When You Know Your Business Needs Funding

Written by Eric Bank

Almost every business, small, big or in-between, requires financing. Remember: you can be profitable and still have a low bank account. If cash runs short, it might prevent you from paying for:

·        Payables

·        Startup costs

·        Inventory purchases

·        Capital expenditures

·        Uncollected receivables

·        Other uses for working capital

Roadblocks to Success

As a well-prepared owner, you've put together a business plan that lays out your approximate cash flows. If you see negative cash flows, then additional funding through equity or debt is called for. To put it simply, take out a loan when you are running out of cash.

The most infamous cash flow "black hole" is accounts receivable (A/R). When you offer credit to customers, you will always discover a few rotten apples who take an eternity to make good on their bills. If, for example, you estimate cash inflows of $9K a month and sell enough of your offerings to meet this target, slow collections can still cause a cash crunch. Of course, you expect to eventually receive at least 90 percent of your A/R, but the longer you have to wait, the more money you'll need to borrow.

As you await credit customers forking over the cash they owe, you still have to pay bills to lenders, employees, vendors, the IRS and others. These gentle souls are not interested in your A/R problems --they want their money NOW. That's when a commercial loan is just the tonic to get you through the cash doldrums.

Startup Costs

Another common need for external funding arises from the costs associated with launching your business. You need to spend money in order to earn money, and during the initial phase, you'll be spending like a drunken sailor on shore leave while earning not even a nickel in revenues. A startup loan lets you buy merchandise, equipment, space, recruitment, insurance and many other things you must have in order to get your business underway.

Returning to your business plan, a company undergoing startup should know how much funding it requires until it can begin selling services or products. The plan will specify the required borrowing, including an estimate of the payback period and the interest costs. It's a bad signal when you can't obtain the funding you require to launch your business -- it might be better to wait. Perhaps you can change your plans to make them less ambitious. One tactic is to begin tiny and then use revenues to fuel your growth. If even a scaled-down plan doesn't yield sufficient funding, your whole idea can go down the tubes. Unfortunately, that's how capitalism operates -- placing resources where they will bring the highest returns on investment.

The bottom line is to be aware that you might require financing now and then. The best course of action is to identify reliable lenders that will have the money available for you when you require it. By carefully marshaling your cash, you can expand your business and bask in the fruits of your labor.