Need Money for Your Business?
Every small to medium sized business owner at some point in time in their career has been asked this simple question. Whether it be from a credible finance company, a friend, a relative, an angel investor, a retail company, car dealer or a credit card company. The intrigue of the question evokes a whirlwind of thoughts, most of which revolve around the idea of how nice it would be to get an infusion of cash in their business. The answer to the question is generally the same but those who have been down the path of “getting money from a lender” realize it comes with a host of concerns and questions. I would submit to you that those who can demonstrate and/or prove that they can do well without it or simply don’t need it will likely be the same people who are most likely to get it without a great degree of obstacles. Why is this so? The lender wants to be sure they will get their money back, albeit with the interest attached, but that the risk in making the loan is with as little risk to the lender as possible.
That said, most entrepreneurs need an infusion of cash at some point in time. The most obvious reasons are simple:
The problem is that the more common reasons that entrepreneurs think they NEED money is for less enviable reasons:
The fact of the matter is the business owner hasn’t managed his cash flow effectively often because their company has not been managed as profitably as it should be. As I traveled around the country visiting business owners, I would submit that 99 out of 100 business owners that I met with stated that “not adequate cash flow” was in the top 3 of their business challenges. To translate, “not adequate cash flow” really means that they need a cash infusion. My response to their challenge, always in the form of a question was, “what do you need the money for?” Invariably once we dialed in on the business’s other challenges, it came down to the second set of reasons previously stated. Okay, so here we are, cash outflows exceed cash inflows. Let’s dive deeper.
Whether you need money for start-up, expansion, enlarging equipment or inventory, or even to sustain business operations, the burden is on the borrower to demonstrate to a lender that there is little risk in lending the money. A lender never wants to think that you are borrowing money to pay off debt although there are many such companies that offer this option but at a substantial expense to the borrower. I learned early in my career using an excavation metaphor, “when you are in a hole and you want to get out, stop digging!” That said, getting a loan by showing the lender low risk can be challenging. A home loan or a car loan are quite common, and most people have managed through that circumstance before and generally with ease. The difference here is that the car or the house is collateral. In other words, the borrower decides to stop making payments and the lender takes back the car or the house. In a business, particularly one where the equipment or machinery will not satisfy the loan as collateral, the borrower must now prove that using the money from the loan, business operations and the profit thereby achieved will be able to make the loan payments. Put simply, they can’t (or certainly don’t want to) take the business away from you. For clarification, all SBA loans are determined this way.
Where to start… There are two things required by all lenders for business loans:
Both of these get extremely difficult when borrowing for the second set of reasons, and are challenging enough for the first set of reasons.
On step one, the business must figure out exactly how much money you have coming in (cash inflows) and exactly how much money you have going out (cash outflows) and the schedule of each. This is a fundamental need. In the case of a start-up, the process is the same except the inflows and outflows will all be projections based on similar business models. Thereafter, determining how much money the investment will enhance the value or profitability of the company is key. In other words, you borrow to gain a return on investment (ROI). If you understand the fundamentals of an Income Statement and a Balance Sheet, you will notice that loan payments do not appear on the Income Statement, only the interest (an accounting lesson for another day). Thus, the operating profit of the company must exceed the debt service (loan payments) to determine that a loan is feasible. And THIS is how you can demonstrate that the risk to the borrower is minimal.
Once you’ve understood and substantiate the feasibility of someone loaning the company money from a cash flow perspective, get busy writing a plan. Start-ups write Business Plans explaining the nature of the business and how their particular business is uniquely positioned in the market to return to the owner more money than it takes to run it. The fundamentals of the report are concise but descript enough to make the lender realize how little risk there is in making the loan. Business Plan preparation has evolved over the years trending more toward an executive summary format with key unique, yet actual features that make the business low risk. Unfortunately, gone are the days of selling a lender into giving a loan based on flowery, compelling language, unrealistic blue-sky expectations and because it’s your neighborhood banker. In other words, do the due diligence required, provide the financial reality of the circumstance, then most of the other challenges of getting a loan will fall into place.
I appreciate that preparing yourself for a loan can sound dauting. I can assure you that it is dauting if you can’t prove to yourself that if the roles were reversed, would you lend you the money? Referencing the many business owners that I’ve met with that said they didn’t have “adequate cash flow”, once they realized that their inflows wasn’t the problem and instead their outflows was indeed the problem, the course of the conversation changed dramatically. If you’ve read any of the other blogs we’ve written about business and operations, or read any other business resource material, you will know that profit is a primary directive. Between calculated risk and reckless decision-making lies the dividing line between profit and loss. Show a lender you can make a profit through good decision-making and the process of getting a loan will be much easier.
Steve McCrillis
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