Last week, at our Business Meeting, we had a discussion on small business financing. Most of the attendees had good suggestions, but there were a few points of contention that needed to be brought to our attention. After considering the suggestions of several attendees, here is a summary of our thinking on small business financing. We encourage you to comment and make suggestions on what might work best for your business.
Summary. The attendees came to us with a variety of concerns on their mind regarding small business financing. We heard that most small business owners are strapped for cash, especially given the current economic conditions. Many of them had already exhausted their credit lines; some were considering the acquisition of another small business, while others were simply trying to figure out what else they could do to stay in business. The attendees made thoughtful and detailed suggestions in response to our questions, which we will address in this article.
Many of the attendees brought up the issue of borrowing money from friends and relatives, particularly if they did not have collateral, which they felt was a must in today’s lending climate. There were some exceptions to this rule, but these were on fairly small sums, usually only a few hundred dollars. It seemed that borrowing from family and friends was a relatively untapped resource for small business financing.
Another suggestion was to approach existing lines of credit, whether it be a credit card utility bill or personal loan. Many of the attendees brought up the possibility of using a business line of credit, and the Chair of the meeting suggested that we would begin discussing that issue at the next Business Meeting. The purpose of such a line of credit was to provide small business owners with an additional source of short term financing, which could be used when an emergency situation arose, such as a need for inventory, supplies or office furniture.
At that point I suggested that we create a formal business financing policy, whereby the Business Manager was required to authorisation by the Board, as Chair, for the use of such funds in cases of need. That was also to ensure that such funding was not only available for short term business needs, but that it was also available for the long term management of the business. As suggested by Mr Jones at the previous meeting, we could consider an alternative business financing option such as an equity loan. This was referred to as an “abbreviated partnership agreement”. After some discussion and analysis of the pros and cons of each of these options, we agreed to move forward with one of them – the equity loan.
We had several different small business financing options available to us at that time, so it was a challenge to find the right one for our particular small business. The idea was to identify two key things that we wanted to look at: Firstly, cash flow, and secondly, a credit score. Our goal was to ensure that we used cash flow to expand, rather than simply finance operational expenses. To this end we needed to ensure that we kept track of our cash flow, as well as our credit score.
In this article I will quickly sum up some of the key aspects of the small business financing process. First, as previously mentioned, it is important that you keep track of cash flow. This is actually the most difficult aspect of small business finance, because as you know, no money is really going to come out of the ground just yet. In order to achieve this you will want to regularly analyse your cash flows and your cash balance. You also need to be aware of any debts that you currently have and try to reply as quickly as possible.
A final consideration is your business credit score. It may seem somewhat surprising that you would need to improve your credit score in order to obtain small business financing. However, if you have poor credit then it is important that you look to improve it as much as possible in order to find financing for your small business ventures. There are many companies out there that will provide you with excellent business financing, but if you have poor credit you will probably have to spend some time looking around for a business lender who will approve your application.