Posts Tagged ‘Finance’

Mondays with Mike: 5 Ways to Get Paid Faster

11-2 Paid Invoices smallThe default payment period for most of us who bill clients after services are rendered is 30 days.  When you examine your receivables, though, you see those 30 days often turn into 45 days or even longer.  Think about the difference it could make to your cash flow if you could significantly reduce the time you wait for folks to pay your bill.  As it turns out, you can.  And it’s not even that difficult.

  1. Change your terms.  So simple, most of us don’t even think about it.  Why exactly do we offer 30-day terms?  Because that’s the way we’ve always done it.  Now your established customers might not be thrilled if you suddenly changed your terms to COD or Net 10, but there’s no reason on earth you can’t bring new customers on with terms that bring your cash in quicker.  Just do it.
  2. Offer bank financing.  Now this option works best for high-dollar purchasing, but if you set up a program through a local bank to offer free or low cost financing, you can remove all objections to purchasing.  You’ll pay a fee to the bank for the service, but the best part is you get your cash up front, and any collections in the future are the bank’s responsibility.
  3. Accept credit cards.  I’m astonished how many businesses still go the paper invoice, antiquated check route.  You can literally turn any smartphone, iPad, or tablet into a credit card reader, so there’s no reason not to swipe your customer’s card on the spot.  You’ll pay a small percentage for processing, but you have access to funds right away.  No need to remember to pick up stamps and wait for months for a check to arrive.
  4. Build a reverse cash flow model.  The old-fashioned model is to build a product or deliver a service and wait for the customer to pay.  But think about the way Dell revolutionized the way we buy computers.  Rather than building machines and waiting for people to show up at a store, Dell took orders (and payment,) built their machines to customers’ specifications, and then shipped the computers out.  Even if you’re delivering a service, find a way – like an annual service fee – to get your payment up front, and you’re radically altering your cash flow.
  5. Change your billing frequency.  If you provide a service on the 1st of the month, but don’t bill until the end of the month on 30-day terms, you’re looking at roughly two months before you see your money.  If you start billing weekly, or even daily, you’ll see payments arriving throughout the month, ultimately far quicker than you would if you held your billing until the last day of the month. 

So often we blindly follow established practices – like 30-day terms – with no good reason other than that’s the way it’s always been done.  In today’s market, though – given that you can send money anywhere in the world instantly – there’s no reason we can’t change the way we do business in a way that benefits cash flow.

How to Pursue Funding for Your Company

10-7 Funding your biz smallIf you have a great idea for a business and your second thought is to look for financing, I want you to hold your horses for a moment and ask yourself, Why? You need to get three different answers before moving forward. If you think that funding is the best option rather than bootstrapping it with your personal resources, be careful! Outside funding brings its own crop of distractions. Here are 7 things you need to know before pursing financing for your small business.

1. You Won't Write the Deal

If this is your first business, then you don’t have a financial track record, which puts you in a beggar's position. The investor you seek funding from has the power and may deploy an agreement that puts you at a disadvantage, either by valuing your company less than you think it should be valued at, or by charging you a higher cost of capital.

2. You'll Be Chasing the Funding Instead of the Customer

At this stage of building a business, there are few things as important as your customer. Once you divert your interest from your clientele to pursue funding, you will distract yourself from the building your business. Building a customer base requires focus and dedication; getting funding requires the same. Since you have limited time, it will be a real challenge. Customers are the linchpin of your success. Ignore them at your own risk.

3. You Could Undervalue Your Company

When you seek money from outside sources, you have to place a specific monetary value on your company based on its assets and intellectual property. It is easy to make a substantial mistake that you’ll only be able to determine after the fact. It is difficult to calculate the value of an emerging company, and this may make getting funding a challenge.

4. You Might Partner With the Wrong People

Partnerships are like other relationships. When you partner with an investor in haste, you put your business at risk. The offer to fund your enterprise rarely comes without strings, so make sure you understand your financier better than you understand your spouse. If that sounds like a tall order, then you may not be ready to take the leap with complete confidence. There is a lot at stake, so use caution.

5. You'll Learn More Without Funding

Bootstrapping is a valuable exercise. A true entrepreneur builds a business to learn something: about the market, about the customer, about the product and himself. When you build your business without a cushion, you get to learn expensive lessons. They are often the most valuable. Running a business will build your instincts and help you hone your talent.

6. Funding Often Masks Underlying Problems

An excess of cash can hide critical deficiencies in a business model. An infusion of capital won’t fix all your problems. If your staff isn’t properly trained and you’re getting customer service complaints, money won’t remedy that; effort will. It’s sometimes easier to see these issues and fix them if you don’t have too much money between you and the problems.

7. You Could Lose Control of Your Company

Once you’ve put your most devoted efforts into building your company, and secured outside funding you’ll have to appoint a Board of Directors, but most likely your funded will have financial and board control. Investors like to work with executives they know. You, as a fresh entrepreneur, represent an unknown territory. Backers don’t know how you’ll react to success or difficulty and may want to remove you as the CEO.

If you see your business opportunity as a way to cash in quick, you may not have the stamina to bring your business venture to success. Investors rarely invest in an idea and they don’t invest quickly.  It could take 18-24 months to secure a deal.. The reality is that funding brings as many problems as it appears to solve. While there are other options for funding, explore them carefully and avoid making commitments under duress.

When Will the Next Recession Be?

9-4 recession smallThe next recession may have started on August 24, 2015 when the Chinese stock market dropped another 7% and for a total of a 40% loss from its peak. That day, U.S. stock markets followed suit and plunged 1,089 points within minutes of the start of trading. The markets slightly recovered, but are still down 12% year for 2015.

This is a troublesome indicator since many times the stock market predicts the coming of the next recession. Although as Economist Paul Samuelson retorts, "The stock market has predicted nine of the last five recessions". Even so, from March 1961 to now, the average growth period following a recession has been about five to six years. If the last recession ended June 2009, the economy is now past the six year mark and is in one of the longest periods of expansion ever. This may also mean that a new recession is about to start.

After the stock market crash, most economists publically said not to panic. A conference call that I listened to with financial advisors repeated that all signs of the U.S economy are strong. Ron Lieber at The New York Times wrote that the average investor should take a deep breath and do nothing. But for most small business owners, it’s hard to do nothing when their investment portfolio loses 10% of its value in a week. Investment savings is what many times “backs up” the owner’s confidence if their company fails.

This psychological fear creates havoc in the life of the small business owner. Their lack of confidence in the economy drives them naturally to pull back from hiring people and making new investments. Bad news reports can also make a recession a self-fulfilling prophecy.

If the next recession is coming this year, how can you prepare?

1. Grow profitably. Make sure that any sales growth has the same profitability as the rest of the business. Don’t sacrifice profitability for sales growth. This will help to ensure strong cash flow which is the bedrock of survival during any recession.

2. Preserve cash. Recession proof companies always have positive cash flow positions. Don’t let investments in the company get too far ahead of sales. Focus on reducing credit given to customers and getting them to pay on time. Keep stock levels as low as possible and inventory turns as high as practical.

3. Get a bank credit line now. Secure a line now before the company needs it.  Draw on it as low rates to ensure the business has six months' worth of cash in the bank.

4. Boost the gross margin. Ask if business can be done another way. Cockroaches thrive during disasters because they know how to adapt or die. For example, if margins had to increase by 10%, how would this be accomplished now?

5. Cut costs even if revenue is stable. Don’t be lazy. No owner ever regrets cutting costs too soon. Examine where the value does not exceed the expense.  

According to Mark Zandi, chief economist at Moody’s Analytics Inc, since 1950, the U.S. has experienced a recession at the start of every decade except the current one. He states that “If that bit of economic astrology holds, the next one will be in 2020…and I wouldn’t argue with that.”

We should only be so lucky.

The Lowdown on Small Business Bank Loans

7-15 small business loan smallStarting a small business is a costly endeavor. It’s rare that a business owner has so much cash saved that she doesn’t need any capital once the business really start rolling. One way to secure funding is through a small business bank loan. While bank loans are not easy to obtain, once you’ve been in business at least 2 years and have financial statements which show your company is growing, you can find some local bank or CDFI’s Community Development Financial Institutions that will extend you a loan.

The key to finding a loan is to seek out banks that are more likely to work with small businesses. Smaller banks move faster in terms of processing the loan, but they are much more rigid in their loan requirements and require significant collateral. That being said, if you have a relationship with a local bank,that may be the first place you want to look at for funding.

Many of the large national banks chains cannot adequately service the needs of very small businesses. In addition, the lending decisions are not made locally. Whether you decide to seek funding for a larger national bank or small one, make sure you consider the six Cs, which is the way a bank will assess your application.

1. Capacity:  This is the most important factor your bank will consider in deciding whether to advance you money. It is essentially whether you can pay back the money you borrow. Your current cash flow statements should illustrate how you can repay the loan in a timely manner.

2. Credit: Your personal credit score is a factor in your small business loan application. Banks will require you to sign a personal guarantee on a loan to share the risk. The higher your credit score, the more favorable terms you can negotiate.

3. Capital: How much money do you need and how will you use those funds? It’s important to detail exactly how much you need and what you will use that money for in your business. Keep in mind the more money you ask for, the more scrutiny your loan application will receive. Typically you can borrow 10 percent of your gross revenue.

4. Collateral: Any business owner will be asked what assets he can provide to secure the loan. For example, if you own a home, car, or other personal assets, those will be considered when a bank decides whether to grant your loan request. The more collateral you have, the more willing a financial institution may be to lend you money.

5. Character:  Simply put, this is your reputation. You will be asked for references that can speak to whether you are trustworthy and have community connections. Banks will also look at your business experience and your industry background.

6. Conditions: This refers to your loan’s terms and conditions. You need to answer the question: is it a good deal for you or the lender? Your bank wants to make sure that you are using the loan for a legitimate business purpose. As such, some lenders will require invoices from your vendors and will cut checks directly to the vendors for payment.

When you’re seeking a small business loan, it’s important to understand what all six of the Cs look like for your business before completing your loan application. Keep in mind that credit unions and nonprofits may also offer small business loans. These organizations may give smaller loans than banks, but they are often a great first step in securing financing and establishing business credit, especially if banks are not an option. 

5 Steps to Building a Successful Crowdfunding Campaign

4-22 Crowdfunding smallIt seems like nearly every day, there’s a new crowdfunding campaign or request for support that comes up. There’s a good reason for this, and that is: crowdfunding has become an exciting way for small businesses to build capital to launch a new business venture. If you’re not familiar with crowdfunding, it is the practice of funding a project or venture by raising many small amounts of money from a large number of people through the Internet. If you think crowdfunding may be a viable option for you to raise money, let’s look at how it works and what you need for your campaign to be successful.

There are more than 500 active crowdfunding websites, with the biggest five being Kickstarter, Indiegogo, Go Fund Me, Crowdrise, and RocketHub. While each site has different features and capabilities, they all function basically in the same way. The sites take a commission fee from what you raise (typically 5 – 9 percent). Before you select your platform, you need to decide on your fundraising goal and the time frame. Make sure you research the platforms and their policy on whether you get any funds if your campaign doesn’t meet its goal. Some sites (like Kickstarter) require you return the money to donors if you don’t meet the fundraising goal. This means if your goal is $5,000 and you get $4,999 in pledges and donations, you get nothing.

How to Build a Successful Campaign

Once you decide on the right crowdfunding site, follow these five steps to build your campaign.

1. Work your network first. The worst mistake you can make is starting your campaign and then start using social media as your go-to place to reach prospects. You should be active on sites like Facebook, Twitter and LinkedIn at least six months before the launch of your campaign. Your first 30% of pledges will come from your personal network, and if you can’t get people who you know to invest in your idea, no one else will.

2. Tell a good story. Storytelling is one of the most effective ways to make a sale. If you have a strong idea, tell a compelling story about it. Then write engaging copy that focuses on the story, and create a short video that explains your idea. These will become the basis for your crowdfunding website profile.

3. Do not exaggerate. It’s important to be enthusiastic about your business idea. After all, how can you convince a customer to buy unless you also believe in what you’re selling? But make sure you don’t overhype your project either. If you promise things you cannot deliver, it will turn into a public relations (and possibly legal) train wreck.

4. Have great rewards. People love to get something, even if it’s small, for their donation. Create a list of rewards you are willing to give in exchange for a donation. The rewards should range in significance from the lowest amount to the highest. For example, if you’re crowdfunding to publish a book, perhaps the smallest donation receives a credit in the book as a reward. The highest donation may receive a signed copy and book cover poster.

5. Donor relations are critical. A successful crowdfunding venture does not stop the minute your campaign ends. Have a plan in place to communicate with your network and donors after the funding campaign is over. These people helped you raise the money you need to build your business. Make sure you keep them informed about what’s going on, and thank them whenever you can. You never know when you may need them to raise more capital in the future.

Crowdfunding is a great way to fund a business venture from the ground up. Start researching successful fundraising campaigns, look and your network, and decide whether this is the right medium for you.

Should I Borrow Money from Friends or Family for My Business?

3-15 loaning friend money smallGetting your business started requires money, and while there are many sources for finding this funding, one often overlooked source is friends and family. On the one hand, a friend or family member may be able to offer you an interest-free loan that you wouldn’t qualify for at the bank, but on the other hand, money and the people you’re close to don’t always mix well. Family and friendship dynamics are delicate, so carefully evaluate your relationship with possible creditors before opting for this financing source. Use these five steps to ensure a successful outcome.

Assess the risks from the outset

Begin by having a blunt conversation with your future financier. Talk to her about the risks and pitfalls of this transaction. The idea is not to spoil her enthusiasm in investing in your business, but rather to confront the harsh realities that small businesses sometimes face. If, after this conversation, your benefactor is still ready to loan you money, you have done your part to let her know of the risks she’s taking.

Decide if it’s an investment or loan

Continue the discussion by assessing whether or not your creditor would like to come aboard as a partner and take equity in your company or simply loan you the money and stay out of operations. Be comfortable with the terms and the equity you give, and consider whether this person would be an asset as an advisor to the company or not.

Have a formal agreement

Even if you trust one another implicitly, having a formal contract for the loan or investment is still a good idea. You may not need a lawyer to work out the details, but if the amount of money is substantial, you’ll definitely need an accountant. If your benefactor wants to forego a formal agreement, it may still be necessary to discuss more precise procedures such as what to do in the event of default or bankruptcy. Never promise something that you cannot deliver.

Keep it professional

Treat your private creditor like you treat your bank. Pay on time or early if that’s part of your agreement, and keep track of every transaction. Don’t take advantage of your personal relationship to pay late or not at all. Being formal and professional ensures that you don’t blur lines between business and personal relationships.

Put everything out on the table

Create the habit of communicating with your friend or family member. Let her know regularly how business is progressing. Never make her pursue you for updates. Whether you have challenges or successes, keep her in the loop in the way you would other partners or investors. She will appreciate this and feel more vested in the success of your company.

Deciding to borrow money from someone you’re close to is a decision you need to spend time reflecting on. The last thing you want to do is jeopardize your personal relationship with that person, and money has a funny way of doing that sometimes. Keep the lines of communication open and make sure you properly manage your investor’s expectations.

Mondays with Mike: 7 Ways To Cut Costs Without Stifling Growth

4-6 Cost Cutting  smallToo often, we discover a new way to reduce our expenditures, only to find out it’s not ultimately good for our bottom line.  The trick is to manage our costs, while still flourishing.  I know – that’s easier to say than do.  But here are seven sure-fire ways to keep your business growing on the cheap.

  1. Pool your resources.  You and other local businesses share many of the same needs.  You need things like ink for your printers, paper towels for the kitchen, and health insurance coverage for your staff.  If you can come together, assess your needs, and approach your providers for these goods and services, you can often negotiate for a better group rate.  Your ink supplier, for example, will likely win some new customers, and you’ll all save money.
  2. Hire contractors.  Take a step back from your staff and assess your real staffing needs.  Often it’s advantageous to hire contractors for certain jobs, paying them a much higher hourly rate, but only using them as needed.  Your staff gets more flexible work days, and you save money in the end.
  3. Free advertising.  So one of your competitors goes out of business, but their billboard on the edge of town is still standing, inviting prospective customers to call their now-out-of-service number.  Call the phone company and arrange to have that old phone number forward to your line.  When the phone rings, you can explain the situation and detail what you’re willing to do to earn that customer’s business.  Why pay for a billboard when you can get one for free?
  4. Cut phone costs.  Most business owners don’t realize how much money they spend annually on their phone services.  Explore lower cost – or even no cost – options like Nextiva.  You may find better call quality and services for far less than you’re paying now.
  5. Assess your office space.  Over the life of your business, you may find that you expand or contract from time to time.  When you’re paying for a space that’s larger than you need, you’re wasting money.  See if sharing a space with another company makes sense, or look for options with shared public areas – kitchens or restrooms.  Make the most of your rent dollars.  Also keep in mind that landlords with space that’s been vacant for a long period of time are far more willing to negotiate rates.
  6. Train your own talent.  Superstar, experienced employees command high wages – no two ways about it.  If you hire raw talent, and take the time to bring your staff up to speed on your own, you can realize huge staffing savings.  Whether you take a chance on an intern or find a diamond in the rough worth taking a chance on, training staff not only saves you money, but also lets your mold your staff to work the way you want.
  7. Get your staff involved.  One of the best moves I ever made was to have a sit-down with my employees and solicit their help in finding ways to trim unnecessary expenses.  They came up with ideas that would never have occurred to me, and when they pitched in, we had a whole team of people working to improve the bottom line.

Cutting costs doesn’t have to be painful.  Finding creative, win-win approaches is the key to making successful, long-term changes without inhibiting your company’s growth. 

How to Make Your Business Appealing to Angel Investors and Venture Capitalists

3-11 funding for SB smallSmall businesses and investors can go together like ice cream and apple pie. It is definitely a vote of confidence when someone provides funding that can take your business to the next level, yet there are trade-offs that come with accepting investor funding. If your idea is so big that you know the only way to bring it to success is with the support of outside resources, then angel investors or venture capitalists might be the right fit for your company. However, remember that this class of investor is looking for a good investment. They weight talent first and ideas second, so make sure you understand how to position yourself for this level of funding.

What’s The Difference Between Angels and VCs?

Keep in mind that angel investors and venture capitalists are very different types of investors. Angel investors are usually private individuals who have some money and are keen to use it to get a return, but they may want very little to do with the day-to-day running of your small business. They may fund businesses with lower growth rate projections and be more interested in firms that create value in the community in ways other than high profits.

Venture capitalists, who usually work as a collective firm rather than individuals, have deeper pockets, but desire larger and faster returns. They usually will require a much larger stake of your business to entice them to partner with you and may even take over management of your business as active backers. However both types of investors will become your partners and require a piece of equity in return.

There are many ways to appeal to angel investors and venture capitalists. The main thing to keep in mind is that you will have to work very hard to interest them and have conclusive evidence that your organization brings substantial value to the table. Here are five ways to make sure that you’ve got what it takes to encourage this level of investor.

1. Build your business (and your personal brand)

There is no way to avoid it: building your business takes hard work. One great way to make sure you succeed in this task is to become an expert in your field. Dig deep to build those skills. You may want to look for a mentor or networking group to ensure you continue to grow in areas like public speaking, marketing, or management. Consider this an investment in both you and your company.

2. Solve a problem

Make sure that your business solves a problem for which your customers need a solution. You need to be able to convey to an investor that you understand this problem, as well as how and the why your company is the best solution for this problem. There is no room for feebleness here. You must be on point. Rewrite your business plan if you have not yet fine-tuned this aspect of your business.

3. Have an amazing team

In short, your team must work together effortlessly and complement one another’s skills. Trust me, venture capitalists will go through your roster with a fine-tooth comb. They want to see your team in action and know that you can withstand whatever challenge comes your way. Always hire candidates who bring a variety of hard and soft skills to the table so that you can create a culture of success from the outset.

4. Have a phenomenal pitch

Your pitch must be persuasive, thoughtful, and farsighted. It will go hand and hand with your business plan, but you must be able to convey in confident and concise speech the essence of that plan. There is an art to delivering a pitch, so make sure the right person delivers it.

5. Always have the big picture in mind

If you have your eye on the big picture, you are guaranteed to keep things in perspective. Be honest with yourself about your venture and its challenges, so that you anticipate market changes that affect your industry before they arise.

Investors want humble founders who know the industry, the competition, the technology, the business climate, and regulatory issues. In short, they want to see someone who has their feet in reality, but is reaching for the stars. If you can be that person, you’ll find the right investor to help your business grow.

How to Choose a Bank for Your Small Business

2-25 Choosing a bank smallOne of the first things you need to do on your path to becoming your own boss is to open a business checking account. Now, you might think it’s best to keep your business account with the same bank where you have your personal accounts, but it’s better not to. Should your business fail and you have both business and personal accounts at the same bank, you risk losing everything because the bank can seize your personal assets to satisfy your business debt.

What You Need in a Bank

Your business needs a banking relationship not just a bank. It isn’t just a place to put your money. It’s a place you have a relationship with a partner that should be interested in helping your business succeed. Not every bank has great personal relationships with its business clientele, so keep that in mind when beginning your search.

While you might only start out opening a business checking account, there may come a day when you want to apply for a small business loan through your bank, so make sure the banks you consider offer a variety of small business services that can support your company as you grow.

Where to Start Looking

Ignore billboards, online ads, and commercials when choosing a bank. You’re better off asking other entrepreneurs for referrals, since they will know which banks are small business-friendly (not all are).

It’s a good idea to narrow your choices down to three, and then schedule time to sit down with a branch manager from each. These questions can help you gauge which is the best fit for your business’ needs:

  • What percentage of your customers at this branch are small business owners?
  • How fast are checks cleared to my business account (both in- and out-of-state)?
  • Is there a dedicated small business banker on your staff?
  • What kind of customer service do you provide for small business?
  • Are loan decisions made locally?
  • Does the small business banker have any influence over the loan decision process?
  • How many SBA loans did your bank process last year?

The point of these questions is to see how much energy a bank puts into managing and developing its small business clientele. You want to feel like a welcome and cherished customer, especially since you will be trusting this bank with your hard-earned cash!

Also consider what you’re looking for in a bank. Do you need to easily get to it to deposit cash each day (if you operate a restaurant, this is a must)? Would you prefer to be able to access your accounts through a mobile app?

Developing the Relationship Over Time

You may have little need to visit your local branch, especially since many banks allow you to deposit checks with a few clicks on your phone. But make a point to stop in and visit your branch manager or small business banker every few months and update them on what’s happening with your company.

Ask if there’s anything new service-wise with the bank. You might find out they’ve got a new banking program that’s perfect for your needs at the moment. Keeping that dialogue going will help you both find ways to work together for the success of your business.

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