Being in business for yourself isn’t always everything it’s cracked up to be. There’s the never-ending work schedule, handling customer service, daily decision-making, employee turnovers, bookkeeping, and did we mention sleepless nights? But one of the biggest reasons small businesses fail is just simply a lack of capital.
Borrowing money when you really need it can just be next to impossible. So, from the time you open the doors to your first big expansion, what you need is a financial plan of action. You want to treat your operation like it’s not just a “going concern” but like you might be putting it up for sale within a few years, instead of digging in and “becoming the job” – after all, aren’t you an entrepreneur?
Keep your personal assets as far away from your business as possible. Open a business bank account with your legal business name and EIN number – and don’t pay your kid’s babysitter with a business check! Pay yourself a draw or wage, depending on the type of business entity you’ve chosen, and deposit it into your personal checking account. Conversely, don’t pay business expenses with your personal funds if you can help it; sometimes it’s necessary, so reimburse yourself with a proper expense report and receipts to match. Should creditors ever come to call, you may need to prove the separation between your family household monies and those of your company.
Use Other People’s Money Whenever Possible
If you’ve kept your personal credit score above 680, go ahead and get a business credit card. Ask and make certain that the credit card company you choose reports to business credit reporting agencies (Experian, Equifax and Dunn & Bradstreet) – this will come back to benefit you when you decide to apply for your business line of credit. Create business accounts with vendors and contractors; if they don’t report to credit bureaus then maintain a portfolio of on-time payments and paid-in-full receipts.
You’re working yourself to the bone on a daily basis, so you don’t want to also encumber your house, your car or other personal assets if you can help it. Cash flow on your books is not just a good feeling – it’s a sign to lenders that you don’t really need them. This is their favorite time to lend, when you have plenty of your own money available to ensure their repayment. Keep building your financial history –a line of credit looks really good to your overall credit worthiness; it is a testament to the fact that your books are straight, your cash flow is substantial, and you have your head on straight. And even more importantly, a business line of credit gives you instant capital – on demand!
In today’s economy, there is always somebody willing to give you a loan at the right interest rate. If your credit and cash on the books isn’t strong enough to illicit offers of unsecured loans in the form of more credit cards or a line of credit, consider a secured loan. Think short-term and don’t get carried away borrowing more than you need – this has been the downfall of many bankrupted businesses. Assess what it is you truly require to bridge the gap. Are you making wise decisions or are you jumping the gun – is that expansion really necessary now? Are there ways you can reduce your expenses today if you put them up to a magnifying glass?
Remember your business will never be measured by the amount of hours you labor in its development, nor the sacrifices you’ve made. The value is set by the money it produces, bottom line. So, keep on point – don’t overspend, don’t grow before the demand requires it and keep a realistic attitude. Just because it’s your “baby” doesn’t mean anything to a potential buyer; it’s ultimately just a numbers game.
Randy Sullivan is a loan consultant and content contributor for smallbusinessloans.com, a site offering choices for a Business Line of Credit as well as advice and assistance on How to Get a Business Loan with Bad Credit.