Just about every business, big or small, needs financing. You have to remember that you can have profits without having much money in your bank account. If you run short of cash, it will negatively affect the entire business, including paying for:
- Startup costs
- Inventory purchases
- Uncollected receivables
- Other uses for working capital
- Capital expenditures
Funding is available in the form of debt and equity. If you are a small business, you may not have a way to raise equity, and/or you may not want to be selling partial ownership to someone else. Thus, you are more likely to use debt as a means of raising funds. You use the funding to pay your bills and to grow your business. While it’s possible that you have enough cash in the bank to finance all your needs, the great majority of businesses rely on at least some outside money to start operations, undergo an expansion program and/or replenish their working capital (current assets minus current liabilities).
Roadblocks to Success
If you are a well-prepared business owner, you’ve assembled a business plan that includes your estimated cash flows. Whenever you project negative cash flows, you will need additional funding through equity or debt. In other words, it’s time to take out a loan when you are depleting your cash.
The most notorious cash flow culprit is accounts receivable (A/R). Simply stated, if you extend credit to customers, you will always run up against a few bad apples who take forever to pay their bills. If you make cash inflow estimates of $10K a month and even have sales figures that meet this target, slow collections can result in a cash shortfall. Eventually, you hope to collect at least 95 percent of your A/R, but the longer it takes, the more you will need funding.
As you are waiting for your credit customers to cough up the cash, you still must pay bills to vendors, lenders, the IRS, employees, etc. These folks are not interested in your collection problems –they want to be paid on time. That’s when timely commercial loans, such as the ones available from IOU Financial, are just the ticket to get you over the rough patches.
Another common use for external funding is to pay for the costs of starting your business. To earn money, you have to spend money, and during the startup phase, you are spending aplenty but earning nary a nickel. A startup loan will allow you to purchase the equipment, space, merchandise, recruitment, insurance and dozens of the other things you need in order to open the business.
Going back to your business plan, a startup should have a pretty good idea of how much funding it will need before it can begin selling products or services. The plan will show the necessary borrowing, including a realistic assessment of the interest costs and the payback period. It’s a complete red flag if you can’t secure the funding you need to start your business — better rethink the whole thing. Perhaps you can modify your plans to make them more modest. One strategy is to start very small and then use profits to bootstrap your growth. If even a modest plan can’t scare up enough funding, you might have to abandon the whole idea. That’s how capitalism works — allocating resources where they will do the most good (i.e. bring the highest returns on investment).
The bottom line is not to be surprised that you will need financing from time to time. Even healthy established businesses need to take out working capital loans in order to continue to grow. The solution is to identify reliable lenders, such as IOU Financial, who will have the cash ready for you when you need it. By carefully husbanding your money, you can grow your company and enjoy the fruits of your labor.