A recent survey (genuine!) showed that a third of SME owners, at least of those who took part in the survey, feel that they should have better access to funding. Funding means different things in different minds, but in this particular article I do want to exclude grants, gifts, money for nothing kind of funding and focus on the kind of funding that you must pay back – the kind that must be paid back on time and pay with interest.
This is the most dangerous type of funding, the type of funding that can actually close your doors and leave you with a bad credit record to boot – the kind of funding we should not be scared of, but the type of funding we should treat with the respect it deserves. We need to explore the scenarios that would justify a dip in these dangerous waters – and by evaluating whether you should borrow the money in the first place can you probably pre-determine whether you will actually be able to convince someone to lend you the cash.
Please, I am not building up to the need of the dreaded business plan – in fact, I believe that if you want to borrow money for the right reasons, then you will most probably not need a business plan – I have successfully arranged a line of credit for people with a couple of lines in an e-mail body – with no attachments!
So let’s get to the only two reasons a SME (or any size business for that matter) should consider borrowing money.
The number one reason is project specific finance. Lenders love this, you should love this (too) and it makes a lot of sense. You have landed a job, a contract, a tender or whatever – fact is, you have a customer and he wants to pay you as soon as you have done something for him. Problem is, you need to do something for him which is going to cost you money, then you are going to invoice him and going to wait for him to pay you – how do I do that with nothing in the bank? This is a good reason to borrow money. In your calculations of how much you need to borrow, and over what period you want to pay it back, you now take into account the cash flow requirements of this particular job and you do not borrow more, nor less, than what the job needs. Most important, you also need to make sure it is all paid back when you receive your last payment for this particular job. Do not extend the loan period and end up having monthly obligations linked to income that you have already received and spend, it is a dark hole that can swallow you and your company.
You present the income stream, the linked expenses and the timeline to the lender in a simple single scenario, he easily understands the mathematics, i.e. where the money is going to come from to pay him back, he understands what his money is going to be used for and he understands and agrees to the timeline – bingo, you should be a winner.
If your business is not the project type mentioned above, if you render a lot of small services or sell different goods on a daily/weekly basis – then the above still applies to you. Group your weekly/monthly transactions into one – showing the forecasted income stream and the expenses needed to make it happen. Your project could be “doing business four weeks at a time”. Your timeline might extend longer but make sure that you reduce the need for external funding as you realise profits.
The number two reason is to finance income producing assets. This one is fairly self-explanatory, to run a business you do need some stuff – the stuff differs from business to business but they all tend to cost money. Please note that I did put in a caveat – it must be income producing. Income producing means “need to have” in order to render your services or sell your goods. It does not mean “nice to have”. Many an entrepreneur have tried to convince me that their flashy car counts as marketing spend and shows the customer that they are dealing with a reputable company – absolute rubbish. All you need is a sensible vehicle that is clean and well looked after, anything more is just to boost your ego, waste your money and to make the customer feel that he is paying too much for what you offer.
Important to note that you finance all kind of items like forklifts, machinery and even stock items and inventory. If you need stuff to make a living for you and your employees, then most will consider it worthy a reason to borrow money – even the lenders.
“That’s it?” I hear you say – only project and asset finance? What if I need to pay salaries and the rent – don’t you know they call it working capital and growing the business?
Well, of course can you borrow money for working capital and growth – but then you better start writing a business plan – no way that you will be successful without one. In your business plan, make sure to explain your project specific funding and the assets you need to finance . . .