In many businesses, financing is absolutely necessary. For instance, doctors and dentists require a lot of expensive equipment to operate their practices. A trucking company or car rental agency obviously will have to finance their vehicles. If your small business requires any kind of financing be careful. Bankers are a greedy bunch, and you will pay dearly for the money you have to borrow. Not only will the interest and fees be outrageous, but they will also want you to pledge every asset you own to secure their loan to you.

The key to negotiating a good loan is not to need the money. Most SBOs wait until they are in desperate need of cash before they go to their banker. Without batting an eye they sign anything their banker sticks in front of them. They rarely read the voluminous paperwork associated with the loan and hardly ever get the advice of an attorney. Few realize how much power they have given to the cold, arrogant banker who cares nothing about them, but only about the big profits his bank will be making off your sweat.

When I read through commercial loan documentation today I am appalled at how the finance industry is taking advantage of the SBO. Not only do banks require far too much collateral, but it is common now for banks to make a borrower waive all defenses and offsets that they might have against the bank, waive the right to a jury trial, waive notice of default, comply with highly complex financial ratios that few of them understand, provide burdensome financial reporting and documentation, and even sign over the business to the bank before they will make the loan.

Borrowing money today is almost as dangerous as smoking cigarettes or sniffing cocaine. The SBO may not die from borrowing money, but his business could be snatched away from him in a heartbeat. As soon as he signs the big stack of loan documents his future is in grave danger. In fact, I’ve found many, if not most, small business loans are in default before the ink is dry. If you read all the onerous provisions and requirements of these documents, few SBOs could ever comply with them. Consequently, the banker has the power to put you out of business at will.

If you make every payment on time you might be okay, but almost every small business owner has cash flow crunches from time and time. Once your payment to the bank gets behind, your business is in serious jeopardy. Whereas some bankers will cut you some slack, just as many won’t care about your plight and will pull the choke chain and you’ll be out of business.

So what do you do if you absolutely must have capital for your business. First of all, it’s far better to get investors than borrow money. You would be surprised at how many of your friends and family would be willing to invest in your business if you would ask them. Investor money doesn’t have to be paid back and doesn’t accrue interest. This gives the investor financed business a great competitive advantage in the marketplace.

For instance, the publishing business is a brutally competitive business today. If you walk into any major chain bookstore and look around you will be overwhelmed by the number of titles you have to choose from.. The big publishing houses spend hundreds of thousands of dollars to promote many of their front line titles. They have big sales forces and often purchase exclusive use of the prime shelf space in the bookstores.

For someone to start a small press in this environment might seem foolhardy, but it is done every day. The SBO in this case has investor money, or is putting up his own money to finance the business. If he had to borrow money, he wouldn’t last six months because very little revenue comes in during the first six months of operations in this industry. Even after that, revenue growth is slow, so it’s imperative to have a very low overhead.

Those who invest in small businesses are simply betting on the ability of the SBO to make the business a success. Over the years I have helped a number of fortunate SBOs sell their businesses for over a million of dollars. Had these ventures been financed by investment capital rather than commercial loans, the investors would have made a killing. I know of one such investor who has now retired and spends half his time in his million dollar home in Dallas and the other half of his time in his million dollar beach house in Maui.

If you can’t find any investors, try to get unsecured loans if possible. It’s amazing how much money can be borrowed today without putting up collateral. Every week I get applications in the mail for $25-100,000 unsecured lines of credit. If you have good credit so you can do this and not pay too high an interest rate, then that is the way to go.

If you can’t get an unsecured loan, then the next best thing is a loan without recourse. This means your collateral is at risk but the bank can’t come after you personally for any deficiency they suffer. In real estate financing I see this type of financing all the time, particularly by life insurance companies. If the bank is anxious to make the loan they might agree to do this if you ask for it. If they say "no," thank them and keep looking. When they see that the non-recourse financing is a deal-breaker, they might change their mind. If not, you're better off to keep looking.

You should always try to avoid personal guarantees. If your business is doing well and has accumulated assets, then it should be able to borrow money on its own financial statement. Why should you have to risk every dime you’ve earned over the years? Don’t give in to your banker's insistence that you personally guarantee every loan.

Preparation for obtaining a loan is very important. Before you apply for a loan, you should get with your attorney and set up what I call a defensive estate plan. What this means is that you structure your assets in such a way that they aren’t vulnerable to all the predators lurking about who are looking for an opportunity to take them away from you. This is done by setting up a living trust to provide you with a little privacy and a layer of insulation from your predators.

A living trust is simply another legal entity which you control that holds most of your assets. One of the great advantages is the privacy that it provides both while you are alive and if you or your spouse should die. When you give someone a financial statement, all you have to disclose is the value of the living trust ownership interest. There is no requirement that you itemize each asset held in the trust. People may ask you to disclose the trust holdings, but it is your option whether or not to do it. My recommendation is to hold your assets close to your vest. The less the rest of the world knows, the better.

Once everything is in your living trust, it then sets up a family limited partnership. A family limited partnership is simply a limited partnership of the SBO and his living trust, or sometimes a corporate general partner and the SBO’s living trust. The FLP, as it's called, provides additional privacy, some tax advantages, but most of all, asset protection. This is because most limited partnership statutes do not allow a creditor to seize assets from a FLP, but only to surcharge the partner’s interest. This makes it very difficult for a predator to successfully steal assets from an SBO.

Once you have set up your defensive estate plan, you’ll want to keep your financial affairs private and only tell lenders as little as possible about the assets you have. Remember, your banker will want every asset he knows about as collateral. You have no obligation to tell him what is in your FLP because it is not borrowing the money. If the banker won’t lend you what you want without knowing what’s in the FLP, go to another bank.

The key to getting a loan on your terms is not to be desperate. Be prepared to walk away if the bank isn’t willing to make the loan documents fair and reasonable. Don’t agree to guarantee the loan and only give them a reasonable amount of collateral. If the lender wants to make the loan, they will bend to your will. If they won’t be reasonable, find another lender.