So how do we look at money for your business, per this week’s radio show: SHOW ME THE MONEY!
FILLER UP!
If your business is the car engine, then cash is the gasoline and the occasional tune-up. The more growth a business experiences, the more cash is required as working capital to keep it running. Growing and expanding a business requires investment too. You’ll need new equipment, employee training, facility improvements, systems, software, etc. A good business eats cash but returns more than it eats – eventually. A bad business just eats…
CASH-ON-HAND
Ever look in your wallet and see only a couple of bucks? Not a confidence-builder, is it? Take a page from the experienced business turnaround professional: Conserve cash at all costs. It does no good to have zero cash and happy vendors / employees at the same time. You must keep a minimum of 6 months of operating cash available to you if you want to be able to weather the occasional storms. If cash gets weaker, either find more of it or cut your expenses down until you recover your cash stamina.
WHERE DID THE GROWTH CAPITAL GO?
As our guest, Tom Walker, of i2e.org, said: “It vaporized…” Yes, it’s true, the wave of available cash has withdrawn as if the ocean was at permanent low tide. Tom added, “All of us today have half as much as last year.” Thus, since investor activity hinges on what happens in the stock market, we can see why attracting investment for business growth has been hard. The tip for this is simply: Forget what you were expecting last year – it will help you figure out today’s reality.
HOW IS OKLAHOMA SITTING NOW?
Oklahoma is suffering less than most states. Our housing prices did not get crazy and have not fallen significantly if at all. However, our state budget is being reduced due to lower prices on oil and gas revenues. Additionally, business loans are much harder to find. Thus, for business growth capital from investors, we need to be aware of what investors are currently active. For business debt, we need to be aware of the adjusted expectations of lenders today. Fact: 2009 venture capital invested nation-wide is equal to what it was in 1995!
WHEN SHOULD WE ADD DEBT?
If you can borrow money for a business, please do it to GROW. Do not borrow money to SURVIVE – a huge mistake. Borrow money that is attached to a PLAN for improvement. That is how small business grows to medium and medium grows to large. Important: The most savvy business people borrow in down times and use that inexpensive new cash to kick the tail of their competition by the time the economy improves!
CAN I ADD DEBT?
Maybe. Do you have an asset that the lender can secure/collateralize (attach to the loan)? “Hard assets” are what they want – things that have a decent life span and can be auctioned off if you default. If you don’t have assets that you can borrow on, look at your Accounts Receivable total. You can borrow on that if the customers have good records and the amount is $10,000 or more at any time. A lender will help you set up a LINE OF CREDIT – something every growing business needs. The more you grow, the more you can borrow on “the line”.
TYPES OF COMMERCIAL DEBT:
You can pursue: 1) An asset-based loan (discussed above); 2) An asset-based SBA-backed loan; 3) an accounts receivable and inventory Line of Credit, and 4) an excess cash-flow based loan – based upon proven excess cash flow (this is a more sophisticated debt instrument).
TYPES OF INVESTORS – ANGEL INVESTOR:
You can pursue a high-net-worth person who likes to invest in startup companies. Your idea, business plan and proven concept are the minimum requirements. For that risk, they want equity (ownership) that is significant but not too much. They don’t want to control it. GOOGLE “Angel Capital Association” to find them!
TYPES OF INVESTORS – VENTURE CAPTIAL FUND:
A Venture Capitalist is looking for a company that has existing revenue and good recent history. The fund manager is managing money for others and they usually aren’t willing to mess with things that Angel investors will pursue. They don’t want to run the company. They will turn down deals that are too small– A person who manages the money of other high-net-worth people
HOW LONG DOES IT TAKE TO GET MONEY IN THE BUSINESS?
It takes up to TWO YEARS to get money INTO the business after you start preparing for it. TWO things have to be ready when you are making the sales pitch to get money: 1) A good story with a solid foundation; and 2) A positive trend (sales trend, testing trend, consumer trend, government trend, etc. You need these two things to be positive to get the deal sold and they must remain positive until the deal closes. Start early. Money doesn’t chase desperate people.
SHOW ME THE MONEY!!!
- Mike
Tags: Starting a Business