I consult with dozens of CEO’s from start-up’s to 20 years old small businesses, many of them have the same problems.
- How do I get access to capital?
- What do my financials really mean to me?
- How do I position myself in the market?
- How do I grow my revenue?
One could say that all businesses have more than one of these same problems. True, but small businesses make up the vast majority of the US economy and their issues tend to carry a huge weight on our daily lives. According to surveys 99% of US employers have less than 500 employees. Most of my established businesses have less than 20 employees and generate less than $2,000,000 in annual revenue. As a SCORE Mentor and Chapter Board Member I help my clients deal with these issues every week.
In this article I’ll just discuss Problem #1 – Access to Capital.
The number one reason small businesses fail is lack of capital. Most often this starts right from the very beginning when the CEO completely underestimates his/her cash flow needs for the first 18-24 months. I ask my clients to completely focus their initial understanding of financials on cash. Simply, do you have enough in your checking account to pay the bills? Developing a simple business financial plan showing revenue and expenses will help start the cash flow analysis, but as they soon find out “revenue might not mean cash”. This is often the case when a business extends payment terms, I’ll provide the products or services today and I’ll bill you tomorrow. Then guess what, the customer is slow to pay their bills and the new business owner learns a new term “accounts receivables” (A/R). The best “Access to Capital” is to get paid either in advance or immediately as the product or service is provided. In my former business, even dealing with larger institutions our standard method of payment was ACH debit, monthly. A/R was a bad “asset, I wanted cash. This, by the way, worked well and we were always flush with cash.
From a practical point of view, my smallest clients rely on good old fashion business credit cards to either provide 30 days of float or on-going credit, albeit at very high rates. They quickly learn that banks will provide them with 0% interest for say 12 months or so for either opening a new account or transferring an existing credit card balance over to them. Credit cards also provide both and audit trail and potential purchase discounts in the form of points or cash back.
Once a business gets established I encourage them to start working on a Line of Credit, specifically a Revolver. In a regular LOC, once the extended credit is paid down, it is not replenished and is therefore paid-off over a term. A RLOC, set’s a maximum amount and the company can draw against it “at will” as it makes payments. Most often a bank will ask for security to protect the RLOC, such as pledging assets or personal guarantees. Interest rates can be friendly based on the health of the business. A RLOC will require you to have a good set of financials and a relationship with the institution.
Most small businesses find it difficult to secure outright bank loans these days. Don’t misunderstand, banks in the US are sitting on huge stockpiles of cash, but are not willing to take the risk lending it to small businesses. The larger the business, more banks are will to lend to them. Large national banks fight over companies like Apple, Google and 3M, they offer low rates and highly customized services.
There are however avenues available for small businesses. For example, in my area we have Micro Loans available through the Pasco Economic Development Council (PEDC). In this case a small business works with a SCORE Mentor to develop a business and financial plan and fill out the required application that can then be submitted to the PEDC. The PEDC Loan Committee then meets with the small business to better understand their situation. Currently these loans can range up to $35,000 over 72 months at attractive interest rates.
Another source of business loans is the SBA, Small Business Administration. Although the SBA does not make loans directly to a business, they do act as a facilitator with SBA approved banks and other financial institutions. In many cases the SBA will guarantee the loans, usually the SBA is used if the business can’t qualify for traditional bank loans. Sometimes all the small business needs is a Surety Bond for example a contractor trying to bid on a job, the SBA can help with this. CEO’s looking for SBA loans can often just use the SBA LINC web site, answer a few business questions and start the process all on-line. One final comment about SBA loans, this is a government program and is subject to constant changes and modification of the rules. Not all banks partner with the SBA and provide these type of loans. In addition finding a bank and securing a SBA loan can take quite a bit of time.
The bottom line is that it is difficult for small businesses to receive access to credit to start or grow their businesses. Getting consulting services from SCORE or a business advisor may help you in your efforts. Once a CEO gets to a sufficient level of cash flow, the goal is to stay ahead of the curve. In future articles I’ll cover the other 3 Problems shown above, they too reflect back on Problem #1 – Access to Capital.
You can research our Florida SCORE chapter here: https://pascohernando.score.org/