Despite a push to increase small-business lending, it is still very difficult for small companies to get traditional loans from banks. That fact has many small businesses looking to less traditional means to finance their business ventures; however this trend could land some start-ups in financial straits.
A recent survey by the National Small Business Association found that a third of firms can't get adequate financing. Many small-business owners are just treading water. "The situation has become acute," said Jerry White, executive director of Southern Methodist University's Caruth Institute for Entrepreneurship. "I see quite a few people who are just getting by. It takes persistence and a little creativity, but the serious players are figuring out how to survive."
Unfortunately, many small businesses are "surviving" by using their credit cards, cashing out their retirement accounts, taking out home equity loans and using unknown and often unscrupulous online lenders. Business owners considering alternative financing should consider the following risks:
- Using your personal credit cards to finance your business is very risky. If you default on any credit card loan used to finance your business it may prove difficult to discharge that debt in a personal bankruptcy. While Chapter 7 bankruptcy allows the discharge of "personal" debt on a credit card, it may not allow you to discharge debt incurred for business reasons.
- Cashing out your retirement account to finance a business is putting your future at risk. Even if you file bankruptcy after a business fails, the retirement funds you cashed out may not receive protection because they are no longer in your retirement fund account.
- Using obscure online lenders may expose your to exorbitant interest rates and unreasonable lending terms. Please take the time to carefully review any loan documents given to you by online (or offline) lenders before you commit. Not carefully considering loans (especially equity loans) could put some of your most important assets at risk.
Remember, business owners strolling to pay debt can file Chapter 11 bankruptcy. If you are a small business owner who is battling mounting debt, you may want to discuss your bankruptcy options with a bankruptcy attorney.