If you're like most business owners, you think about money regularly...perhaps constantly.
You Need Money To Maintain Cash Flow
It is the lifeblood of your business. You've probably lived through this scenario on more than one occasion: It's the end of the month, the bills have been paid, and you let out a sigh of relief because you are in the black. Good cause for celebration. But it didn't happen by chance. It happened only because you questioned every invoice and cut every expense to the bone; because you checked your accounts receivables against your accounts payables and compared that to cash on hand in a daily monitoring of your company's financial picture. You know that even a slight miscalculation can tip your business across that not-so-imaginary line and put you into the red.
Then There's Long-term Capital
You need money to help you develop and introduce new products or services, to expand your facilities, add new hires, and more. Without long-term capital, your business will struggle to grow and evolve, while the rest of the world passes you buy.
Where To Find Money
Businesses that thrive know where to find the money to finance their operations. Here are some of the most common sources:
- Self-financing: If you put your own money into your business, you're not alone. "Overall, small firms rely more on owner capital and less on external debt than larger firms," reports the Small Business Administration. Common sources include personal credit cards (39.1%), business credit cards (27.7%) and other owner loans (16.5%), including home mortgages and home equity loans. Others tap life insurance cash values or sell assets to find funds.
("The Facts About Small Business, 1997," Small Business Administration)
The drawback: This breaks the "OPM Rule" (use other people's money). It also may put a strain on your overall financial situation. Most of all, especially if you use your credit cards, you can pay a premium for the money you need.
- Private Financing: This could be known as the "family and friends" plan. You approach every relative or associate who even hinted that it would be exciting to put cash into your business. You can offer them either equity (partial ownership) in the business or pure borrowing, with a plan to repay. Either way, be sure to (1) put everything in writing, even with blood relatives; (2) if you offer equity in the business, insist that your backers become limited partners (not general, active managers in the business) and (3) have your attorney draft the terms.
The drawback: You may have to kick in part ownership in the business or offer such generous repayment terms that it will be years before you get out from under.
- Venture firm financing: These small business investment companies (SBICs) lend money to businesses with solid potential. The key is to have a professional looking proposal that details exactly why you need the money and how you will use it. These companies are licensed and regulated by the Small Business Administration.
The drawback: Venture firms are in the business of providing financial backing...and they will drive a hard bargain. They will also take their time exploring every aspect and detail of your business. Finally, if things don't go as projected, you could lose your company.
The government: Depending on the nature and location of your business, there may be grants available or loans from the SBA. For information, visit their web site at www.sba.gov.
The drawback: There is red tape and no guarantee that you will qualify. While grants are free money, loans are secured by business and personal assets. Finally, there are lending limits.
- Your financial institution: Many people mistakenly believe that their credit union or bank is only a source for personal funds. However, you may be eligible for financing under a number of options. Very often, only a signature loan is required. Contact your lender and set up a line of credit that can be tapped instantly when needed.
The drawback: Standards can be tough. The key is to establish a working relationship with your commercial lender in advance. That way, when you need capital, it will be available quickly.
Policy loans will affect the death benefit.
The best source for financing is the one that helps you achieve your objectives with a minimum of risk and allows you to retain control of your company. Only borrow when you have a specific plan for using the money...and a plan for repaying it.
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