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Small Business Finance – How to Prioritize Your Profits

When you business finally starts producing income (and the initial joy wears off), business owners now have a new financial issue — how should this money be spent? Should you invest profits back into the business, spend the money own your own personal expenses? Or if your business is producing profits, is that the time to pay yourself a salary or save for retirement, or should you wait? Allocating that next dollar of income is challenging, because you and your business have conflicting priorities. On one hand, you want to grow your business as fast as possible. But you also want to enjoy your profits (finally!) and start to up-level your lifestyle.

You also know you “should” be saving for retirement — and you don’t want to miss out on years of saving (especially when you would be building your 401(k) if you still had your corporate job).

I recommend you triage the allocation of your income. As you are able to pay for the first category discussed below, you can move on to considering expenditures in the next category. For example, once you have your minimum expenses covered, you can start investing in business growth and saving for retirement.

“Must” have expenses

  • Minimum Personal Expenses: shelter, utilities, food, gas, loan payments, insurance.
  • Minimum Business Overhead: rent, payroll, licensing, operational costs, insurance, taxes, inventory.

Maintenance & early growth

  • Personal Expenses: clothing, household goods, toys, personal care, discount travel, insurance, gifts, charitable donations.
  • Business Growth: promotion & advertising, networking, staff, outsourcing, new products and services.
  • Retirement Savings.

Lifestyle & Growth

  • Lifestyle Expenses: luxury vacations, 2nd home, luxury automobile, designer clothes, country club membership, extensive charitable causes.
  • Rapid Business Growth: research and development, new technologies, staff, branding, business real estate, additional business ventures.
  • Wealth Building: real estate, equities, alternative investments, college savings funds, additional retirement savings.

But be aware — these choices depend upon you personal priorities and goals. You may not be willing to “give up your coffee” today for a million dollars in 40 years. That’s not right or wrong. It’s a matter of personal values. The important decision is to always be making a conscious choice of what you are taking and what you are giving up in response. The Wealth Spa(TM) Minute Do you know the average monthly overhead of your business? Is that figure a real number or just a guess? Use your bookkeeping software to find your average monthly expenses — to determine how much it costs each month just for your business to stay afloat.

Small Business Financing Methods

Small business financing comes in a number of different forms. Typically, when an entrepreneur wants to start a new business then they approach their local bank as it relates to receiving a loan in order to launch their operations. However, obtaining a loan from a bank comes with a number of risks. As we have discussed before, you are almost certainly going to need to provide a personal guarantee as it relates to receiving the capital that you need for your new business venture.

Second, you may need to provide your home, car, and retirement accounts as collateral as it relates to your loan. As such, the risks related to this type of financing are extremely high as it relates to your personal financial situation. We strongly recommend that you speak with your certified public accountant as well as your financial adviser before you undertake a large debt obligation in order to launch or expand a new business venture. We are going to continue to touch on the subject of the risks relating to small business financing as we write about this subject.

Of course, and as we have mentioned before, you can always seek the assistance of a private investor as it relates to financing your business operations. However, there are significant risks involved when you are working with private funding sources due to the fact that they can take control of your business very quickly. As such, we recommend that you speak to your lawyer before you begin the process of raising capital from a private investor. This is not only due the risks that you business may face as you seek this type of funding, but also because you are going to need to comply with a number of securities laws as you obtain capital from private sources. Additionally, your legal counsel will be able to provide you with a tremendous amount of guidance as it relates to negotiating a proper deal with an angel investor or outside funding source.

Finally, all types of small business financing comes at a cost. Whether you are going to have to pay a significant amount of capital for a loan or sell your business to a third party there are issues that you are going to need to confront as it relates to your cash flow. One of the other things that we constantly recommend is that you develop an appropriate profit and loss statement and cash flow analysis that you can use to determine the cost of capital as it relates to your business venture.

Small Business Finance – Unorthodox Options

Working through the rigorous chain of processes, trying to secure a license or permit to start a business or trade can be difficult enough, now add to that the great worry for most; how do I raise the capital? For long this question has been recurring, experts in the field of business finance have turned out series of books and articles on the best ways of raising the necessary funding, but if one looks closer, you will discover that as the capitalist society is class ridden, so does it affect the rules as they relate to business finance.

I would want to draw attention to the funding options available to the poor, or putting it more correctly; the financially challenged. From my observation, it is clear to me that on average, the poor pay more for services than the well off in the same city. If you think this to be farfetched, then consider how much a family occupying a one room shack pay to buy water from a selling point on a daily basis as their deprived neighborhood is not connected to the mains, in contrast to what another family living in a wealthier suburb pays for a similar liter of water.

Over here in Nigeria, it is common to hear people patronizing finance houses and money lenders who charge as high as 10% to 15% interest rate per month. I believe you are wondering aloud “that’s Outrageous”, but to those securing such loans, they feel they are being done a favor. The fact is having a low or non existing collateral base, limits the option of being able to secure loans from the banks. They then look for funding anywhere they can find. This restricts their business prospect to acquiring stocks and getting rid of them (selling) as many times as possible before the debt matures. Such businesses have a relatively small non-current asset, also, long term planning and expansion is difficult.

Now with all said, there are some ingenious methods that are being taken advantage of. I will like to put forward a contributory scheme I thought of, it involves shop owners and trades men committed to making regular weekly contributions to a pool of fund, on attaining a minimum of twenty weeks of contribution, a member can apply for a loan that is double the total contribution made so far. It all adds up as half the members are active while the other half are not at any point in time. Now the cooperative must be formally structured with it accounts in line with best accounting standards, furthermore, its books must be subject to periodic audit. On the basis of this, I propose that the cooperative can then serve as a guarantor for further loan not exceeding the value secured from the cooperative. This is based on the financial requirement of a members’ business need.

With the role of the cooperative standing as a guarantor of further loans from the banks come more challenges. What if the member defaults? This creates the need for the cooperative to do the necessary background check on members’ credibility and also make sure only those with a track record of paying back their loans on time qualify for bank loan guarantee.

Taking a critical look at the entire deal, one will observe that members of such cooperative on average will be getting access to loans at below the bank interest rate. This will afford them the opportunity of having the financial flexibility to expand and entrench into the business assets that would generate better efficiency.