Cash flow is the lifeblood of business. According to Fundera, 29% of businesses fail because they are short of capital. The problem with income is that it can be massaged by accounting gimmicks. However, no one can BS cash flow. (That is, without openly lying about it.)
Ecommerce startups are thriving during the pandemic as tens of millions of Americans shop for all kinds of products, services, and groceries online. This creates a need for direct-to-consumer (D2C) sellers to raise cash to fund inventory, hire labor, and improve infrastructure.
This bodes extremely well for small businesses that have eschewed traditional retail and turned to mobile and social. Looking ahead to a post-vaccine America, 49% of business owners plan to increase their staff and expand or reshape their business, according to a 2021 financial report from Guidant.
Since extreme sales growth can lead to temporary cash flow issues, what are some common financing options for a small business?
Increase working capital
Lack of capital / cash flow (23%) is the no. 1 non-Covid challenge that business leaders are currently facing, according to Guidant Financial, followed by recruitment (19%) and marketing (15%).
But a business may not need to raise cash from external sources (and possibly dilute equity). For example, why not bill customers up front, like taking pre-orders (which is typical of crowdfunding) or immediately upon checkout?
Another way to improve working capital is to fine tune your marketing to communicate a better value proposition. This allows an operator to increase the price of goods and services, including charging money for value-added after-sales support. Telecom giant T-Mobile charges an additional $ 5-10 per month for customers who don’t use automatic bill payment.
If you have a niche product that solves a boring problem, why not? An efficient market is all about finding an optimal price at which consumers will continue to buy your solution. Test out different price ranges where you still see strong customer loyalty.
In addition to collecting debts earlier, a business can renegotiate payment terms with vendors, utilities, and landlords by paying at a later date.
Business line of credit
How do entrepreneurs finance their business? According to the same Guidant financial report, no. One method is personal cash (39%) followed by rollovers for startups (20%) or ROBS. Other sources are family and friends (10%), SBA loan (9%), line of credit (9%), unsecured loan (5%), equipment leasing (3%) ) and home equity loan (3%).
If you have a good, long-standing relationship with a credit union or bank, try getting a secured or unsecured line of credit and / or a revolving line of credit that a borrower can draw on for business expenses.
That’s what Josh Delaney did: He injected $ 1 million in cash out of his own pocket, along with a million-dollar line of credit to launch a new brand. “Use cash and deposit accounts to support local banks because strong relationships can be leveraged to help your business. Especially since e-commerce is a hot topic in the banking sector at the moment. ”
Delaney says his D2C company, FAB CBD, is seeing an increase in online sales by delivering a high-quality product in an unregulated industry teeming with fake or bad products.
With historically low interest rates, it is also possible to get a home equity loan and pay less than 4-5% interest.
Alternate Source: Personal Connections
Other sources of funding are family and friends. Jack Ma, China’s richest person, raised $ 60,000 in the late 1990s to start Alibaba.
However, it may be better to sell equity rather than entering into debt deals with personal relationships. Heritage expert Dave Ramsey says lending money to family and friends negatively affects the dynamics of a relationship. He says that either giving money outright or getting an interest in the property than involving a debt between loved ones.
On the other hand, if you are approached by a brother, uncle or cousin to finance a business, take a critical and impartial eye at the operator. Do they spend a lot or are they resourceful with money?
The importance of ingenuity and savings
It is said that recessions restore resourcefulness. Or in the biblical context, it takes a famine for people to be thankful for their food.
ABC “Shark Tank” investor Kevin O’Leary frequently tells the public that nearly all of its venture capital (VC) profits come from businesses owned or managed by women. And that female shareholder returns tend to be higher than male (in her portfolio). According to O’Leary, male entrepreneurs too often risk knocking a business into the ground by being overly aggressive in expansion efforts, while women tend to be conservative with cash – which bothers a business. .
Depending on the industry and target audience, supporting savings is generally safer than loot.
In terms of what the Covid landscape looks like for female entrepreneurs, this year has seen the largest increase (+ 13%) in the number of female business owners in recent years, according to Guidant Financial. Women now own 32% of for-profit businesses in America. And according to the Small Business Administration (SBA), small businesses account for almost half of all economic activity.