Saving Money

6 Realistic Ways to Grow and Fund Your Small Business

Welcome to another episode of Money Talks with Tiffany Kent, Certified Financial Planner and Founding Partner of Wealth Engagement, LLC. In today’s episode, Tiffany breaks down three ideas to maximize business growth and three financing options that can prepare your small business for the next stage of funding.

Transcription: 

Tiffany Kent:
Most people think that when you start a business, you need to raise money and that you have to give away huge amounts of equity in your company in exchange for that investment. But that’s not the case. And I’ve got a few smart tips and suggestions for low-cost ways to raise money to fund your business without giving up equity. My name is Tiffany Kent and I’m a certified financial planner and investment manager and a business owner. I’ve talked to many other entrepreneurs and business owners over the years, and I’m surprised that so many people think they have to give up equity in order to raise cash and grow. That’s an outdated way of thinking, and there are so many more options out there.

Tiffany Kent:
Starting a business is hard, no doubt. And most of the time you need some startup cash and capital in order to hire people, buy equipment, lease office space, and cover other initial costs. Finance and the cost of capital usually makes people cringe. Even seasoned executives get nervous and stressed when they have to think about the cold, hard truths of what it costs to start and run a business. Yet managing a balance sheet and understanding your financial options is crucial, so that you can grow and earn the highest return on your investment.

Tiffany Kent:
In my previous life as a portfolio manager and a stock investor, one of the things that made me super excited was when a company-funded its growth with the lowest cost of capital. That would be cash, working capital, and then of course, debt. My colleagues and I would even ridicule management teams when we saw a company with a lazy balance sheet, meaning the company had way too much cash and didn’t know how to grow. Because if you’re not growing, you’re dying. As a business owner, you probably have a business that is running well, and maybe you’re earning a nice little profit and things are humming along. But it’s crucial that you invest in your future growth, especially now as the economy is in flux and as we are coming out of this pandemic.

Tiffany Kent:
In order to grow, you need to get your sales team in front of new customers, buy new equipment, invest in research and development, maybe take more office space, and find and hire and retain new and best talent. All these things cost money. Growing the top line by finding new sources of revenue is one of the best ways to raise cash for your business. Here are some strategic decisions you should be considering. Maybe opening up a new store or location, study the historical performance of your existing locations, and what it costs to open a new store and how quickly the store usually turns a profit. Then look ahead to the growth that you could expect over the next three to five years from each new store you open.

Tiffany Kent:
For example, maybe it costs around $500,000 to open a new store. And within a year, if that store will be earning a million dollars, then that’s a great new investment. Maybe consider buying a building. Let’s say you’re paying $5,000 a month in rent. That’s money down the drain and is making your landlord richer. Right now, you can borrow cheap money at incredibly low-interest rates and buy a building. You might only need half of the space and you can rent out the other offices and collect additional cash streams from your other tenants, while also saving on paying your own rent. Even better, your building will probably appreciate over time, and you’re building equity. Another option is to create a separate business entity that owns the building and leases it to your company. There are a lot of creative things you can do with real estate.

Tiffany Kent:
Third, maybe introduce a new line of business. If there’s a new product that you’ve been wanting to develop or a new segment of customers that you should be going after. Maybe your original vision was to run an online store that sells women’s accessories, but it’s been doing well and it’s earning a lot of money. But maybe you’re missing the other part of the population. What if you added a men’s line to the business? Or items specifically aimed at children or teenagers? What if your target customer, maybe women, could suddenly shop for the entire family by staying loyal to your business?

Tiffany Kent:
Step back and do some critical thinking about your product line or service offerings and make some smart decisions about natural brand expansions or extensions. Be careful about straying too far outside of your area of expertise. Maybe go after a new business. This can be very difficult and challenging, and often requires you to have a strong balance sheet. We’ll explore this area a bit more later in the show.

Tiffany Kent:
Now that you have a few growth ideas that you can take your business to the next level, you need to figure out how to fund this next stage of growth. The stronger your balance sheet, the more access you will have to lower-cost financing. If you get this wrong, it could backfire and you could end up growing your business to death. It’s a common mistake that business leaders make. And sinking costs before you had the financial backbone or revenue growth to support these expenditures can drag your company down and cause you to run out of money. Think of finance as a menu of options, and people like having choices. So let’s go through your list of financing options, just like you’d go through a menu at a restaurant.

Tiffany Kent:
Working capital and cash, low-cost small business loans, home equity as a source of low-cost financing. First, let’s dive into working capital and cash. They say cash is king, but flow is queen. That means your free cash should flow. But what if you’re short on cash? If you don’t have enough cash from the business to invest in the next stage, the next best way is to consider working capital. Working capital affects many aspects of your business, from delivering goods to customers, paying vendors and employees, to keeping lights on of your brick and mortar store.

Tiffany Kent:
Working capital is the difference between a company’s current assets, such as cash, accounts receivable … which are the bills of invoices that your clients haven’t paid you yet. And inventories are raw materials and finished goods, less your current liabilities, such as accounts payable … which are bills from vendors and suppliers that you haven’t paid yet. And debts. Working capital can be heaven or hell, depending on your business. Let’s start with the heaven scenario.

Tiffany Kent:
You have an online business that sells jewelry. You sell to your customer a $200 necklace and you collect payment with a credit card. You immediately have $200, less credit card transaction fees. You then run out to the gem store and purchase stones for $50, make the necklace, and ship it out. The total cash outlay is $50, plus the $10 to ship the necklace. But you already collected $200. Your customer, in effect, funded your cash investment of your supplies. Your working capital has $140 positive cash flow.

Tiffany Kent:
Now let’s flip it around and imagine a working capital hell scenario. You purchase fuel for your clients who work on a construction site, which needs delivery of very large quantities of fuel. As the distributor, you buy a truckload of fuel with a check for $100,000, and you refuel your client’s trucks on the construction site at a marked-up price of $110,000. But the clients don’t pay you for 30 days. So your margin is $10,000, but you have to float the entire $110,000 cost to your clients for an entire month. If you don’t have $100,000 sitting around on your balance sheet, you need to fund that expense somehow, otherwise you can’t take any other orders from other customers or any other clients until you get paid.

Tiffany Kent:
Networking capital is a measure of a company’s liquidity, operational efficiency, and short-term financial health. If it is a company with substantial positive networking capital, like in the case of the online jewelry business, then it should have the potential to invest and grow pretty easily. But if a company has substantial negative networking capital and its current liabilities are greater than its current assets, then it may have trouble growing or paying back creditors, and might even go bankrupt. So liquidity is key. The secret here is to get paid as soon as possible by your customers, and delay payment as long as you can to your vendors. Essentially, you’re using your client’s balance sheet to fund your operations in the short term. But just like you, your vendors are trying to use your company’s balance sheet to fund their growth, which creates a lose-lose position.

Tiffany Kent:
Now, there is a better way. Forget the old world of ACH payments and writing checks. That’s the old-school way of making payments from your bank accounts to the accounts of your customers and vendors, and vice versa. Think about the world of cash management. If you could get the cash in faster and pay your vendors slower, you might be able to go after business that others can’t chase because of their limited cash flow. If you’re waiting too long to get paid by most of your clients, this can cause your working capital to dip too low, and you’ll run the risk of running out of cash. Even profitable businesses can run into trouble if they lose their ability to meet their short-term obligations. Without positive working capital, you run the risk of closing up shop permanently.

Tiffany Kent:
Unless a customer pays you immediately or with a credit card, you’re tying up your own capital and accounts receivable. That’s like lending your money to your customer for free. There are some great companies out there that solve this problem for small and medium-sized businesses, like an Atlanta-based company called Now Corp, that provides immediate payments as soon as their invoiced to your clients. They essentially float you the money that your clients owe you, solving a hellish working capital scenario.

Tiffany Kent:
Now let’s talk about option number two, small business loans. There are several types of small business loans and they vary in amounts offered, interest rates, and eligibility criteria. The government backs these loans, and so the terms and rates are typically very good for small business owners. To apply for a small business loan, you will need to visit the website and follow the directions, and be prepared to do a lot of paperwork. You’ll find most of the necessary forms on the site. And you will also have to find an SBA-approved lender to complete the application process.

Tiffany Kent:
The SBA offers several different types of loans, like a 7a loan program, which caps the interest rate and promises the lowest possible fee. The maximum you can borrow is $5 million. There’s also a 504 loan through a certified development company that is a fixed-rate loan to help businesses with equipment financing. SBA microloans are much smaller and specifically meant for startups or modest expansions for existing businesses. And they’re capped at $50,000. You can also get a business line of credit, which is similar to a personal credit card, but it comes in the form of a bank account. A line of credit gives you some money to draw from when you need it, sort of like a revolving line of credit. It is very flexible, but it comes with a very high-interest rate.

Tiffany Kent:
The third option is drawing on the equity of your home to finance your business, by refinancing your home mortgage at a much larger amount. This is the least desirable option because it puts your personal wealth at risk and it ties up your personal finances with the business. Some entrepreneurs have done this successfully, but many more have regretted this decision.

Tiffany Kent:
Among these three ways to raise cash to support your business growth, using your working capital and cash flow is the smarter way. And it’s obviously the preferred option. Always do extensive research about the fees, terms, payment conditions, and other fine print before taking out any loans or using accelerated invoice payment solution. Make sure you’re striking the right balance between getting paid on time by your customers, which is account receivable, and paying your own vendors and service providers at the latest possible date, accounts payable, so that you can maximize your working capital.

Tiffany Kent:
Remember that cash might be king, but flow is queen. And we all know the most valuable piece on the chessboard is the queen. A certified financial planner can help guide you through this complex decision tree and pick the cash-raising tool and strategy that best fits your business.

Tiffany Kent:
I hope that this has been helpful advice for you. I’m Tiffany Kent, and I’ll see you next week.


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