The coronavirus crisis has caused a plethora of financial issues that businesses must now face. All of my clients are dealing with dilemmas concerning customers, credit, future sales, financing, planning cash flow, forecasting, etc. when it comes resolving financial stress.
For the most part, we still live in a world with an old system of small business financing. Most financing (including institutions like banks and the SBA) is based on antiquated businesses, such as manufacturing and retailing, where financing was handled mostly through asset loans, guaranteeing debt via family assets, and personal savings.
However, things are very different today. Most new businesses are service or technology-based, and require much less investment.
Many clients start the financing process by asking the age-old question, “How do I raise money?” That’s an outdated way to start and I believe it’s a mindset that needs to be changed in order to be more successful. For example, traditional style advisors often recommend raising as much money as possible. In contrast, I suggest minimizing to reduce costs and risk, keep equity, and avoid excessive financing charges.
Some of the biggest changes that need to take place involve utilizing alternative techniques to minimize financing needs and marketing opportunities to accelerate growth. I recommend a more comprehensive and flexible approach to the process which focuses on key issues like: How much money do you need? How and when will you pay it back? Why should someone invest or partner with you?
Additionally, we live in an environment with low interest and inflation rates, and lots of capital to invest. The rest of this article will discuss financing suggestions that take into consideration new trends and current events. For example, the government has instituted $2 trillion of relief programs for salary, unemployment, and investment that must be considered.
Operational Financial Resources
The simplest source of funds is to reduce the need for funds through regular business tactics. This can be accomplished with strategies such as outsourcing, contracting services, utilizing sharing resources, and testing. While not all of these strategies may be appropriate for every business, consider the ones that have most potential to save cash:
- Plan and manage inventory to maximize return: focus on the 80-20% rule that states: 80% of your sales will come from 20% of your products. Additionally, manage inventory and services for seasonal and market changes.
- Consider direct shipping from your facilities or organizations like Amazon.
- Minimize investment through strategies like renting or sharing. For example, warehouses, cooking facilities, and manufacturing can all be outsourced. One caution: doing things in your home will frequently result in long-term, operational, and legal issues.
- If asked, suppliers are often willing to help a business with things like financing, holding inventory, reducing production times, and direct shipping.
- Use services for internet management, warehousing, and programming.
- Understand and minimize complexity. For example, there’s a big difference between selling a shoe (with various sizes, colors, widths, and styles) versus selling food products (which have a few ingredients that can made into a number of items.)
- Analyze why you are really spending and what you will get from it.
- If the business is profitable and growing, you can frequently finance the growth with working capital from profits. This also means giving up less equity.
Expanding Marketing Efforts
Don’t wait for business to come to you, but consider the rule: you have to spend money to make money. Analytics, internet marketing, and outsourcing programs provide numerous opportunities to grow and make money faster:
- A website and a simple marketing statement provide basic information for potential customers. These can be inexpensive through programming tools like WordPress.
- Amazon is the fastest growing retailer in the country and controls about 30-50% of most internet sales. It is easy to set up and relatively inexpensive.
- Paid search through organizations like Google and Facebook are underestimated. These options can be inexpensive and fast, and the results can be measured.
- There is nothing as productive as Networking, Networking, Networking!
These tactics must be tested and measured. Kill or modify the ones that fail and expand the ones that succeed.
Non-traditional Sources of Capital
- Crowdfunding was initially used by “social entrepreneurs” to fund their projects, films, books, and social ventures. It’s becoming more popular as it allows small investors to back your business through organizations like Kickstarter.
- While credit card interest can accrue (at a high rate) if not paid off right away, some credit cards do offer a 30-day free program, or zero interest (for sometimes up to 18 months) with a new account.
- Bartering, alliances, and exchanges are viable methods to get both excellent services and save cash.
- Community based lenders (such as non-profit, independently financed, or private organizations) often make loans to small businesses or entrepreneurs who do not qualify for traditional commercial bank loans.
Traditional Sources of Capital
- Equity from yourself, friends, and family. This is the amount of money you can put into the business on your own, and you don’t have to pay it back until you see profits. It may include sweat equity or contributed assets. It also provides other investors with more confidence in your commitment.
- Outside equity has the same properties except it involves giving up at least some of your own equity in the company. It can come from a variety of places such as partners, venture capitalists, private equity dealers, private offerings, and private investors.
- Traditional banks and loan institutions are focused on reducing risk and making certain they get paid back. These are usually asset-based loans or are combined with equity contributions.
- Raising capital is a two-way street that requires honesty, understanding, and communication. Understand your needs and the risks involved in order to find the right type of investors.
- Don’t overestimate your potential or what is needed to meet your goals.
- Develop plans, measure results, and satisfy investor requirements.
Significant changes are occurring in financing. There will be more risk, more volatility, more uncertainty, and more focus on profit and cash flow. Thankfully, there are numerous tactics to manage these shifts. As these changes progress, consider including more alternative methods—especially cost reduction, analyzing goals and strategies, and focusing on the dynamics of the financing rather than just how much money you can raise.
Dr. Bert Shlensky has an MBA and a PhD from the Sloan School of Management at MIT. He is the President of the New York-based consulting firm The Startup Connection, where he uses his 30 years of high-level business experience to guide his clients toward maximum sales and profit. For a free consultation, please visit www.startupconnections.net.