Getting the Money

Getting the Money

Now that you have computed your initial capital requirements, where will you be getting the money? The first source is your personal savings. Then relatives, friends, or other individuals may be found who are willing to “venture” their savings in your business. Before obtaining too large a share of money from outside sources, remember you should have personal control of enough to assure yourself ownership.


Once you can show that you have carefully worked out your financial requirements and can demonstrate experience and integrity, a lending institution may be willing to finance part of your operating needs. This may be done on a short-term basis of from 60 days to as much as one year. Any institution that has money to lend is primarily concerned with security. The security may be a business asset, but when you’re just starting the best security is usually your home or some other personal asset.


The second thing the lender will want to see is some sort of business plan. If you complete a business plan – which includes a cash flow forecast – the lender will see that you have done some serious and realistic thinking about your business and be more likely to consider your request.


Become acquainted with your banker. In selecting a banker consider progressiveness, attitude toward your business, credit services offered, and the size and management policies of the bank. Is the bank progressive? The physical appearance of the bank may give you some indication. When the employees are reasonably young, interested in your problems and active in civic affairs the bank is likely to be progressive. The character of the bank’s advertising may also be a clue to its progressiveness.


To be effective the banker should be interested in helping you to become a better manager, and build a continuing relationship that will mean profitable business for you and the bank over the years.


Will the bank offer you the kind of credit you need? For example, if seasonal accumulations of inventory become a problem will the bank make a loan against public or field warehouse receipts? If your capital is tied up in account receivable during your heavy selling season, will the bank take these receivables as security for a loan? Will the bank consider a term loan?


Finally, know the size and management policies of the bank. Will your maximum requirements fall well within the bank’s “legal limit”? If you plan to do some export business, does it have a foreign exchange department? If you or your dealers sell on installment terms does the bank have facilities for handling installment paper? How deeply is the bank concerned with the growth and prosperity of your local community?


When you deal with your banker, sell yourself. Whether or not you need a bank loan, make it a practice to visit your banker at least once a year. Openly discuss your plans and difficulties. It is the bank’s business not to betray a confidence. If you need financial assistance carefully prepare, in written form, complete information that will present a thorough understanding of your entire proposition. Many business-people or prospective business operators destroy their chances of obtaining financial help by failing to present their proposition properly. Remember, before a banker will make a loan he/she must have satisfactory answers to questions such as these:


What sort of person are you?

What will you do with the money?

 When and how do you plan to pay it back?

 Does the amount requested allow for unexpected developments?

What is the outlook for you, for your line of business, and for business in general?


Companies from which you buy equipment or merchandise may also furnish capital to you in the form of extended credit. Manufacturers of store fixtures cash registers, and industrial machinery frequently have financing plans under which you may buy on an installment basis and pay out of future income. You need not pay for the goods at once. If goods are for resale, no security other than repossession rights of the unsold goods is involved. However, too extended a use of credit may prove expensive. Usually cash discounts are quoted if a bill is paid within 10, 30, or 60 days. For example, a term of sale quoted as “2-10; net 30 days” means that a cash discount of 2 percent will be granted if the bill is paid within 10 days. If not paid in 10 days, the entire amount is due in 30 days. If you do not take advantage of the cash discount, you are paying 2 percent to use money for 20 days, or 36 percent per year. This is high interest. Avoid it.


One of the principal causes of failures among businesses is inadequate financing. If you do go into business, remember it is your responsibility to provide, or obtain from others, sufficient money to supply a firm foundation for your enterprise.

Challenge No. 5: Managing Finances Effectively

From the start of a company … “You know, the first year you’re just trying to keep the doors open. You’re a one-man operation so you’re kind of close to everything…I always thought, gosh, more sales, you’re in hog heaven.”… To managing growth…managing finances effectively is critical.


“But managing growth is almost as tough, if not tougher than, start-up. If you don’t have enough working capital, increased sales can really give you a problem because of the (increased) receivables, because of the commitments (to suppliers) coming due before the money comes in. “…cash flow is the pervasive financial management issue for small business owners. It manifests itself in ongoing capital, managing inventory, extending credit to customers and managing accounts receivable.


Many small businesses struggle just to make ends meet, especially during the start-up period. A “hand-to-mouth” existence often continues beyond the first year. Often, a little juggling is required:


“I looked at the checkbook this morning and it didn’t look real healthy, and I know Friday’s payday. I do have a little job we can start tomorrow, weather providing, and I know I’ll make enough off that job plus what I already have to make payroll this week. Then I’ll put off another job that I probably shouldn’t, because it’s a job that I know I won’t get paid for within thirty days.”


Inventory is a pivotal area for non-service business. “You maintain your profit margins by turning your inventory quicker,” explained a sporting goods distributor.


The key to success is maintaining good inventory, the appropriate amount and a good mix of merchandise. “Don’t keep any dead inventory around,” continued the same retailer. “If you’ve got bad merchandise, get rid of it. Keep a clean inventory, a saleable inventory.” The ideal thing is to be able to turn your inventory more often.


Careful control will also help. “To help cash flow,” explained a different owner, “I monitored my inventory as carefully as I could.”


Another challenge to successful financial management is extending credit to customers — a necessary part of many businesses. Customers often expect it. However, many owners find it difficult to evaluate the credit risk of potential customers. One suggested “looking at their financial statement, and then trying to make a good decision.” Another thought is a good idea to evaluate risk based on the amount of potential business: “If a guy wants work done, yes, I’m going to check him out.”


Monitoring accounts receivable to assure a steady cash flow is a universal concern of small business owners. “Cash flow’s the biggest problem,” said one owner. “If you can’t keep track of your receivables and follow upon them, you’ll always have a cash flow problem.


Cash flow is also an area where the experts are full of helpful advice: “Keep a close eye on your receivables. Don’t let them go too far out. I’ve got suppliers that give me 30 days and on the 31st day, they’ll call. Stay on top of who owes you money and don’t let it slide. You don’t want to make more sales, necessarily; you want to get paid for what you sell first.”


“The basic thing we did was to make sure that when a job was completed, the invoice was out in the mail the next day. We also followed the job through to make sure there weren’t any problems. Using this two-step approach, our receivables usually came within the terms of a normal 30-day period. This kept our cash flow steady.”


Many small business owners use professional services to help manage the financial aspects of their businesses. Accountants are the most frequently relied-upon advisors; many businesses also tap the expertise of a lawyer, especially when incorporating their business or purchasing an existing one.


Challenge No. 4: Having Adequate Capital

Here are some thoughts on “Adequate Capital” to consider in developing a business plan:

“The first thing we did was to establish financing and credit relationships. Make a bank contact. A lot of our successes have been dependent on that relationship.”


“Establish a good working relationship with one or more banks early in the game. There’s always a large contract that comes up when you need working capital.”


“Have enough capital to withstand slow periods and competition … all of those things that nobody told you were going to be there. Many people go into small businesses who have enough capital or enough assets to open the doors — but not enough to withstand the pressure from competition and accounts receivable during all of that first year.”


Small business owners concur that having sufficient capital is essential to surviving the first year, which inevitably brings unforeseen challenges.


How much should you capitalize? Based on the experience of others, you should count on obtaining more than you think necessary: “Double your estimates of the cash you need to have during the first year,” advised a retailer.


“Look at whatever you’re going to do,” advised another, “and then look at the worst possible thing that could happen. Prepare for the worst case scenario. Borrow twice as much as you think you’re going to need. Or, have access to that amount.”


Credit lines are an important part of capitalizing a new venture, as indicated by some of the business owners quoted at the beginning of this section. A line of credit enables a company to meet ongoing capital requirements or to capitalize on business opportunities.


However, obtaining credit from suppliers can be difficult for the new company. “In starting out a small company, you may have to pay cash for a while.”


To help tell their business story to potential creditors, many small business owners find maintaining a business credit report on their company helpful. “It gives you a standing in the community to be rated,” believed one owner. In addition, owners recognize the value of keeping their company’s report current.


This difficulty in establishing credit is only temporary. “After they’ve done business with you for a while,” assured the same owner, “they’ll start giving you terms.”


Some small business owners perceive that suppliers are becoming even more discriminating about extending credit, demanding detailed financial information even from established customers. One way to meet this challenge, say owners, is to form basic business partnerships with bankers, local vendors, and Dun & Bradstreet, to keep your company’s business information report as accurate as possible. Nothing is as important as to “Know Your Banker”.