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Listen in! Pick up some expert advice to a reader's question that we selected from CyberSchmooz.

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Featured Biz Question

Hi, I've been in business for 11 years. I started with 80 bucks in the basement of my apartment and now have a beautiful 4,000 sq. foot design showroom stocked with $200,000 worth of inventory, a solid customer base, awesome employees(3) and I love everything about my business. I'm not bragging, I'm insulted. I have an idea for expansion. I have spent three years researching it and have moved it into the test market phase and it looks extremely profitable. I just got turned down for a loan by the bank. My credit report is clean. Yes, I have two lines of credit that are maxed this time of year, and one small long-term loan I took out a couple of years ago to expand the showroom. I just can't express how defeated I felt when "Mr. Potter" told me he didn't think I was ready for this and that I should wait another year. No offense, but what does he know? Has he ever been responsible for the wages of others? Has he ever had an original thought for that matter?

Sorry to sound so bitter, but $#@! I've worked my kiester off and am proud of what I've built. He also said that because my tax return for last year showed a small loss that it didn't reflect well on my cash flow position. What business doesn't want to show a small loss at the end of the year? I thought that's what we pay accountants for! What do you think? Am I misguided or is he really a descendant of the original Mr. Potter?


Answer from our Guest Expert Peter Hupalo of Hupalo Ltd.

Hi, Sandy,

First of all, be proud of what you've achieved! Starting with $80 and building what you've built is no small feat! However, don't be insulted by your banker. He's just doing his job. I may believe in miracles (especially around the holidays), but I don't believe banks will loan money to start-up companies. I know, you've been in business eleven years. But that doesn't matter from the bank's perspective. You're trying something new. That makes you a start-up with an uncertain outcome.

Now, if you went to the bank asking for more financing to do more of the same thing you've been doing successfully in the past, that's one thing. If you went to the bank for gap financing to cover a cash-flow crunch -- where there's collateral and a high certainty of future incoming cash flow (from credit sales coming due, for example) -- that's another thing. But! When you want to grow in a slightly new direction, well, that's another whole ball of wax! It's more risky, and banks don't like risk.

So, your loan's rejection is quite common and you're not alone! Plenty of other entrepreneurs are in the same boat. Try to look at it from the bank's standpoint. Suppose they loan you the money and you succeed with a new idea or expansion. You might become very wealthy, but what happens to the bank? It just gets its money back with a competitive rate of interest. There's no significant compensation for the extra risk the bank is taking.

Without significant financial upswing, the bank must aim for near 100% survival and repayment of its loans. From the bank's perspective, they'd rather loan this money to a couple who's worked for the government for ten years (a more stable and assured cash flow than nearly all small businesses) and wants a loan to buy a new home than give you the money to try something slightly new with your existing business. It's purely objective risk-reward analysis, although it never feels that way!

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About the Expert

Peter Hupalo
Owner of HCM Publishing, Inc.
Peter investigates the latest computer-programming technologies and researches companies for investment. He also writes a column about entrepreneurship and small business for and reviews biz books. Peter wrote Thinking Like An Entrepreneur, about how to make savvy business decisions and take real control of your financial destiny. more