When You Get There: Business Funding

Once you have a plan to show you where you’re going, how do you know when you get there?

By now, there will probably be certain people who will have dropped themselves from the ranks of the target audience for this article series. Those are the folks who are using a home-based occupation simply to pull in a few extra dollars but who are not necessarily interested in operating a growth oriented business. Perhaps they have other priorities, or perhaps their home-based business is secondary income and they want to keep it that way. As long as they are making enough money to make the business worth their while, and have enough business to keep themselves reasonably busy, they are happy.

But there are other people who do want to grow their businesses. They may have to start small — doesn’t everybody? — but they envision themselves at the helm of a staff of any number of people from a few to a few hundred, steadily expanding their product base or their market share or both, and running a business that will eventually allow them to retire in carefree comfort. It may even be that they aren’t quite sure how to get themselves there, but they know that’s where they want to be.

This series of articles is for them.

When you first start your business, you select your product, choose your venue (will you be a mail order business? an Internet pure-play? or perhaps a hybrid of both?), crunch your numbers and write your business plan. You set about the day-to-day operations of your business, all the while making the decisions that will help you to implement the plan that you made. Hazily, you know that you will reach a point at which you will need to take a step, and that step will initiate the first growth stage of your business, when you emerge from start up into the life cycle of a real business.

There will be some things you’ll need to do to help yourself out when you get to the point at which you are really ready to grow. One of the best favors you could do for yourself during the startup phase of your business is to take care of any credit repair that may be necessary with respect to your personal liabilities. You may find that you have a great deal of trouble getting any kind of financing if your personal credit is in a shambles, regardless of how clean you have managed to keep your business’s credit.

Of course, that might be a tall order to fill. If you are typical of most Americans, you may look at your personal credit and feel a strong sense of despair at the thought of having to get your credit report in order. It’s important, though. In addition to being able to show them two to five years’ worth of financials, banks and most other financial institutions are going to want to look at your personal credit history — and that is particularly true if your business, like most home-based businesses, is a sole proprietorship. While you should probably be meticulous in keeping your business finances separate from your personal finances (although, statistically, most small business owners don’t), that doesn’t mean your personal finances will not have anything to do with anything.

It doesn’t necessarily mean that the bank is out to get you, either, and will check your personal finances in an effort to find an excuse to turn you down. The fact of the matter is that most small businesses fail. Banks, when they set about lending money to small businesses, want to be reasonably certain that their own risks are relatively low. If they didn’t do that, loan defaults would be so high that, after awhile, either the loans would get very expensive (in terms of interest rates and/or fees) in order to weed out the high-risk businesses, or the banks in question wouldn’t be able to lend any money out at all. So, they want to have a pretty good idea that you’re going to pay them back when they lend you money. They’ll want to look at everything that is relevant, including not only how your business is doing but what kind of history you have when it comes to managing money.

Another thing you want to be doing during your startup phase is to consider the acquisition of assets. I don’t mean you have to go buy a warehouse or a factory or expensive equipment that you don’t need and/or can’t afford. Assets can be anything from stocks and bonds (preferably long-term investments) to real property to equipment to automobiles. In fact, something as simple as opening a savings account (and making sure that when you put money there, you leave it there) gets you at least one asset. You see, you don’t have to spend a lot of money on this. Write it into your budget. Designate a certain percentage of your business’s profits for acquiring assets.

It may not make much sense to you to be buying into assets this early in the game, but I’m not really talking about buying things you don’t need and I’m not suggesting this without a reason.

If you find that you do quite a bit of not-too-long-distance travel in the course of your business, maybe it would be worth your while to have the business buy a car.

Or perhaps you might consider investing in some stocks or bonds that will mature over a fairly lengthy period of time. Maybe you can start a pension fund for yourself and any employees you may have. That pension is an asset even though it isn’t available for you to dip into it when you need to.

The point of all this is that it will be easier to finance your business’s growth if you can collateralize your small business loan. And it will be much better for you if you have business assets to use so that you don’t have to use personal assets.

There’s no need to go nuts about this. If you can do it, that would be a good thing. If you can’t, if your business just eats every dime you make, then you can’t. Depending on what you finally need that financing for, you may find that your receivables provide all the collateral you need. Or you may find that you only need a microloan to begin with, and the way you handle it will do very nice things for your business’s credit rating. So, if you don’t have the money on hand to invest in anything, try not to sweat it.

So, while you’re chugging along, doing what you can do with the money you make to take care of business, how can you tell that you have gotten to the point where you’re ready to grow?

The first obvious answer is this: you know you’ve gotten there when there is something you want to do with your business, that your research indicates will make you more money — increase your market share or expand your product base or whatever — but that costs more than you can reasonably expect to cover through internal sources of capital.

You do not want to borrow money in order to hire staff. If you can’t cover your payroll expenses out of your business’s income, then you haven’t reached the stage at which you can afford to hire people. It doesn’t make sense to borrow for that.

You do not want to borrow money just because you are having cash flow problems. Perhaps the business you have going has a fairly long lead time before the money starts coming in, in which case you may want to look into a working capital line of credit. Or perhaps you are making poor judgments when it comes to what to do with the money you do have coming in. There are changes you can make to your money management habits, but you shouldn’t have to borrow money just to cover your operating expenses.

You do not want to borrow money for more inventory when all you are doing is testing your market. If you want to expand your product base and you want to see if a certain new item will fly with your customers, first you test. You buy that item in small quantities and you see if people want it. The more of it they buy from you, the more of it you can afford to buy from your suppliers. You shouldn’t need to borrow for that.

Nor do you want to borrow money just to cover your normal marketing expenses. Again, that item should be in your budget; the more marketing you do — assuming that you have been able to figure out how to pitch your product and who to pitch it to — the more customers you acquire. The more customers you have buying from you, the more money you are making and the more marketing you can afford to do. You shouldn’t need to borrow for that, either.

Okay, I hear you say, So now I know when I shouldn’t want to borrow money. When do I need to start thinking about funding?

You need to think about funding, as I said, when you want to do something that will grow your business, buy you don’t have enough cash on hand to cover the expenses it will generate.

Let me give you an example. Let’s say that you sell soap. It’s special soap, hand-made from a recipe that has been handed down in your family for generations. It’s wonderful stuff, smells like heaven and makes your skin feel like the proverbial baby’s behind. And let’s say further that you have been making this soap in your kitchen and selling it, fairly successfully, from your website. You’ve been making a tidy little profit from all this, and you’re having fun, too. You could go on like this indefinitely.

But what if, just because you happen to be a little ambitious, you decide to try making your soaps available to local bed and bath shops? Or a certain hotel chain? Or the local school district? Or a certain airline (you know, for in-flight lavatories)? Or all of the above?

In that case, if you successfully pitch your product to any one or all of these potential customers, you will almost immediately have to make more soap than would be possible from the comfort of your kitchen. You would have to outsource the manufacturing and packaging process. The problem is, the manufacturer doesn’t know you from Jane Doe and may be disinclined to give your business credit.

Or maybe they do give you credit, but the terms they give you are the standard net 30. The thing is, those are the same terms you gave to that big new client. They won’t pay you until after your bill to the manufacturer is due. And the manufacturer will only let you go for so long without paying your bill before they stop making your soap. What will you do if one or more of those big clients pays you late?

Now, you need to find some financing.

That is because now, we’re talking about real growth. We’re talking about going from selling a little something that you make at home to a few people who buy from home, to selling a lot of something that you make at the factory you hire to a few people who need huge quantities of it. That’s the difference between wholesale and retail, and the reason why the retail segment of the economy consistently posts losses but wholesale is one of the best bets around for home based businesses.

So the odds are that you’ll make a lot more money if you transition to wholesaling, which means your business will experience a surge of real growth if you manage to retain those large clients. And landing those large clients will probably put you in the way of getting yourself noticed by even more such large clients. Even one such sale can constitute a major leap of growth for a small business.

Take a look at your business. Try to imagine a scenario that would take your business to that first growth spurt, and think about how you would point yourself in that direction. If you are a coach, think corporate clients. If you are a retailer, instead of selling your product one at a time to individual consumers, consider selling your product to other businesses by the truckload. If you are in any kind of service business, think corporate consulting or multi-media presentations (and the production costs that go with them).

In short, when you have reached the point where you can seriously start to think big, that is when you will need to seriously start to think about business funding.