Borrowing Against a Bankrupt Hope

If desperation makes you consider surfing the Web for a last-chance loan, watch out for sharks

By Karen E. Klein

Q: We are a small, family-owned security business and after two years in operation, we have stumbled badly. We need money now, but all conventional avenues seem to be closed to us. Is there anyone who offers loans of $25,000 or less to ailing businesses? -- M.B., Wright City, Mo.


The difficulty in securing financing after a business takes a wrong turn is that lenders will want to scrutinize your financial documents. Since a lender's priority is being repaid, on schedule and with appropriate interest, the loan officer will be looking for a history of success, or at least strong indications of your family operation's potential to turn a profit in the not-too-distant future. It doesn't sound as if your books can provide much assurance that any loan will be repaid.

Turning to a lender specializing in high-risk loans can be dangerous. There is no shortage of unscrupulous outfits that charge outrageous interest, and won't hesitate to make your life extremely unpleasant if payments are late or you default. Many hawk their wares over the Internet and target companies and individuals desperate for quick cash. "Solicitations to loan money are in a pandemic stage," says attorney A. Barry Cappello of Cappello & McCann, a law firm specializing in lender liability.


  Many Internet-marketed loans are real-estate oriented, Cappello says, which likely means any line of credit you obtain will need to be secured with your home. But if you have sufficient equity in your home to use it as collateral, then you can probably get cash from a conventional lender. The big problem is that, if your business fails, you could lose everything -- including the roof over your family's head.

You might have more success with the U.S. Small Business Administration's Microloan Program, which lends a maximum of $35,000 to entrepreneurs. According to SBA guidelines, funds can be used for working capital, inventory, supplies, and other equipment, and loans can be issued at any stage of a business' life cycle. The SBA provides funds to nonprofit community-based lenders, which make loans to eligible borrowers. Applications are submitted to the lender and all credit decisions are made on the local level.

"To obtain a microloan, you will need a business plan that explains what the business is , why the money is needed, and how you plan to repay the debt. It is important that you are able to show that you have developed a good business plan that will help you become profitable," says George Cloutier, founder and CEO of American Management Services, a consultancy offering profit-improvement and turnaround services to small and midsize businesses.


  To learn more about microloans, or to find intermediaries in your area, call 800 827-5722 (U-ASK-SBA). You might also ask about other government agencies, including the Commerce Dept., Import/Export Bank, and Agriculture Dept., which help businesses obtain capital. Look to your local economic development office and/or city hall for information on state and city programs that may be available to businesses in your jurisdiction.

"The most important thing for all business owners to keep in mind is that they cannot finance their way to profitability," Cloutier stresses. You can only become successful through good management, which means micromanaging your business financially and producing accurate and up-to-date statements. Notes Cloutier: "This will allow you to catch problems before they become crises and allow you to better manage your money."

Have a question about your business? Ask our small-business experts. Send us an e-mail at, or write to Smart Answers, BW Online, 45th Floor, 1221 Avenue of the Americas, New York, NY 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.

Karen E. Klein is a Los Angeles-based writer who specializes in covering covered entrepreneurship and small-business issues.

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