We all know how important it is to have financing for your business. You will rarely find a list of reasons for business failure that will not list access to capital as one of the top reasons why businesses fail. The SBA.gov website talks about the reasons businesses fail and lists insufficient capital (money) as the #2 reason on their list. On the Dun & Bradstreet Cred. Corp website I’ve talked about the Top 3 reasons businesses fail and #3 on my list is lack of access to capital. So I think it’s safe to say that most of us will need access to financing to grow our businesses.
So “when” should we get our funding?
Very few businesses need all their money up front. Of course there are exceptions to every rule but for most of us, we’ll need our funding in stages. Some now, some later, and some down the road further. It’s probably also a good idea to listen to people who have built companies and who are experienced at running a business. They will basically all tell you that things take longer and cost more than we plan and expect.
Well-known author Les McKeown, in his book Predictable Success, has a simple formula. He says to plan, project, and forecast and do all you can to calculate the amount of funding you need. Then when you’re done doing that, Les says, take your number x3. If you project you’ll need $50,000 then he says you’ll probably need closer to $150,000 when it’s all said and done
It frustrates me a little to admit that Les’ formula hasn’t been far off for me over these last 5 years of building our business. But there is a Golden Rule of Business Financing. Simply put, get your money before you “need” it. But wait, to understand the Golden Rule of Business Financing you also must understand the difference between loans and lines of credit and decide how you’re going to financing your business.
If you plan to finance your business through loans (instead of lines of credit) then it’s a little more difficult to get a loan before you need it since you would incur the monthly payments. However, if you obtain some or all of your funding through a manageable series of business lines of credit then you’ll always have access to funding from a variety of sources. It will also relieve your stress when you “wait” to apply for a loan and you really “need” that loan to get approved.
In a perfect world you would have a mixture of lines of credit and loans and you would be intentionally and purposefully treating your personal and business credit as assets so that your credit always allows you to obtain additional funding as you need it. The two biggest problems we run into with early stage entrepreneurs and small business owners is that they either have derogatory items on their personal credit that limits their funding options or they have excessively used their personal credit cards. Either of these two factors or a combination of them can, and often does, limit your financing options because of the negative impact on the personal credit profile of the owner.
So here are the takeaways:
*Lines of credit allow you to get your funding before you need it and relieves the stress of “needing” to get a loan approved.
*Follow the Golden Rule of Business Financing and get your financing before you need it whenever possible.
*Treat your personal and business credit as an important asset since having access to financing now and in the future will likely be an important part of your businesses success.
Best of luck to you as you chase the dream of owning a business and building it into a successful and valuable asset.