This rosy fairy tale could use an additional chapter on funding and financing – the most misunderstood and challenging obstacle that most new business owners face. The use of savings and personal credit cards to fund a startup business is often the reality, and typically the only option available for entrepreneurs. But establishing a credit “safety net” should be a priority – to ensure access to the resources needed to thrive, compete and take advantage of opportunities in the market place.
In addition to funding the startup costs, there are a number of reasons businesses might need access to capital on credit. Fast-growing companies need to invest in employees, equipment, supplies, increased working capital and other expenses related to growth.
Healthy, established businesses may meet unexpected expenses or short-term cash flow issues that require a credit safety net, and opportunities for business or resource acquisition may afford an opportunity to make strategic growth moves that require capital.
By following some basic best practices, businesses can better access the money they need, when they need it:
Review your options
“There are a variety of tools that businesses can use to supplement their cash resources and ensure they have access to capital when they need it,” says credit expert Michelle Dunn, author of Credit and Collections: A Business Perspective. Businesses may use a combination of trade credit, where vendors extend payment terms of 30 or 60 days; bank SBA loans or lines of credit; equipment leasing and financing packages; credit cards; or other methods of borrowing money on a short- or long-term basis. Dunn suggests reviewing these various options and comparing them with your business needs.
Create a plan
Banks look for a strong business plan that reflects a pattern of growth. Within the plan, lenders want to see strong, detailed financial statements. Have you done your homework? Do you have a contingency plan if something goes sideways? Do you have a strong management team? Are you looking forward three or five years from now?
Start small
“Businesses that have not yet established significant credit can take some simple steps to do so,” Dunn says. It’s usually easy to open a small business credit card account, although that often requires a personal guarantee. Businesses should always be negotiating better terms with vendors to build a trade credit profile, which can give them greater buying ability. Working with your banker to take out a small loan and repaying it promptly can also help you build a credit profile.
Know the numbers
We often see business owners who don’t have a good handle on the money they need to operate or who underestimate the investment they’ll need to make to grow the business. Bankers are leery of such lowball numbers because the business may borrow money and then run out of capital. Business owners should work with a financial advisor or accountant to get a strong handle on the financial resources they’re going to need to achieve their goals.
Mind the money
Good financial management is a key indicator banks seek when deciding whether to lend. Having cash on hand is king, but it’s also important to have a history of timely payments and a team that includes employees and good financial advisors who oversee the business’s finances, reinvestment, invoicing and receivables. A history of growth shows banks you have a solid track record and an ability to repay the loan.
Kevin T. Rask is senior vice president and sales leader, business banking, for KeyBank’s Oregon & SW Washington District. He can be reached at 503.626.1607 or Kevin_T_Rask@keybank.com.
{jathumbnail off}
