In a recent survey of entrepreneurs that were about to start a business or had been in business for less than a year, we recently uncovered the areas that business owners explored to finance their business. When asked about how they financed their businesses or how they planned their financing, some revealing answers came to light.
A pattern started to emerge — these entrepreneurs, initially, fully expected to be self-financing in the start-up period. They used available savings and other ‘cash’ resources such as pension funds, and access to capital through facilities such as second mortgages on their own homes, etc.
Once that capital was exhausted, which in many cases was quicker than they had expected, they invariably turned to family and friends. Some reported that their group of friends dwindled very rapidly when asked for financial assistance. Once again, though, the inflow of funding was limited and only sustained them for a few more months.
What the surveyed group showed was a lack of detailed financial planning. Most assumed that if they could ‘sell’ their product or service they would easily survive and grow on the cash flow that those sales generated. They rarely recognized the fact that growth would always demand more capital. It is a fundamental cycle — the more a business grows, the more capital that is needed, and the more capital injected into a business, the more the business grows.
The group members turned to their banks for assistance when family and friends had made their last contributions, and growth demanded more capital. As most stated “Going to the bank was the obvious thing to do — banks are there to finance business.” And then the shock set in — the banks turned down their applications for a myriad of reasons: because their business was too young, it lacked a solid balance sheet, there was insufficient cash flow to support debt service, the bank didn’t finance that ‘type’ of business, and so on.
What could they do next? For some, they indicated that it would be the end of the road. For others, they had too much at stake to quit so the search for that illusive working capital continued.
Options the entrepreneur group discussed for locating additional capital ranged from ‘angel investors’ to ‘equipment sale and lease back,’ from ‘venture capitalists’ to ‘factors and discounters,’ etc.
The bottom line clearly showed that the lack of planning was a serious setback in building a viable business. Even a modest business plan usually talks more about marketing than finance.
It is essential that small business owners do their research before they become desperate. Businesses do not usually fail because of a lack of finance — they fail because the owner neglected to investigate and obtain the appropriate financing at the appropriate time.
Chuck and Karin Schultz are principals of The Interface Financial Group (IFG)’s Las Vegas office. The company is a leading alternative funding source for small business. IFG has provided short-term working capital funding in the form of a unique Invoice Discounting service since 1972. For more information, contact Charles and Karin Schultz, 702-636-8644 or visit www.ifgnetwork.com/cmaca/