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Financing Business Growth
It is no surprise that many small business owners have never composed a business plan of their own. Let’s face it, the only time most small to mid-size business owners write a business plan or do financial forecasting is when they are looking to obtain financing and the lender wants to see a business plan before they will do the loan. When a written plan is required many business owners buy a software template and just fill in the blanks, or if that is too much work, they hire a business plan writer who does little more than cut and paste from a previous plan.
Most lenders are satisfied with that. As long as there is a plan in the loan application file in the right stacking order, and as long the business plan looks good at a glance, then the decision to make the loan is mostly based on other criteria. So having a business plan is just a formality. Or is it?
Now, in my personal opinion, people who are going to be successful can succeed even without a written plan. On the other hand, I am sure there are quite a few people who have gone into business with a great business plan, but failed anyway. Maybe they didn’t work hard enough, maybe they started out with assumptions that were just plain wrong or maybe after putting in a certain amount of effort they lost interest in making the business succeed.
I cannot stress enough how crucial planning and timing are for the decisions that need to be made for the successful operations of a business. If you start a business from scratch, you know how much effort it takes to build up a business to where you can “breathe air” and the investment you put into your business is paying you back. I think for many people, when that point is reached, and profits are being booked, there is a desire to stop taking risks.
If it isn’t broke, why fix it? I think it’s a great thing when you can sit down, look at your cash flow projections, and say:
“So long as I stay within my budget, I’ll have a very good year with plenty of money coming in to meet all my expenses, and enough left over for me.”
Steady as she goes wins the race. Then one day an opportunity comes along to grow the business. Unfortunately, there is not enough money in the budget to finance growth. There is a temptation to pass up the opportunity even though income is projected to exceed expenses in the coming year. The problem is, while it is a good opportunity, too many expenses will be incurred before the growth in income is realized, resulting in a short-term budget shortfall.
Rather than passing up a good opportunity, let’s look at several options on how to finance the growth. Since going forward with the decision to expand the business is in the best interest of the business, the major risk to overcome is going to be the short-term cash flow problem. How can cash flow be managed and controlled to avoid risk?
We are starting with a business that is profitable, but perhaps just marginally so. Without additional financing in place, there is a risk that additional expenses will force the business to shut its doors before the business returns to profitability.
In order to find out how much additional cash you will need to finance your growth, you should work out some cash flow projections. You will need a plan: a written plan. The main issue to deal with is going to be the timing of cash flow. How much money is going out, and when? How much money is coming in, and when? You should consider as many factors as possible, and make several sets of projections based on different variables. You might even want to get a second opinion to make sure whatever assumptions and expectations you based your expansion plans on are realistic.
Once you have a good idea of what your expenses will be and you are able to project how long it will take to overcome your short-term budget shortfall, you have several options to consider. If you decide to seek outside financing, you will want to be able to convince your banker or other lender that the only reason you need additional financing is because what you are dealing with a short-term problem in the timing of cash flow (rather than a shortage of revenue or excess of expenses).
Bank financing is not your only option, and it may not be your best option, depending on what else is available to you. As much as possible, you will want to keep your existing cash and bank credit lines available for your other business needs. Here is a broader list of options for financing the expansion of a business:
1. Obtain a loan.
2. Utilize a line of credit.
3. Venture capital, additional investors, co-owners or share holders.
4. Speed up collection of receivables.
5. Finance the purchase of equipment by leasing it.
6. Liquidate investments or assets.
7. Delay payments to vendors.
Written by
David Prince
VR Equipment Leasing
Businessopportunity411.com
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