The ins and outs of access to capital for small business.

It does not matter how much of a higher purpose you ascribe to your goals of going into business for yourself, ultimately you hope and expect to make MONEY. You will quickly learn that it takes money to make money. Whether it’s your money, invested capital, purchased money, or a loan, you cannot generate a dollar until you have put some in.

This represents a real paradox for some groups of entrepreneurs. In the Black community in particular, family wealth is extremely limited. According to the Federal Reserve 2019 Survey [of Consumer Finances], “Black families' median and mean wealth is less than 15 percent that of White families, at $24,100 and $142,500, respectively.”

This means that if you are an aspiring Black business owner, access to capital may be a real barrier to entry. Lack of access to capital also creates a barrier to sustaining, scaling, and pivoting your business whenever necessary.

Getting the money you need is not easy, and making the wrong choices about what money you do get can slow your progress, or in the worst-case scenario, tank your business. At the end of the day there really is good money and bad money. So, what is the difference?

There are several definitions of good money (and conversely bad money). The definition that I want to focus on in this article is that good money is money that comes from reputable, reliable, reasonable, safe, and understanding sources.
It will not create greater problems by severely limiting your cashflow or future profits, it’s a reasonable expense, and it does not create undue pressure on you, your partners, or the business.

So how do you know investors, small business loans or other sources of capital you’re receiving meet these criteria?

1. Reputable: Well-known or regarded. You can do the research and know that this source of funding is a good business 
2. Reliable: Will come through in a realistic timing with a fair proposal. Is responsive and does not leave you wondering about next steps 
3. Reasonable: Has terms that take into account what you can afford 
4. Safe: Will not come after you or your family to get paid back if things do not work out 
5. Understanding: Willing to work with you on repayment. Recognizes that things can change and will not force a hard line

The Covid-19 pandemic is a useful and real-time case study in what it looks like to identify good money in a time of need for your business. In this scenario, good money would come from sources like the CARES Act/Covid-19 Grant or other federal, state, or charity-related pandemic-related relief. There is universal recognition of the financial devastation of the pandemic. Capital from these sources typically comes with:

• Low interest rates of 4% or less
• Extremely reasonable repayment terms including sometimes no requirement to repay
• Rarely include personal guarantees
• Substantial amounts, enough to support and/or sustain your business

While opportunities to access good money are attractive and should be pursued aggressively, small business owners should be aware of additional barriers to access.

• Organized Financial Records: A big blind spot for many entrepreneurs. Failure to consistently record cost and revenue can lead to an inability to discuss these details with a potential lender or investor. Get a good bookkeeping software (I like QuickBooks) or hire a bookkeeper to manage your business finances.
• Competition: Access to  capital is often extremely competitive – especially for grants. When it comes to standing out from the competition, the narrative of your business and yourself as an entrepreneur is imperative. Anyone reviewing your application needs to be sold by a compelling story.

Now is a great time to really think about your story and reason for going into business for yourself. Think about what makes your business narrative special, because effectively communicating that narrative is a major key to winning grants and other forms of capital.

Now that you’re armed with the knowledge to pursue good money vs. bad money, you must be wondering where to go to identify potential sources of capital. Below is a list of links worth checking out. Find one that makes sense for you (women focused, Black focused, etc.) and keep tabs on their programs/offerings:

Covid-19 Relief:

• Paycheck Protection Program:
  • Most banks offer this program, but if you cannot gain access through your bank, try your local CDFI – Community Development Financial Institution. CDFI’s are local community focused banks and/or lenders who have been given specific funds by the government to give to small business owners. Find them through a simple Google search or check out your local Small Business Center, Local Business School, or local Chamber of Commerce for leads.
• Economic Injury Disaster Loans (EIDL):
  • The EIDL program is designed to provide economic relief to businesses that are currently experiencing a temporary loss of revenue due to coronavirus (Covid-19).

Aggregators: Sources that put together lists of local or otherwise specific grants

• https://blog.helloalice.com/
• Your local Chamber of Commerce website

Other sources worth considering:

• Home or Investment Equity Loans or lines of credit: Be careful. It is your money, and you may want to use it but be careful not to put all your eggs in one basket. Decide how much or what percentage of your equity you are willing to risk and avoid increasing that number even if things do not go well.

So, with that, you have got some good places to go right now to get financing. But there are some places I highly recommend you stay away from. Here it is, the Bad Money!

• Any kind of factoring program: Factoring is a financial transaction in which a company sells its receivables to a financial company (called a factor). The factor collects payment on the receivables from the company’s customers.
• Balloon payment loans: A balloon payment is a payment that covers the balance of a loan at the end of a loan term. It's usually much larger than the earlier payments on the loan — creating a debt that you may never be able to solve.
• Hard money – money from lenders on whatever terms, where you know the lenders will take an overly aggressive, unforgiving approach to getting their money back.
• Microloans - Loans that are too small to create the impact you “REALLY” need (as projected by your financial records). These ultimately just kick the can down the road, but now with more debt and a deeper hole.

Reputable, reliable, reasonable, safe, and understanding. Gauge any prospective funding source by these criteria to help identify the good money and steer clear of the bad.