Chase’s Lame Attempt to Help Small Business

You’ve seen the commercial about the guy who calls his credit card company and the phone is answered by Peggy, who is actually a middle-aged man.  He’s in a small office – in the middle of Siberia – and is surrounded by many Soviet-style phones. When he gets a call, he can only introduce himself and say “yes” to every question.

Well, I had a similar experience yesterday with my bank.  First of all, they messed up on some transfers on my accounts.  And then they tried to sell me a new credit card.  I said, “But I already have three.  I’d rather just have two.  But if I do this, will it hurt my credit rating?”

The customer service rep just talked about the benefits of the card and never addressed my concern.  I asked several times but he just kept to the script.  I was talking to Peggy.

I’m obviously not alone.  Unfortunately, this mess is actually a big problem for small businesses.  Can a big bank really understand the needs of its customers?

Just take a look at a recent program from Chase.  It attempts to provide incentives to small businesses to hire more employees (Read more here:  http://investor.shareholder.com/jpmorganchase/releasedetail.cfm?ReleaseID=483977).  Essentially, if your business is approved for a Chase line of credit, your interest rate will be 0.5% for the first three people hired.  This is supposed to show that the company really, really does care about small businesses and restoring the US economy.   

But it doesn’t.  It’s really a pathetic attempt at PR. 

According to the Chase press release:  “a small business owner could save about $4,000 over three years on an outstanding balance of about $65,000.”  Really?  Let’s assume that it involved hiring only one new worker, who will be putting in 30 hours per week at $8 per hour for the year. Even for that relatively small contribution by the employee, the business would still be paying that worker $11,520 for the year.  Therefore, what incentive does this program actually provide to a business in this economy?  In the end, the business is still raising its costs. 

Maybe instead of using such useless programs, Chase should do something more innovative.  Hey, why not hire employees itself – so it can better help customers.

Securing an Unsecured Loan

If you have lots of assets — like real estate, stocks and so on — it is usually pretty easy to get a loan.  The bank will simply have you use your wealth as collateral for the loan.  So, in the event of a default, there should be enough coverage.  Of course, you may lose your home and retirement fund.

But what if you are not wealthy?  Actually, you may have already put much of your money in the business.

Well, one idea is to look at an unsecured business loan.

It should be no surprise, but there are some hitches.  Don’t expect to get $1 million (unless your business is large and thriving).  Actually, a typical amount would be $10,000 to $25,000.  But some small businesses may get as much as $100,000.

Oh, and expect to pay higher interest rates.  And the term on the loan is likely to be shorter than one that is secured.

Yet an unsecured loan can be extremely helpful.  If you have uneven working capital, then you will have more wiggle room.  Also, if the worst-case scenario does happen, your personal assets won’t be taken away by the repo man.

So why will a bank take a leap-of-faith with an unsecured loan?  First of all, the profits are juicy.

But perhaps the main reason is that a bank will only extend an unsecured loan to someone who meets certain qualifications, such as a good credit history and a business with a decent track record.

A Loan Is Not Just A Loan

While Congress has made attempts to loosen up the requirements on Small Business Administration (SBA) loans, the paperwork can be torture.  But of course, our mission at MultiFunding is to be the ally of the business owner, so we’ve done lots of the grunt work to make the process much smoother and understandable.

The most common SBA program is the 7(a) loan. (Yes, yet another code section!)  It’s a versatile program, allowing for new loans or even the restructuring of existing debts.  A typical loan has a term of ten years but it can stretch out to 25 years if you own an office building.

OK, what is restructuring?  Think of it as debt consolidation.  Granted, it has a negative connotation for consumer debts.  But in the business world, consolidation is just another way of doing business — and it can be quite effective during recessions. (Just look at how many times airlines consolidate their debt).  You will effectively be able to lower your debt payments, which means you’ll have more cash flow for the operation sof your business.

If you’re looking for a new loan, the timing is good.  The typical rate is only about 6%.

You can get anywhere from $250,000 to $2 million in a 7(a) loan, depending on your business plan, collateral and growth prospects.  In fact, there is legislation pending in Congress that will likely increase the amount of money available under this program.

Although, since banks want to get repaid on their loans, their main focus is on collateral.  For a small business owner, this includes real estate, stocks/bonds and inventory.

With Business Loans, Don’t Wing It

If a Fortune 500 company called you up and asked you to put together a proposal, you would probably spend tons of time preparing.  You would analyze the company, understand the competitive environment and figure out strategies to get the business.

Yet, when it comes to getting a business loan, business owners often fail to have this kind of zeal.  Maybe the reason is that the prep work can be boring, tedious and technical.  Another reason is that it may not be fun to look at your business in a realistic way.  What will the banker find wrong?

But, in the current credit environment, you need to do a tremendous amount of prep work for even the smallest loans.  Simply put, banks have tightened up their lending standards.

For example, you need to have a strong business case for the loan.  How will the extra money grow your business?  Do you have it modeled on a spreadsheet, which includes different assumptions?  Have you found the most cost-effective ways to get your supplies and materials, such as through craigslist?

This kind of planning certainly takes lots of work.  But keep in mind that this is the kind of stuff that all successful businesses need to do.