I talk with business owners across the country every day who ask about the most effective way to get additional working capital (not start up capital) for their business. In most cases we’re able to help them locate the funding they need. So…question answered.
Problem is, the wrong question was asked and answered.
Better: Why do I need capital?
The underlying question is often ignored when the new funds arrive. Sounds foolish, but it happens every day. Moving from crisis to crisis is no way to operate your business. You may feel compelled to douse the next fire rather than take a hard look at the more difficult, but that merely masks long term (more expensive) problems.
I have these conversations almost every day and notice 1) Not much has changed when I get the call looking for the next round of funding, and 2) most cash needs stem from one of the following issues just below the surface.
1) Initially under capitalized
I spoke with the owner of a fruit bouquet franchise this morning who was searching for capital and admitted he was under capitalize from the outset. High on expectation and optimism, he launched ahead regardless.
In their 16 months of business his credit score has dropped 140 points which makes most traditional funding impossible and he’s already sold away 25% of his future credit card sales to help make ends meet.
He’s in a death spiral not yet admitted to himself, he’s too wrapped up in the day to day details and it will likely cost him whatever other money he commits to this business.
2) Slowing sales
The impact of 2008’s forth quarter was felt across the country as sales have slowed almost everywhere. So, what have you done about it? What changes have you made to cut costs, reduce inventory, and pick up market share? Recessions always provide opportunities; they are just not as obvious. Additional capital and the impact on cash flow will not magically improve sales, that is up to you.
New capital will either reduce your equity or will be a drag on what is already lower revenue. More debt without a plan to improve sales is now much of a plan.
3) Poor planning
Many of the national franchises require their owners to remodel their location every 5-7 years, yet this seems to “surprise” even long time owners who scramble for the necessary funds.
A friend of mine owns several limited service hotels and his franchise company requires they set aside a percentage of revenues each year for capital improvements. The reinvestment into his properties is significant, but already budgeted for in a planned, considered manner.
What are you preparing for? Whether required or not, advance planning makes you a better and more profitable business owner. “Unexpected” events are part of business and part of life, start preparing for them now.
4) Unplanned opportunity
We’re an optimistic bunch which is probably why we’re in business for ourselves. Every time I get a call for capital because of an opportunity I inquire if the excitement is because it offers something better or just something different.
I just spoke with a restaurant owner who has a great opportunity to take over a vacated Bennigans restaurant location at about 20% lower rent than the past tenant. So I wondered, why that location went out of business (the chain filed bankruptcy), what the traffic flow was, if their new concept could fill a location twice their current size, what would the impact to their first location be?
It was the first time he’d pulled his attention from the lower rent and “free equipment” to consider these issues that could put his entire company at risk. Not to mention the impact to his current cash flow and lifestyle.
Getting additional capital is never the complete solution to what ails your business. Look deeper and ask more focused, pointed questions to yield better results.
Comments on this entry are closed.