- June 7, 2018
- Posted by: Ken Fortney
- Category: Uncategorized
Where does one begin when shopping for business funding?
Problem solving is a full-time job for entrepreneurs. Entrepreneurs set out to solve society’s problems (customer “pain points”) and generally focus on the process of creating the products or services that will solve those problems.
Most entrepreneurs believe that their greatest problem will be perfecting their product/service. But that is not the case.
Securing business funding has been and remains the single greatest hurdle for most entrepreneurs, particularly early in the stages of the business growth (affectionately known as “ramp up”).
For businesses with larger scope, venture capital and investor capital are valid options, but entrepreneurs must still figure out a way to fund their prototype, market research, beta tests, patents and consulting fees, all of which typical must happen before acquiring investment capital.
“When I launched the venture in 2014, I assumed our biggest challenge would be overcoming technological hurdles and coming to market with a unique product…The financial side has turned out the be the bigger challenge.”
Most small-business owners choose to “bootstrap,” meaning that they fund their business themselves: personal cash/assets and whatever borrowing they can accrue on their own merit. Bootstrapping gives entrepreneurs full control of their company.
Borrowing Power is Your Ability to Get Business Funding
Understanding your personal and/or business’ borrowing power is a highly insightful way to evaluate how quickly you can fund your business.
To understand how this works, you need to see borrowing power as its own currency that directly impacts your ability to scale (or grow) your business in a timely manner.
For example, an entrepreneur who purchases a franchise realizes that the demand for the product is much greater than they anticipated. It becomes obvious that if they could add two more locations within 3 years, then they could reach their long-term financial goals much faster than they ever could have dreamed. They need to be able to rapidly increase the scope of their business.
How will they accomplish this? Unless they have $500,000 sitting around somewhere, they will need to borrow. They need business funding.
Borrowing power insures that a business owner can grow at a necessary pace to keep up with demand for their product/service.
In order to steadily increase their borrowing power, smart borrowers incorporate loan payback schedules into their long-term business plan. When considering startup costs, it is best to set aside 1-2 years of loan payments into startup costs.
With these considerations in mind – anticipating loan payments as an essential piece of your startup costs and determining to maintain a healthy pay back schedule – business funding is not the scary monster it appears to be at first glance.
Before you begin shopping for business funding, you must consider how different kinds of loans will set you up for more borrowing power down the road. (Most businesses must borrow more than once during the life of the business.)
You need to understand the business funding terms.
You need to take stock of what you have to work with in terms of assets (both tangible and intangible). If you are doing business for the first time, all the assets you have will be personal.
Any tangible assets (e.g., cash and real estate) and intangible assets (e.g., personal credit history) are your resources, and you must be willing to take calculated risks if you want to grow your business.
Each year that you perform optimally for your lenders (through a healthy payback schedule) presents more and better business lending options.
More lending options equals increased borrowing power.
PERSONAL GUARANTEE (PERSONAL CREDIT HISTORY)
Any lender that looks purely at your credit history (unsecured debt) before issuing a loan is counting on your ability to personally guarantee the borrowed funds.
Initially, business owners will present their personal credit history to lenders.
As your business grows and demonstrates its ability to pay back on its own, you will have the opportunity to separate your personal credit history from your business credit history.
When your business has its own credit history, lending options generally increase dramatically.
It is worth noting that using unsecured loans tends to build your credit history faster than other forms of lending.
For example, credit cards are increasingly useful for funding a new business and building up both a personal and business credit history.
If you work with an unsecured credit line specialist, they will help you find credit cards/unsecured lines of credit at 0% introductory rates and help you liquidate those credit lines into cash without incurring cash advance fees.
“The rates [on credit cards] are very important and if it is possible to get a card with a zero percent introductory interest rate, you can take advantage of it and make sure (or at least try) to pay back before the rate goes up” after the first 9-18 months (Toby Nwazor, Entrepreneur).
After leveraging your personal credit to get business funding, you can operate your business and begin to build your business credit.
“It’s a good idea to apply for a small amount of credit shortly after establishing your business, so you can work on building your business credit history before you find yourself needing a larger sum of money.” (Lucinda Watrous, Entreprenuer).
Again, if you work with a unsecured credit line specialist, they will do this for you.
Secured loans (loans based on tangible assets which can be liquidated) require real estate, accounts receivables, equipment, or inventory leveraged as collateral. Lenders are much happier to work with substantial amounts of collateral, as collateral decreases their risk.
It is important to note, however, that business owners put far more at risk when they offer collateral for a loan, because if they cannot pay back, the asset may be surrendered AND the business owner’s ability to personally guarantee future borrowing suffers greatly (i.e., your credit score will plummet).
However, there are many benefits of secured loans over unsecured loans, such as lower interest rates and better terms.
In very simple terms, here’s how most asset based loans work for retailers. The lender (often with the assistance of an inventory appraisal firm) will evaluate the quantity and quality of the inventory. The question they are seeking to answer, at its most fundamental is, ‘If I had to call this loan, and liquidate the collateral, how much could I get for the inventory in a liquidation sale?’ – Ted Hurlburt, Business Know-How
Leveraging assets to fund your business is best done later rather than sooner, and then only if you need the capital.
Ideally, business owners first personally guarantee a loan (unsecured) and then use the funds to purchase tangible assets which can be leverage for secured funding later.
For example, if an owner of a new local brewery in Wilmington, NC, needs $45,000 to finance his equipment, he may leverage his 750 personal credit score to get the unsecured credit he needs to purchase the equipment and open the doors. After performing and paying back for the first year, the owner leverages his equipment and inventory to acquire a $55,000 secured loan to pay off remaining unsecured debt of $15,000 and hire another bar tender. This move (using, paying on a schedule, then paying off all unsecured lines) stands to drastically improve his personal and business credit history. It also produces another injection of working capital into the business bank account.
The funding strategy described above is smart and will increase an entrepreneur’s ability to get more unsecured lending in the future. Savvy business owners are always skilled at financing and re-financing with great intentionality so as to open up more business funding option down the road.
POSITIVE CASH FLOWS
The name of the game in business is profitability. Businesses achieve profitability once their revenues surpass their costs.
Often, it takes months or years to achieve profitability. As the business becomes profitable, the business owner’s ability to get business funding significantly increases. All business lenders look at bank and profit-loss statements, and statements with consistent positive cash flow instantly strengthen that business’s credibility with lenders.
After personally guaranteeing a loan and/or leveraging equipment and inventory as collateral, business owners open up new opportunities for lending when the business makes money. Even receivables (unpaid invoices) and positive cash flow can be assets to use as leverage for various forms of secured loans.
If your business is cash-positive, before shopping for cash-flow-based loans, consider how lowering your costs would free up the capital you require.
If you have unsecured debt, pay off a little more and then ask for credit line increases and/or lower interest rates (smart entrepreneurs do this with each unsecured lender every 6 months). Loans based on cash flow tend to be more expensive than other secured loans.
Nothing is more valuable to a business owner than is his/her time. You can spend money, lose it, and get it back later. Time spent can never be retrieved.
Business owners who devote time to streamlining their business process, lowering costs, educating themselves on their industry and target market and recruiting valuable employees will perform better than their peers.
Business owners who protect their time do a great deal to increase their business equity and potential for growth.
As a business owner there are things you do better than anyone you know, and so you continue to do them yourself and procrastinate the hiring of others to handle those tasks, or you avoid paying for quality, saying “If you want it done right, do it yourself.” This is flawed thinking that doesn’t allow your business (or even your own capabilities) to grow, Gunderson says. – Cheryl Conner, Forbes
What does time have to do with business funding? A great deal, actually.
There are some things that you will not be able to buy (even if you borrow), and you must learn to do. There are other things that you should NEVER do yourself and must budget accordingly. Learning new skills or shopping for the appropriate hired help both take significant time.
Sometimes you have no other funding available to you and must focus your time on increasing your networking and lead generation activities. Budgeting your time is just as crucial as budgeting your financial resources.
But when you have the ability to secure business funding, protecting your time probably means acquiring additional manpower, seeking business consulting/coaching, outsourcing and strategically making use of technology, all of which cost money.
Protecting your time often means a cash investment. Increasing your borrowing power is intricately connected with your ability to sustain healthy business habits, like time management, which both directly and indirectly affect the profitability of your business.
Referral and Inbound Traffic Ultimately Fund Your Business Long Term
I see two entrepreneurial habits which consistently have a powerful impact upon business profits: building relationships with customers and asserting oneself as a thought leader.
Borrowing money is not the end-all goal in business: it’s a means to increasing your sales. Hunter Garth, an executive for General Cannabis Corp and industry startup coach, notes that:
“A fortitude to push yourself into a relationship driven sales mode” through direct sales and networking is key to profitability. Direct sales (cold calls, door-to-door, etc.) and networking (business mixers/events) takes time, which requires you to pay attention to your schedule. Too many business owners I know perfect their craft but refuse to make time to engage their customers.
What good can borrowing do for your business if you do not invest time into building customer relationships?
Asserting yourself as a thought leader is a fairly recent entrepreneurial technique which requires you to think in a community mindset..
Communities of thriving business startups all have something in common: “Far from being disconnected outliers, entrepreneurs thrive best when they operate in tight-knit networks, nurture fellow risk takers, and trade know-how and capital” (James Allen, The Wall Street Journal). This is slightly different from building relationships with customers.
As a thought leader, you mingle with your business peers and mentors in order to help each other pioneer solutions. In truth, entrepreneurs are already thought leaders.
“An entrepreneur is a thought leader before, during, and after his/her successes. Literally. An entrepreneur thinks of a way to address a pain point for thousands, maybe even millions of people” (Jay Turner from Elite Innovations).
All of this thought-leader rhetoric implies that you devote time to learning from your peers and nurturing a new generation of entrepreneurs to follow. It may not be immediately clear how higher sales directly relate to asserting yourself as a thought leader, but they do. A thought leader is an authority to his/her industry, and industry authorities rarely starve. Other thought leaders and professionals begin to refer clients to you on a regular basis as you earn a reputation for expertise.
Business funding will more than likely be your number one obstacle as an entrepreneur. Pay attention to your personal ability to guarantee funds and use the funds wisely. As your business begins making sales, guard your time, create meaningful relationships with customers and peers, and track your progress.
I have never heard one of my clients tell me that they had too much borrowing power at their disposal; on the contrary, most entrepreneurs live a few years in a constant state of “needing more business funding” until the day that momentum pays off through sustainable, positive cash flows.
It is in your best interest to increase your borrowing power by first educating yourself about what you already qualify for.
Business loans often involve some level of risk, but entrepreneurs take calculated risks. And those risks can be seriously minimized. To discuss smart borrowing and minimizing your borrowing risk, talk to a business development manager today.