Financing Your Small Business

If there were only two reasons for a business to fail they would be poor financing and poor management or planning. You can’t over-emphasize the importance of financing your business. Financing the business is not a one time activity as some might think. It is necessary whenever the need arises such as when expanding, modernizing etc. At this stage you need to understand the importance of exercising extreme caution and plan the utilization of capital. A wrong decision here can haunt your for the life of your business.

Are You Sure You Want To Raise External Funds?

For start-ups, it’s understandable that you need to raise capital through loans. But what about expansions and upgrades? Make sure that external financing is an absolute must before you apply. It is critical that you organize your finances at transitional stages but only after you make sure that you can’t do it yourself, either permanently or for some time. Equally important are the criteria of risk, the cost of not financing and how well it contributes to specific and overall goals of the company.

FINANCING TYPES

Equity Financing: Equity financing involves selling off of your shares (mostly partially) in return for cash and giving away that portion of ownership and rights to profits. Equity financing can be sought from private investors or venture capitalists. This brings about proper capitalization opening access to debt financing. Equity finance doesn’t need to be returned like loans unless your partner wants to withdraw.

Debt Financing: Debt financing is loan financing against some kind of guarantee of repayment. The guarantee can be collateral, a personal guarantee or a promise. Lenders restrict the use of debt finance to inventory, equipment or real estate. You need to properly structure the debt and the rule of thumb for doing so is giving long term debt for fixed asset loans and short term for working capital. The reason is that fixed assets generate cash flow over their lifetimes and have the benefit of lower interest rates as opposed to working capital loans.

Sources of Finance:

You can choose finance sources depending on your circumstances and the amount required.

1. Family and Friends: Small and short-term working capital requirements can be financed quickly through your own resources or through family and friends. The benefit here is the absence of the interest component (mostly.) This method of raising finances is handy even in early stages of business. You should be mindful, though, that disputes over money are the main reason that close relationships turn sour.

2. US Small Business Administration: This is the most prominent source for debt financing. The SBA doesn’t lend money directly but organizes and guarantees loans through various lenders and sources under its umbrella. Local governments, banks, private lenders, etc. disburse loans immediately to businesses approved by the SBA. SBA loans are available for various business purposes and at the lowest interest rates available.

3. Venture capital: Raising venture capital is organizing financing through selling shares whose value equals the finance you require. Essentially this means selling a portion of the ownership and control rights. It is essential that a proper valuation of your business’s worth is made before the deal is done.

Financing a business shouldn’t be hard provided you have established your credentials as a good manager, have collateral/assets, a convincing cash flow statement, genuine need, a proven track record, good credit history and a robust plan. This should not just save your business from collapsing but also allows it to grow and succeed.

Small Business Finance – How To Find The Right Price For Your Product Or Service

NAME YOUR PRICE; I JUST GOT TO HAVE IT! Sweet music to our ears when a customer asks us to just name our price.

What possesses a customer to act like this? And, how can I duplicate this feeling for my other customers?

First: The above example happens a million times a day. Every time we purchase something this feeling is occurring on some level. Usually, we look at the price, determine if it’s a good value, and then purchase or not purchase based upon our internal value judgment.

Second: The real trick is determining the variables your customers are using to make their value judgment. Knowing these variables allows you to determine the range of acceptable prices for your product or service.

Examples of variables involve the five senses, psychological factors (prestige, security, and acceptance), convenience, availability, etc.

Earlier, we talked about profiling your customers. A part of your profile should now include the variables involved in their buy decision. If your product or service has strong variables (ones with direct triggers to emotional variables) to work with, you have an easier time determining your price range. Weak variables force you to use more marketing tools to move the customer to a buy decision.

An example is The Club a device which locks your steering wheel. Their advertisement shows someone breaking a window and stealing a car capitalizing on a big violation and fear component. They then supplement that violation and fear with their strong name and police endorsement.

Third: Price should reflect the type of relationship you want with the customer. If you want a relationship with your customers built upon high quality. Then provide yourself with enough margin, the difference between your cost and your price, to provide the extras that are needed in that type of a relationship. It will take time, follow-up, and a great product/service to establish a high quality relationship. Also, you will not be able to maintain a large customer base so your profit must come from a smaller loyal customer base influencing an increase to your price.

Fourth: Pricing is your tool to motivate the customer to the behavior you want.

Whatever challenges you are facing in your business, pricing can usually be a tool to help you meet them. It is one of those versatile tools much like your favorite tool around the house. If you are having trouble scheduling customer projects to maximize your billable time, then offer discounts for customers willing to schedule out further. If you have too much inventory, then offer a clearance sale to get rid of it. If you are just too busy, raise your prices to handle the overtime or to just make it more worthwhile to you – while also slowing down the number of customers coming to you.

Pricing is neat, handy, AND when well thought out; it is a very powerful tool.

Fifth: Approximately 30% of US shoppers are categorized as price sensitive shoppers within any given industry. These are shoppers who like to bargain and will travel across town to save on a purchase. These shoppers are not loyal to a business. If someone comes in and asks for a great price on their first order because more orders will follow expect them to ask for another great price on the second, third, etc. Instead of saying no to them, explain that your policy is to offer discounts based upon quantity, loyalty, and timing. Avoid saying “no” whenever possible, use your pricing tool to allow the customer to decide whether your solution is right for them.

The good news is 60% of shoppers are value buyers and 10% are prestige buyers!
Lastly: How do you know when your price is the right price? When customers who should say no to you, do say no, realize that it is a good thing. If no one is objecting to your price then you are pricing too low. Be prepared to handle their objections by anticipating them and having your explanation ready.

Some Options for Small Business Financing

One of the major problems with being a small business is that the business owner will invariably run into difficulty with the access to and securing of funds from commercial lenders who will be somewhat deterred by the lack of market presence of the business and so will be less inclined to issue a loan.

As a result then, this means that the potential growth of the business is effectively retarded outright, as without sufficient levels of working capital at its disposal, it cannot hope to grow, develop and expand to ensure that it attracts a sufficient portion of the available market to render it a successful venture.

Being a small business is a risky affair indeed, and the reason for this is that the market will already be controlled to varying degrees by those companies that are already firmly established within a community, and which have managed to cultivate a degree of goodwill among their customers. These companies have the advantage of a steady stream of income, thereby ensuring that they have good cash flow, which in turn means that they are fully solvent and as a consequence then, self-sufficient.

A small business on the other hand will need to actually prove their worth to both the lenders as well as the customers whom they are seeking to attract, although it should be noted that this is oftentimes, a task much easier said than done.

Regrettably then, the range of small business financing options that are actually available are very narrow indeed, and so the owner of a small business may have to make some very tough decisions as to what exactly they are willing to sacrifice in order to ensure that their business will increase and blossom as a whole.

One option that the business owner may want to seriously consider is the taking out of a small business loan. This would mean that the business would be able to get his hands on some much needed capital in a short period of time, without having to relinquish any control of it, and so once the loan has been paid off in full, then the company would not be committed to any more or further obligations.

This is of course, assuming that the business will be actually able to get access to a loan, which is a fairly challenging feat in of itself it should be noted. Another option is

Another avenue to explore is small business grants provided by the government. The government is fully aware of the remarkable benefits that small businesses will bring to the economy as a whole as it means that services are much more competitive which in turn helps to stimulate greater demand for associated supplies.

Venture capitalist companies are another option for small business financing, the only problem here is that they are rather demanding as to what they expect in return for their initial investment and so the business owner must be prepared to relinquish a sizeable portion of their company away.