Financing your Business

After much thought and consideration, you have decided to take that big step – start your own business. But before you take the plunge, you better be pretty sure about the financial aspects of your proposed venture. After all, being in business is all about making money.

As a business consultant and an entrepreneur, here are some general financial lessons I have learned over the last 30 years:

1. It is 100 times easier to spend money than earn it! Devote most of your business efforts to planning and implementing ways to get people to part with their hard-earned cash.

2. You are in business to make money, not accumulate assets. So think twice before spending your money on "buying" land, buildings and equipment. Leasing these items may be a better option. Use your scarce cash for marketing and other income-generating activities.

3. Watch your money. It is not good enough to wait until year-end to assess whether you are profitable or not. There are many good accounting programs available. Use them. Monitor your cash flows at all times, and know which products and services are making money. Dump your losers quickly.

4. Your revenues always turn out less than expected, and your expenses always more than anticipated. Be prepared for the worst, and always keep money in reserve.

5. I strongly recommend that you keep your full-time job and start your business on the side on a part-time basis. This reduces your risks significantly. If the business is successful and begins to grow, then you can quit your job. If not, then at least you have not lost everything.

Here are some other suggestions and advice about how to effectively manage the financial aspects of your business.

1. Consider bartering to save cash. Determine what you need money for, and see if you can barter with others to get what you need.

2. Get the landlord to help finance your business. The most common approach is to get the landlord to pay for leasehold improvements and add it on to the costs of your lease. You may even ask him to throw in the furniture needed by your business.

3. Obtain future commitments. If you can obtain letters of intent or commitment letters from customers, this increases your credibility tremendously and helps reduce the risk in the eyes of a lender or investor.

4. Buy instead of starting a business. It is easier to get financing on an existing business than a start-up. An existing business will also generate immediate cash-flows. You can expand or change the purchased business into what you really want later.

5. Work out of your home. With the technology available today, many businesses can be started and successfully operated out of your house.

6. Consider an incubator. The incubator concept consists of putting a number of small businesses under one roof and providing lots of auxiliary services to support these companies. Most offer free or below-market rent and other free or reduced-cost services. There are incubators in most cities. Check your Yellow Pages.

7. Establish lines of credit at your banks. Always apply for credit before you leave your job to start your business.

8. Take advantage of credit cards. Again, this should be done while you have a job and before you start your business. The best technique is to turn in your credit applications to banks simultaneously so that you can obtain a number of cards with a cash advance privilege. Approach your banks all in the same week so that, on your application, you can honestly say you hold no other credit cards. Don't mention the reason for use of the funds as banks don't like to see credit card cash advances used to start a business.

9. Get the seller to finance your purchase of the business. Sellers will finance most of the purchase price. If the buyer can't make payments, the seller gets the business back. You are actually buying a business and paying for it out of its own profits. If the seller lends you the money to buy the business, that is a good indication that the seller is confident you will succeed.

10. Use cash flow for a down payment. Sellers are sometimes willing to wait a few weeks for their down payment. Determine the net cash flow generated by the business over the first several weeks. Some sellers who are anxious to sell don't care whether the down payment comes from, even if it is from their own business.

11. Maximize trade credit. How much credit suppliers will give you, and how flexible they will be regarding terms, depends on how important your business is to them. Most people just don't ask for enough trade credit.

12. Have customers provide financing. This is often done by selling memberships in advance, which succeeds many times in raising capital. Membership may provide discounts and extra services at your dog kennel, and thus would be of interest to prospective customers.

13. Improve collection procedures. The sooner you get your money, the better it will be for your business. Here are some basic rules:

  • Bill customers quickly.
  • Set a definite written policy for handling past-due accounts.
  • Establish penalties for late payments and enforce them.
  • Contact past-due accounts by telephone immediately.
  • Set up your collection procedures according to importance of the customer.
  • Determine how you will handle bad debts, disputes with customers and chronic past-due accounts.

14. Get free advice. Don't pay consultants when you can get the same advice for free. Here are some places to start:

  • Suppliers will bend over backwards to help a business succeed.
  • Associations such as Chambers of Commerce and trade groups are helpful.
  • Governments at all levels have advisors who can help.
  • University students are often available for low-cost or work study projects.

15. Improve your sources of internal capital. There are many things you can do to get capital from your own business. These include:

  • Shorten credit terms to accelerate cash flows (due now instead of net 30).
  • Raise discounts for early payment of invoices.
  • Tighten credit policies so that marginal, slow-paying customers are required to pay in cash or credit card.
  • Use more aggressive collection practices.
  • Mail out invoices promptly, usually along with shipments.
  • Review inventories for excessive stock, and accelerate inventory turnovers.
  • Pay bills at the last possible date.
  • Increase prices or gross margins.
  • Sell off equipment, inventory and other assets.
  • Establish minimum orders or service fees on orders below your minimum.
  • Sell gift certificates.
  • Open mail immediately, and deposit checks the same day they are received.
  • Take out bad debt insurance.

Following these suggestions will give your business more money to with which to work.