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The Worst Small Business Financing Strategy Ever?

Depending on whose stats you pay attention to, approximately 80% of small businesses fail within their first 5 years of operation.

In many cases, its not that a particular business could not succeed; there just wasn’t sufficient time to figure out how to succeed.

Which brings us to the worst small business financing strategy ever.

Here’s how it work.

The would be entrepreneur develops what they believe to be a sure fire business plan that can’t fail.

Unable to locate any form of start up capital, they start their business with credit cards as the only source of financing, and an expectation of sustainable business results within 3 to 6 months.

If everything goes well, the debt will be retired within a year and funds will start building in the bank account.

Sounds Good, right?

I mean the thinking lines up perfectly with all the get rich quick business opportunities that exist on and off the internet today where some of them even try to convince you to use your credit cards because the opportunity is soooooooo good and can’t miss.

The problem is that every business can miss.

Every single one.

And the vast majority do fail.

Have you ever spoken to someone who runs a successful small business; perhaps one that’s been around for 10 to 20 years?

If you take the time to ask one of these entrepreneurs about their start up period, what you learn may shock you.

Even some of the most successful small and medium sized businesses out there today had some hairy moments making a go of it in the early years.

And some times the difficult early years lasted for several years.

The point here is simply this.

The process of getting a business operating and successful can take many unexpected twists and turns, no matter how diligent you are in creating a thorough business plan and business financing strategy.

Therefore, to increase your probability for success you need to allow for the unknown, the unplanned, and the unfair.

A business financing strategy that cannot accommodate unforeseen events is not much of a strategy.

A business financing strategy that is based on high interest credit cards that can destroy both your cash flow and your personal credit is also not much of a strategy.

To improve your odds of small business success, here are some tips for developing a solid business financing strategy.

Invest Your Own Cash

If you have some of your own cash penciled into your business financing strategy, it will immediately increase your likelihood of getting some sort of start up loan.

The more “skin” you have in the game, the more interested a lender will be in approving your loan request.

There is also something to be said about the psychological incentive of losing your own money and the motivation it creates for you to work harder to keep it.

Create Contingencies in Your Cash Flow

Whatever you estimate your working capital requirement to be, double it. At least increase it by a factor larger than 1.

Things can and will go wrong, so give yourself a fighting chance and develop a business financing strategy that allows for less than perfect results.

Use Credit Cards Wisely

Used properly, credit cards can be the cheapest form of working capital that you have at your disposal.

Some business credit cards provide 40 days of interest free financing. If you pay off the entire balance every month, you have an extremely low cost of working capital financing.

But if you start carrying large balances without paying them down monthly, you will go from the cheapest source of working capital to one of the most expensive, and you will likely also destroy your credit rating in the process.

Make Timely Government Remittances

Small businesses are by default tax collectors. And the taxes collected can sometimes wind up funding the business for longer periods of time than they were ever intended.

Using government remittances as a business financing strategy is basically a bad idea.

Government agencies that are assigned to collect from you have large budgets and enough broad sweeping authority to create plenty of grief for you if you are too slow in paying.

If you apply for a business loan while you have an overdue balance with a government tax agency, your loan request will likely be declined.

Even after the balance is paid up, you may have burned your bridge with the lender as a history of overdue government remittances can brand you as a bad credit risk.

Watch Spending Closely At Startup

One of the things you can control early on is how much you spend and what you spend it on.

This is going to change in time, but if you can spend wisely in the beginning you may be able to avoid a cost cutting exercise further down the line.

While its normally true that you have to spend money to make money, you can still be smart about the spending process.

Small Business Finance And Small Business Loans

Starting up and running a small business is not something that can be decided on a limb. It takes time to properly draft an effective and practical plan that covers many of the fundamentals such as start-up costs, proposals, and financial exit strategies. However once that is accomplished, the benefits completely outweigh the disadvantages of taking that extra time. The beauty of having a plan is that it can change at any point in time. This is especially important for owners because things change at different points in time particularly where business financing is concerned. One question that comes up very often with small business finance is that of when to start getting a little help from the bank. Here is some general advice on when to consider a loan.

-You Are Increasing

You opened with your product or your service and now you need to buy equipment in order to cope with the demand. You started off and your customer base has grown to the point where you are looking at expanding your building. When you are taking out a loan to help pave the way for greater opportunities, you are making the right decision. Not just because you’re setting yourself up to make more money, but because you’re most likely going to be able to pay it back. This requires a bit of forecasting, but it is certainly more than possible to put together a reasonable strategy.


You’ve outgrown your old building, the income and customers are still steady but its cheaper to just move to a new building, you want to add an extra store. Whatever the reason for changing buildings, the key is that it is because you are growing. If you need a loan to put a down payment down on the new building or something to that effect, it is a good idea for you to at least begin to consider small business loans.

-Upfront Costs Are Required

This does not mean upfront costs in the sense of monthly rent or daily operations- you should never take out a loan for those reasons. However if you are looking at serious renovations or at upgrading your current equipment there are often upfront costs that you may not be able to afford all at once. As long as you are careful with your accounting and you have some idea of what your finances are going to be looking like for the duration of the loan, consult with your financial advisers but don’t hesitate to get a loan if the opportunity is there and the reasoning is sound.

Taking out a loan is a decision that is never taken lightly when it is just individuals involved, but when you are considering small business loans there are good and bad reasons for going through with it. If you are planning to use the money to cover bills and the like, there are more serious problems that need to be addressed. However if you are looking for ways to manage small business finance through loans, some good reasons are if your company is increasing, you are relocating, or if there are upfront costs that will need to be covered. The key is to make sure that you take the money because things are going well. That way you can rest assured that the money will be paid back to the bank.

Going For Gold in Your Small Business

Measuring yourself and/or your business is always difficult. Whether it is weighing yourself after a week on Weight Watchers or waiting for your credit score to pull up after you have applied for a loan. However, without measurement how else could you show growth and improvement. Let’s take for example the famous swimmer Michael Phelps. Do you think in practice he swims and goes “I think I made pretty good time with the breaststroke”. Or do you think he is timed to within 1/100th of a second during practice and tries to continually beat his time. Likewise, we will explore a way to analyze the integrated financial strategy for your small business, so that is fine-tuned and you can exceed your competitors even if it is by a slight margin.

What is an integrated financial strategy? Well, it is similar to an integrated marketing strategy, which makes sure all the elements in your marketing strategy are aligned and working together with your overall business strategy. Likewise, an integrated financial management strategy makes sure all the financial elements of your business are in place, working together, and are cohesive with the overall company strategy. Many small business owners at least have a bookkeeper or an accountant. If not, GET ONE NOW. This is the equivalent of trying to be an Olympic swimmer and not even having a pool. However, managing your small business finances goes beyond having a fabulous bookkeeper.

An integrated financial strategy is like the all around gold medal for women’s gymnastics. You can’t just be good on the balance beam, you need to be awesome at floor, vault, and uneven bars.. And more often than not, it is more like the all around team event. You need different people on your team each excelling at their best events.

There are 5 areas of an integrated financial strategy: Accounts Receivable, Accounts Payable, Credit, Finance, Accounting, and Treasury.

Accounts Receivables concerns how you bill and receive payments from customers.

Account Payable concerns your payment of vendors.

Accounting concerns the compilation of financial statements and making sure Uncle Sam get his share.

Credit concerns the evaluation and monitoring of extending credit to customers.

Finance deals with budgets and financial performance metrics.

Treasury concerns your banking relationship.

In honor of the Olympics, I have created a template where you can rank your business in each of these areas. You can assign either gold, silver, or bronze to each of the categories mentioned above. If you want to take this strategy up a level or “Kick it up” as Emeril says, fill out the template for your competitors to see where you stand in comparison to them. You will want to concentrate on the areas where you rank a bronze or silver, so you know what needs to be tweaked to create a more holistic approach to the finances of your business. Who knows after this evaluation, you could be the new gold standard.

Copyright (c) 2008 Aisha Jones Scheffel