Business Finance: Borrowing Money for Your Store
There comes a time in most businesses when you run out of money, which can be a harrowing experience, at the very least. Perhaps you can’t make payroll, your suppliers are calling for money that you don’t have, you collected sales tax that you can’t pay to the government, or you may need more inventory than you can pay for. These and other forms of cash shortages can certainly make you feel anxious, afraid, angry, stuck, resentful and other such feelings that not only make it hard to sleep, but also make our business no fun to run, to put it lightly. When you are in this position, what do you do?
COMMUNICATION WORKS BEST
First of all, it is important to communicate. So often the reaction is to hide your cash shortage, to lie to suppliers that “the check is on the way,” get out the payroll checks late, or buy a little extra time by bouncing checks thinking that you will cover them later. These “techniques” may work at first and buy you a week or so, but eventually your suppliers will demand payment, the government will harass you, employees will quit, or you will face lawsuits. This digs your cash short hole even deeper and your fear, anxiety, or resentment turns to outright panic.
Instead of fleeing in this way, it works better to be honest with everyone; your employees, your creditors, your bank and the government. This may feel embarrassing to you, but in spite of that, let them know that you are facing a cash shortage and what you intend to do about it. Once you let these people know what you intend to do about it, ask to be put on a payment plan that is realistic for both you and the person, business or government that you are dealing with. If your plan is not realistic for your business, you will only compound the problem by not meeting your new agreement and you will likely not get another one. If it is not realistic for your creditor, your employees, the bank or the government, they may attempt to meet you half way, or simply turn you down completely.
MAKE A REALISTIC PLAN
Besides honest communication, it is important to make a realistic plan how you are going to meet you expenses. First you need to prioritize whom you need to pay first and then whom else you can pay in order of importance. Take a look at your receivables to clearly determine what amount of money is coming in to your business, when it is coming in, and what amount you will receive. It is helpful to make a chart of this, whether you have to do it by hand, or you can simply refer to your receivables report. You need a clear picture not based on hope, but on reality, no matter what it is. Hope doesn’t pay the bills. Generally speaking, your employees need to be paid first, followed by your fixed expenses like your rent and utilities, your phone, WIFI, or internet depending on the type of business you have, your most important suppliers of the most essential products that you need in order to keep your business functioning, then your other financial commitments. If you have personal rent to pay and other fixed expenses like your electric, water and phone, pay yourself that money after the payments you need to make to those essential to keeping your business open and functioning. Your plan should not be just who you can pay, but also when you can pay them depending on when the receivables are due to arrive.
TO BORROW MONEY OR NOT
It may well be that your financial chart shows you that you will be unable to meet your necessary financial obligations because there just isn’t enough money coming in. If you cannot increase your sales in time to pay back what you owe, the natural inclination is to want to borrow money. Borrowing money will work, but only if it is coupled with a good plan to pay back what you borrow, usually with interest. If you don’t have a good, reality-based plan to pay back what you borrow, it is better not to borrow because you will only dig a deeper financial hole. Practically speaking, whomever you borrow money from is going to ask this of you. If they loan you money, they need to approve your plan, so it is important to present a clearly delineated plan based on realistic parameters. Whether it is an individual, a bank, or any other organization, they will need to see that you will be able to pay them back in an agreed upon time without fail. Your plan needs to show them this. Usually your payment plan needs to not only show a receivables schedule, but also how you are going to boost sales in such a way that you can start making a profit while also paying them back. If you can’t start making enough profit to pay your bills and operate your business while paying yourself, even if you manage to pay them back, you will be in the same financial hole again from which you started. If your payment and profit plan seems viable, then it is ok to borrow money.
BORROWING FROM A BANK
Usually business owners go to a bank to borrow money, often after having exhausted friends and family. Often a smaller, local bank is more eager to loan money to a business located in their own hometown…but only if the business and payment plan seem viable. Generally, local banks like to support local business, while a larger bank may not care as much. Whether a large or small bank, it is important to present yourself professionally. Dress in a professional manner and perhaps bring your personal or business accountant with you (the owner.) Speak politely, with friendliness and with confidence. Don’t beg. That suggests a lack of confidence in your business and plan and is quite off-putting. Remember, no bank is going to loan money because you are a “nice person,” have a conscious or “good” business, or any other such consideration. They simply have to believe that you can pay back the loan with an appropriate amount of interest.
The bank will generally need to see more than just your plan to pay back the loan. The presentation that you make to them should include a good business plan. The business plan should explain your purpose, the list and short biographies of the owner or owners and top executives, (sales manager, CFO or accountant, CEO if not yourself.) The biographies should show any and all experience that you and the top executives have in the industry or related industry that you are in. It should show the history of the business, two or three years’ profit/loss statements and balance sheets, and any awards that you have. You should include this year’s actual and projected payable and receivables report. The business plan should describe your marketplace, your niche in the marketplace, and your competition. The plan should show a detailed sales and marketing plan with two or three years’ sales projections. Along with this, you should present a two or three year financial plan that includes a healthy profit that includes your payment plan for the loan. It is important that your presentation looks professional, perhaps including some charts and graphs and certainly in a nice folder. Take your time with this and do it properly, perhaps with the help of your accountant. Involve your CFO and CEO if you have them in your company. A proper, professional presentation to your bank will engender their confidence in you and your business.
If the bank decides to loan your business the money that you are asking for, they usually will want some collateral, usually your house. (It’s easier to get a business loan if you own your home.) If you don’t own your home, or after several times of successfully loaning your business money, the bank will accept your business receivables or the business itself as collateral.
When borrowing from a bank, see if they have any special loans that you may qualify for. Often banks have minority loans or loans for women perhaps. These special loans may have better interest rates or be easier to get, especially if the bank has quotas of these types of loans that they must meet. Also, if your business is seasonal, the bank may be willing to offer a short-term loan based on the seasonality. For example, if your high sales season is December, January and February and your lowest sales period is July and August, you may find that you are cash short every low season because of the reduced sales, right at the time that you need to start purchasing to produce or stock up for the next high season. You might only need a loan during the low season that you can pay back during or right after the high season. If you show your bank a history of this seasonality, you may be able to more easily get a short-term loan.
Another way of borrowing money, especially if you have invoices with large amounts due, is to factor them. To factor an invoice means that you sell your invoices to a factoring organization for the amount of the invoice less an agreed upon interest rate. This interest rate can be quite high, often 3 percent to 10 percent of the factored invoice amount. The factor will then collect your invoice and immediately give to you the amount of the invoice less the interest. The main reason to factor a large invoice or a group of larger invoices is if you need the money from them right away to pay expenses while the actual collection of the invoice is actually due in 30, 60 or 90 days. If you know you are going to factor an invoice, if you can, add the 3 percent to 10 percent to your price so that the interest is covered. If not, be sure that these factored invoices will still cover your expenses and bring you profit even though the interest is deducted. If your business if in manufacturing and you sell enough so that you have large amounts due in some invoices, this is often a good method to use. In fact, it is fairly common.
USE YOUR HEAD NOT YOUR EMOTIONS
Finally, it is important to avoid making any financial decision based on your emotions. Put any panic, frustration, anxiety, anger, and any other fears aside and just use your logical mind to make any decisions. Financial decisions based on emotions, more often than not, will fail to help you in the way you intend. Only well thought-out decisions will have the effectiveness you intend and will bring the emotional relief that you seek.