A small business owner using Creative business financing strategies is nothing new. A creative business financing approach may be the only choice available for the business owner or manager in many cases. Some stats you read say approximately 80% of small businesses fail within their first 5 years of operation.
Small business failure happens for all kinds of reasons for and most of them are associated with marketing. A poor location, that's marketing, or poor product and that, is a marketing problem. An undefined customer group is marketing one more time.
Everything is directly or indirectly related to marketing for a small business.
And even with a well thought out marketing plan, things still go wrong.
Why? Because even the best laid plans often go awry. Creating a small business is a process full of trial and error. In many cases, its not that the business could not succeed, there just wasn't sufficient time to figure out how to succeed. Which brings us to the worst creative business financing strategy ever.
Here's how it works.
The would be entrepreneur develops what they believe to be a sure fire business plan that can't lose. They start their business with credit cards because they are unable to locate any form of start up capital. Credit cards are the only source of financing, and they have an expectation of sustainable business results within 3 to 6 months.
The debt will be retired within a year and funds will start building in the bank account if everything goes well. Sounds Good, right?
This thinking lines up perfectly with all the get rich quick business opportunities that exist on and off the internet today. Some of them even try to convince you to use your credit cards because the opportunity is fantastic and can't miss. The problem is that every business, every single one, can fail. And the vast majority do fail.
If you talk to someone who runs a successful small business, perhaps one that's been around for 10 to 20 years, and ask one of these entrepreneurs about their start up period, you may be shocked at you what you learn. Even some of the most successful small and medium sized businesses out there today had some scary moments making a go of it in the early years. And some times the difficult early years lasted for several years.
The process of getting a business operating and successful can take many unexpected twists and turns, no matter how diligent you are in creating a thorough business plan. Therefore, to increase your probability for success you need to allow for the unknown, the unplanned, and the unfair.
A business financing strategy that cannot accommodate unforeseen events is not much of a strategy. If it is based on high interest credit cards that can destroy both your cash flow and your personal credit it is also not much of a strategy.
Here are some tips for developing a solid business financing strategy to improve your odds of small business success.
Invest Your Own Cash If you have some of your own cash penciled into your business financing strategy, it will immediately increase your likelihood of getting some sort of start up loan.
This is one of the most important points in getting financing. A great idea is worth absolutely nothing if you can’t invest your own resources. Lenders get literally hundreds of requests each month for financing. Their business and product is money. Their profit is the interest they earn on that money. They do not want to risk anymore than they have to. The more "skin" you have in the game, the more interested a lender will be in approving your loan request.
There is also something to be said about the psychological incentive of losing your own money and the motivation it creates for you to work harder to keep it. And the lenders look at that.
Create Contingencies in Your Cash Flow You can estimate your working capital requirement and then to be sure, double it. Things can and will go wrong. You don’t want to be looking for more loans or cash when you are in a crunch. You have a better chance to get more funding when the business has a cash flow and proven sales record.
If you sell to other businesses, think of factoring as a useful tool to help you with your cash flow. Your clients may pay in a timely fashion every 30 days or even less but think how you could benefit if you were paid in 2 or 3 days. You could take advantage of your supplier’s discounts such as 2% discount Net 10 days or similar offers.
Use Credit Cards Wisely Credit cards can be the cheapest form of working capital that you have at your disposal when used properly. Some business credit cards provide 40 days of interest free financing. If you pay off the entire balance every month, you have an extremely low cost of working capital financing.
But if you start carrying large balances without paying them down monthly, you will go from the cheapest source of working capital to one of the most expensive, and you will likely also destroy your credit rating in the process.
Don’t forget the government!
Small businesses are by default tax collectors. And the taxes collected can sometimes wind up funding the business for longer periods of time than they were ever intended.
Using the collected taxes as a business financing strategy can backfire. Government agencies that are assigned to collect from you have deep pockets and enough broad sweeping authority to create plenty of grief for you if you are too slow in paying. They have a team of lawyers and collection agents to make sure you pay those taxes you collect from your customers.
If you apply for a business loan while you have an overdue balance with a government tax agency, your loan request will likely be declined. Even after the balance is paid up, you may have burned your bridge with the lender as a history of overdue government remittances can brand you as a bad credit risk.
Don't Spend Money You Don't Have.
Too often small business owners start spending their profits before they're earned. And even after the sale is made, the cash may still need to be collected. Any potential sale can fall apart.
While marketing will always be the single most important area to focus on, cash flow is a close second. So make sure you spend enough time managing the sales, closing, and payment cycle. Don’t forget about factoring to help you with cash flow problems.
Watch Spending Closely At Start-up
One of the things you can control early on is how much you spend and what you spend it on. This is going to change in time, but if you can spend wisely in the beginning you may be able to avoid a cost cutting exercise further down the line. While it’s normally true that you have to spend money to make money, you can still be smart about the spending process.
Summary A good business financing strategy is one that will allow you ample time to get your business on track and cash flow positive. Make cash flow management a priority and build allowances for the unexpected events into your spending estimates and financing requirements.
The Worst Creative Business Financing Strategy Ever? - To learn more about this author, visit Rick McCoo's Website.
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Rick McCoo
(Visit Rick's Website)
Many businesses would benefit from a suite
of specific commercial non-bank finance
products, each of which performs a
different and essential financing function
yet work together harmoniously.
Frequently, businesses end up with an
unplanned hodge-podge of different
financing products for different purposes,
but the different products work against
each other. This is wasteful of time and
opportunity. FBI can do for a small and
medium size enterprise (SME) what the
conductor does for the orchestra; bring
together differing elements and have them
work together.
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