NAWBO :: Plot Your Financial Success

Plot Your Financial Success

Wells Fargo Shares Best Practices On Funding Your Business

Credit.

Whether you call it funding, financing or capital—it’s all the same. It’s about getting the money you need for your business. Manage it prudently, and deploy it in a timely way, and credit can work like rocket fuel for your business.

A small business needs financing to grow. As a business owner, you may need it to acquire short-term assets such as inventory, or long-term assets such as a building or equipment; or to expand your team and market reach by opening a new office or acquiring a lucrative contract. You may need credit to consolidate higher interest debt or to fund a buy-out of partners or investors. Assuming a solid business model, the ability to secure financing is vital to your company’s success. This requires having a diversity of credit facilities available when needed, and establishing a history of business borrowing so that your credit will expand with your needs. Here are some fundamental considerations that apply to your business credit health.

My Money Or Other People’s Money?
If your business is not capital-intensive, bootstrapping—starting and running a business with little or no external funding—can be an attractive option for funding your business. If you can consistently generate sales and revenue, you can survive without a cushion of cash. Indeed, many successful businesses were started with little money. Michael Dell began his company with less than $1,000, and Dell is now a leader among computer systems companies.

However, nearly every business reaches a point, often quite early, when the ability to secure financing is critical for liquidity and expansion. The first source can be your vendors—trade credit, in the form of payment terms (i.e., net 30-day or net 60-day) secured by establishing healthy credit relationships with suppliers and vendors. Next, you will want to diversify your credit sources, including lines of credit, letters of credit, and equipment and general-purpose loans. As with your personal financing needs (e.g., home mortgage, auto loan or credit card), different types of business credit are appropriate for your company’s various financial needs. A line of credit, for example, can help with short-term fluctuations in cash flow to cover quarterly taxes, payroll, or help you take advantage of an opportunity. A business loan would be best suited for consolidating debt and funding long-term business growth opportunities, and an equipment loan or lease would be appropriate for equipment and vehicle acquisitions. Moreover, using credit in the business name will help you build your business and business credit profile for future growth.

Pros And Cons Of Equity Financing
Equity financing (that is, selling a percentage of or an ownership stake in your company to raise money) is tempting for a small and growing business, as there are no interest payments or monthly payment terms. Furthermore, an equity investor with special skills, expertise and connections can be a real business asset. However, equity financing can also be the most expensive kind of financing. It means giving away both a portion of ongoing profits and business ownership. The typical equity stakeholder will require more oversight of your business than do most lenders. Lastly, debt can be refinanced or modified under favorable terms, while equity funding may be far less flexible.

How A Business Plan Can Open Financing Doors
Houses are seldom built without blueprints. Planes are not flown without flight plans. And even vacations are seldom taken without itineraries. But every day, businesses are started without business plans, putting their owners at unnecessary risk. According to one recent survey of professionals who work with businesses in distress, 78 percent of business failures can be traced in part to the lack of a well-developed business plan. Clearly, a business plan, based on a sound and viable business model, can be integral to small business success. Here’s specifically how a smart business plan can boost your financing prospects:

  • Demonstrates discipline, clarity and foresight, increasing a lender’s confidence in your skill and your vision. A wellformed plan has value beyond its content.
  • Puts you and your lender quite literally “on the same page,” thus spurring fruitful dialogue around your financing needs. This way, a plan can help your lender help you.
  • Provides a blueprint for financing growth. By laying out your business development path, you can foresee where you will need financing, and thus be proactive rather than reactive when securing credit.


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