Cash flow is the lifeblood of business. According to Fundera, 29% of businesses fail because they run out of capital. The problem with revenue is that it can be massaged by accounting gimmicks. However, no one can BS cash flow. (That is, without blatantly lying about it.)
Ecommerce startups are thriving during the pandemic as tens of millions of Americans buy online all kinds of products, services and groceries. It’s creating a need for direct-to-consumer (D2C) sellers to raise cash to fund inventory, hire labor and improve infrastructure.
That bodes extremely well for small businesses who have shunned traditional retail and pivoted towards mobile and social. Looking ahead to a post-vaccine America, 49% of business owners plan to increase staff and expand or remodel their business, according to a 2021 Guidant Financial report.
Since extreme sales growth can cause temporary cash issues, what are common funding options for a small business?
Increase Working Capital
Lack of capital/cash flow (23%) is the no. 1 non-Covid challenge currently faced by business owners, according to Guidant Financial, followed by recruiting (19%) and marketing (15%).
But a firm may not need to raise cash from external sources (and possibly dilute equity). For example, why not charge customers upfront like taking pre-orders (which is typical in crowdfunding) or immediately during checkout?
Another way to improve working capital is to tweak one’s marketing to communicate a better value proposition. This enables an operator to increase price for goods and services, including charging money for value-added aftermarket support. Telecom giant T-Mobile charges between $5-$10 extra monthly to customers who don’t use automated bill-pay.
If you’ve got a niche product that solves an annoying pain-point, why not? An efficient marketplace is about finding an optimal price by which consumers will keep purchasing your solution. Test out different price ranges where you still see high customer retention.
In addition to collecting receivables sooner, a firm can renegotiate payment terms with suppliers, utilities and landlords by paying at a later date.
Business Line Of Credit
How do entrepreneurs fund their business? According to the same Guidant Financial report, the no. 1 method is personal cash (39%) followed by rollovers for business startups (20%) or ROBS. Other sources are family and friends (10%), SBA loan (9%), line of credit (9%), unsecured loan (5%), equipment lease (3%) and home equity loan (3%).
If you’ve got a good, long-standing relationship with a credit union or bank, try to get a secured or unsecured line of credit and/or revolving line of credit that a borrower can draw upon for business expenses.
That’s what Josh Delaney did: He infused $1 million in cash from his own pocket, as well as $1 million 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 ecommerce is a hot topic in banking right now.”
Delaney says his D2C company, FAB CBD, is seeing a surge in online sales by offering a high-quality product in an unregulated industry rife with fake or bad products.
With record-low interest rates, it’s also possible to obtain a home equity loan and pay under 4-5% interest.
Alternative Source: Personal Connections
Other financing sources are family and friends. Jack Ma, the richest person in China, raised $60,000 in the late 1990s to start Alibaba.
However, it may be advisable to sell equity rather than enter into debt agreements with personal connections. Wealth expert Dave Ramsey says that lending money to family and friends negatively affects a relationship’s dynamics. He says either give money outright or get ownership participation than involve debt between loved ones.
On the flip side, if you’re being solicited by a sibling, uncle or cousin to fund a business, take a hard, unbiased look at the operator. Are they big spenders, or are they resourceful with money?
The Importance Of Resourcefulness And Thrift
It is said that recessions restore resourcefulness. Or in biblical context, it takes a famine for people to be grateful for food.
ABC “Shark Tank” investor Kevin O’Leary frequently tells audiences that nearly all of his venture capital (VC) profits have come from companies owned or operated by women. And that female shareholder returns tend to be higher than men’s (in his portfolio). According to O’Leary, male entrepreneurs too often risk driving a business into the ground by being overly aggressive with expansion efforts whereas women tend to be conservative with cash — which derisks an enterprise.
Depending on industry and target audience, it’s usually more prudent to support thrift than swag.
In terms of what the Covid landscape looks like for female entrepreneurs, this year saw the biggest increase (+13%) in number of female business owners in the last few years, according to Guidant Financial. Women now own 32% of for-profit firms in America. And according to Small Business Administration (SBA), small businesses account for almost half of all economic activity.