Welcome to the difficulty faced by every business owner since Hargem the Haircutter sharpened the first set of rocks and tried to convince someone to help him open a barber shop — so that all the long haired men could have their locks shorn.
Financing of a small business idea is always a challenge, even in the best of circumstances. If you have a banker with whom you can work, you are in the lucky minority. Let’s talk first about why you always want to be searching for additional funding, and then talk about how you overcome the challenge that every business faces: Access to Financing.
The challenge for many of my clients always seems to be that “the lenders”—whoever they might be– want to lend you money when you don’t need it, and don’t want to loan you money when you do need it. Wait a minute—there is really a time that a small business doesn’t need more money?
Let’s clear up that misconception from the start.
Alan’s Small Business Theorem: If you own, dream about, have developed, or are purchasing a small business, you’ll need more money than you have planned for. At least 25% more. Or more.
I’m reminded of the time I was a teenager, and passed my Amateur Radio exam. Up went an antenna. Then I put up a different antenna, then that antenna went even higher. Finally, my long-suffering Mother, probably tired of aluminum antennae and wires in all the trees around the house, asked me, “So, is that antenna high enough?” My answer, which I still remember to this day, was, “No, Mom. They are all still up there. It’s not high enough unless it falls down. Then, it was high enough.”
Small business always needs to be on the hunt for financing. Let me share that again…small business always needs to be on the hunt for financing. And like the antenna story, what you’re seeking is probably never large enough.
Let me share why—better yet, nine reasons why. We’ll call them:
Alan’s Rules for Small Business Finance; or, Why You Should Always Be in the Hunt for Funds
- You never know when great opportunity will strike. Like lightning, it rarely strikes twice in the same place or the same way.
- You never know when you’ll need more money than the current cash flow allows. Wouldn’t you really rather be in the position of saying yes to an opportunity, than asking someone else, “May I, please?”
- You never know when one of your competitors may decide to throw in the towel and leave an expansion opportunity in the marketplace. It’s happening more and more often. Others may not have the same level of tenacity that you do.
- You never know when you’ll need a piece of machinery — or a new vehicle — or a new computer — or to expand your production facility because you just landed a very large order. If you’re a super-salesperson, you know that next big order is just around the corner.
- If you find money available at lesser cost, retire the money you borrowed at a higher cost. Save a dollar.
- You never know when your own cost of funds will increase. (Especially if you hobbled together funds in the first place).
- You know that you’re not at capacity for the business, but you’re a bit afraid to take on more debt. If you just had that extra credit line…
- You know that your employees can do more than they are doing — it’s just a matter of motivation. Maybe pay them a little more?
- Finally, think about this. No matter what you think your business is worth, it’s worth more than that to someone else. Small businesspeople, for some reason, tend to negate the true value of the business they own. It is an occupational hazard.
How do you overcome all these challenges? There are a variety of ways to address them.
- Never be afraid to speak with an equity lender. Often, you’ll find that many people are looking on as you successfully build your small business idea into a reality. They may be envious of the success you have achieved, or they may see working with you as simply a good investment.Equity lenders may be willing to accept a piece of the company — for a long or short term — in return for a significant contribution of cash. Often, equity lenders may be willing to offer collateral against a bank line of credit, putting none of their own money into the deal, but collateralizing your ability to draw against a line of credit when it is needed. It’s great insurance for you, as the business owner, and helps you to sleep better at night, knowing you have a credit line you can draw against, if need be.
- Loans from family and friends are never free, and always have terms attached to them. Although you may end up taking loans from family or friends, it’s a quick way to create dissent; often, you’ll find even small amounts of money interfere with friendship.
- If you need equipment, look at your possibilities for leasing the equipment. Often, you’ll find that the lease offers a more financially lucrative deal to you from a tax perspective; if the lease is structured well, you may be able to write off a significant part of the cost of the equipment on taxes.
- If you’ve scored that huge order you were waiting on, and need to finance it, Congratulations! There are a variety of ways to do that. Don’t just decide a million dollar order can’t be filled. Inventory financing may be an option, or purchase order finance, or even a structured payment stream with the client.
Gaining “Another Set of Eyes”
If you’re a small business and you’ve just closed a deal with a very large business, where one business is significantly larger than the other, you’ll probably want to get some specialized advice from a CPA, an Attorney, or a trusted business advisor or consultant. What you need before committing to any course of action is what I’ve dubbed “another set of eyes.” Another set of eyes looking at the challenge will always, always help you focus more clearly on the challenges at hand.
Charge forth, my friend. And let me assure you of one thing. There are always finance options available for any type of need. Someone will loan you the money, at some price. Don’t ever assume there is just no money available. The decision for you is this: Can you pay what the lender asks?