The old axiom is true: you can only get money when you don’t need it. Cash flow or more specifically the lack thereof, kills more businesses than anything else. Start-ups often launch with far less than they really need to be successful, so struggle from Day One. Small businesses are generally family based and family money is patient money, but most usually inadequately finite.
In real life this comes at us in different forms. For instance many local contracting companies I know are very successful and sharp operators, however are unable to grow their business in the way that they could or would like to, because they have reached the limits of their bonding capacity and cannot bid on any new large contracts AND would in any event not be able to fund the payroll and project expenses till they can get the cash flowing to sustain it.
A tip to remember: It never hurts to ask if the project team is prepared to work with you by breaking the contract up into sections that you can cover with your current bond capacity. Especially if you are the vendor of choice, I have seen contracts secured in this manner.
As a strategic move however, you need to be looking to secure adequate funding to cover the eventuality of an adverse event and your future needs not only just today’s.
The good news is that the Internet has commoditized just about everything you can think of – including banking. Despite (or maybe because of) the poor economy, the process of finding traditional as well as alternative sources of funding is now easier than it used to be. Securing a loan is the big trick!
Funding is either debt or equity based and drawn from institutional or informal sources. As a consequence of recent lending experiences, institutions are generally looking for tangible assets as collateral and even then are extremely cautious in their approach.
Common sources of debt finance include: family and friends, personal credit cards, home equity lines of credit, commercial bank loans and small business loans backed by the SBA.
Equity financing, is where you give up pieces of your business in return for cash. Depending on how the loan is structured, you may not have to pay the money back, but the bad news is that your investor now owns part of your business. Venture capital investors will generally want to cash out on a schedule, which puts pressure on you to perform at least to budget.
Other ways to free up cash might be to explore cost-sharing options. These might include strategic partnerships, joint ventures, alliances and co-branding arrangements. Don’t discount vendors and customers as a source of funding. They already have skin in the game if they are doing business with you. The only question you need to ask yourself is: how they will react to your circumstances if they truly know how well (or poorly) you are doing?
Comparison shop online for multiple financing sources
If you are fortunate to have good financials – it will pay you to secure a line of credit even if you don’t need it now. If you take a line of say $100,000 (with no fees) and use it modestly, you will demonstrate to the bank that you can borrow money and pay it back responsibly. You can then work to increase the facility over time. If you do not then you still need to build a good relationship with your banker so you will be able to hit them up when your financials turn for the good.
Don’t discount you local community bank. Local banks like Parkway Bank offer great personalized service and will take the time to get to know you and your story.
You can also shop loans through internet resources such as www.iBank.com, www.resourcenation.com or www.businessfinance.com. Many small Peer-To-Peer (P2P) loans are available and sites such as www.lendingclub.com, www.prosper.com or www.peerlend.com.
For all of these sources, you will need to make sure that your “Pitch Deck” is solid and impressive. You will need to
- Create a solid and comprehensive business plan.
- Have realistic, achievable and well articulated goals
- Document why the business needs financing, and how much is needed and on what schedule, to reach a specified level of growth and profitability.
- Take a personal, financial stake in your business. If you want others to back you and your ideas, be prepared to ante up yourself.
- Your personal credit profile should be in tiptop shape. Most lenders now use this as a loan criterion.
- Create basic financials on how you are doing. Most lenders want to see 2 years of operating history.
- Don’t worry if you aren’t looking wonderful. Investors know that if everything were perfect, you wouldn’t be looking for money. Most importantly – you need to know where your revenue and expenses come from and go to AND how this will change in the future and under high road and low road scenarios.
- Have a good understanding of any discretionary income and benefits you are running through the business. This generally makes a huge difference to a small business and the first thing your bank or investor will want to do is to normalize the P&L by taking out you personal benefits to see what the true potential of the business is to generate cash that can be used to repay the loan.
- Lenders are likely to ask tough questions, be skeptical of your answers and have little patience for running off at the mouth. Your best step is to be totally prepared and comfortable with your plan.
In a nutshell, know how much you’ll need and how you’ll use it. It’s critical to estimate how much money you think you will need overall and what you plan to do with it. All good lenders or investors will want to know this.
Lastly, a word of caution. Applying for too many loans, over a protracted period could hurt your credit score. While the upside is definitely there, you do not want to create additional problems, so proceed with caution and probably the main thing to avoid is making this a drawn out process.