liable personally? Often you will be liable because of how easy these loans are to get. They're very quick. And usually the person that signs up for it is on the hook. Be careful. My recommendation, do not sign up for these loans if you're personally liable.

13:24It should be tied to the business only. Another option that a lot of people don't like to do, but it's probably the best option if you need cash quick and you want it on good terms, is friends and family, is investment from friends and family. Give them some stock, give them a percentage of the business, or give them some revenue share and pay them back or pay them with some incentive, with some interest as you recover. You'll be surprised. People really don't know how much money people have. You'd be surprised. You might have a friend, an uncle, a relative that has some savings that is willing to invest in you.

13:57They're not really doing it in and maybe they always wanted to start a business and this is our chance for them to be behind something they believe in. You'll never know until you ask, okay? This is a very practical way to raise some money for your business because going the traditional raising money from angels or investors or whatever, this takes much longer. It takes a bit of time to pitch and to have offers and to negotiate. And right now your business is not gonna evaluate very well because you're in a tough spot, you're desperate and you're going to have to give up some major equity for any kind of cash.

14:30And any outside investor outside of family and friends is going to want a huge upside, meaning they're going to want a big percentage if they're going to give you money in this situation. Because if you do get out of this situation and you are successful, they want a good return. Lastly, I would always go to your own business bank, the bank you do business with, with your business. If you've been in business for some time and you have a good track record and you have a lot of transactions going through your bank account and you're just hitting a rough spot, they might have something, a solution, a loan that might help you out.

15:07Often in times of economic crises or downturns or COVID relief, all that kind of stuff, they'll have special kinds of loans for those situations that can help you out short term. So always go to the bank, the people that you do business with anyway. They've made money off you over the years. They may want to do so again and again and again in the future. So it's in their interest again to help you out if they can. But I only recommend this option in conjunction with the first option of getting to the profitability line, cutting your expenses, increasing your revenue, and breathing a little bit with your business.

15:45Listen, business is hard and stressful as it is. You don't want to add more stress by adding the financial component, financial stress component, I should say. This makes things very difficult for you. It makes it very hard to make decisions. It makes it very hard for you to be creative, innovative, helpful, and just fun to be around, okay, to work with. This is why I rather run a business that's doing, you know, 10, 15 % in margins and profitability and is growing maybe at 5 % or 10 % a year. Explosive 100%, 200%, 300 % growth is really risky because you're constantly spending money and pushing the margin to the maximum with no regard for the rainy day.

16:28Like the tortoise and the hare, slow and steady wins the race. Thanks so much for listening to the$100 NBA Show. And thank you, Justin, for asking this question. If you've got a question you want to ask here on Q &A Wednesday, go ahead and email me at omar at 100mba.net. and I'll make sure to answer it right here on Q &A Wednesday. Before we wrap up, if you have not followed or subscribed to the show, go ahead and do it right now. By doing so, you get our next episodes automatically and you get access to over 2 ,400 business lessons in our archives. Also, by doing so, it's the best way to support the show.

17:00So whether you're listening on Spotify right now or Apple Podcasts or Overcast or any other podcast app, make sure you follow the show so that you tell that algorithm, hey, this show's all right. Before I go, I want to leave you with this. Slow growth, profitable, calm businesses are not exciting. They're not newsworthy. They're not sexy. They're not making headlines. But they are the best businesses to run because the stress levels are low. They're predictable. They're easy to manage. And everyone wants to get involved. Investors, banks, suppliers. Everyone loves this type of business because they know they're winning.

17:35They have a track record for it and they have profitability. So don't get distracted by these few businesses that make the headlines with explosive growth. They're anomalies, okay? And many of them don't see past year 4, 5, 10. They go out of business. They don't make it. They have trouble. We've seen it recently with WeWork and Airbnb. You don't have to look far, right? So when it comes to the numbers, being sensible, being overcautious, saving for a rainy day is the new cool, okay? Is the new exciting. Thanks so much for listening, and I'll check you in Friday's episode. I'll see you then. Take care.