Money Matters

When I made the decision to start my own company, I had been personally debt-free for many years and had no intention of going into debt to grow the business. So my partner and I bootstrapped the business using our personal savings and went about the task of finding new customers and delivering services.

I had no trouble finding paying customers. I figured the company could self-fund any future growth once we became a viable player in our niche. That plan worked well for a few years until several customers started making late payments. By this time, there were plenty of ongoing costs like payroll, employee benefits and taxes.

The company was able to sustain the delays for about 18 months and then we hit a cash crunch. I thought surely a trip to our commercial banker would solve the cash flow problem. We had been loyal bank customers for several years. The folks at the local branch knew me and some of the people on my staff. We had a solid set of financial statements.

Suffice it to say, I got a wake-up call when the bank turned down my request for a line of credit. Why? The company didn’t have a strong enough credit history because I had been careful not to assume any debt. The next bank said the company hadn’t been around long enough. The next bank never really gave an answer, they just kept asking for more paperwork until I grew tired of attempting to comply. I was faced with the fact that I had waited too long to seek financing. Now that there was a real financial need, the lenders weren’t interested.

Now there are folks that will say my financing theory was flawed from the beginning, but there are other woman owned small businesses that were built on the same premise. For example, TransPerfect Translations, has been recognized by Inc. 500 as one of the fastest growing privately held companies in the US.

Ultimately, I sold our accounts receivables to a third party to help with our cash flow. This is commonly referred to as “factoring” and it does come with a small price. Here’s what I learned along the way:

Get to Know the Playing Field – There are many financial tools available to small business owners such as credit cards, lines of credit, commercial loans, equity investment, accounts receivable financing and of course personal savings. Research from the National Association of Women Business Owners reveals that women entrepreneurs typically use more than five sources of capital when growing their businesses. Take time to learn about the pros and cons of each, and how to match the right kind of financing with your business needs.

Get to Know Your Lender – Consider making your banker part of your extended financial team. Meet with your account representative on a regular basis to ask questions about any programs that might be a fit for your business. Make sure s/he has an understanding of your growth plans, discuss which financial tools will help to accomplish your goals and develop a plan on how to get there.

Get Financing Before You Need It – Just because you’ve been a loyal bank customer doesn’t mean your bank will lend to you once you start having cash flow problems. On the contrary, research from OPEN: The Small Business Network from American Express shows that most lenders are risk averse and don’t like hearing that a company is having trouble paying its bills, even if they’ve worked with the customer before. Apply for financing when your cash flow is strong and tap into the funds when a need arises.

Get as Much Money as You Can – Don’t just ask your lender for a line of credit to help you make payroll. Take a good look inside and outside the company and determine the factors that might impact your business down the line. In his book Kiss Theory Good Bye, Bob Prosen suggests using your financial team to anticipate what capital needs are now, what they are projected to be in the future, and how to position the business to best meet those needs now. That may mean asking your lender for a line of credit to maintain payroll and a commercial business loan to fund expansion.

So what’s the moral of the story? Whatever financial strategy you come up with – just don’t run out of money!