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The Five Critical Elements of Business: Finance

Bob Fenner  

You've heard and seen the figures'¦ X number of new retail ventures fail within Y years. "But that's them, not me" you say. Well it could well be you. By some reliable estimates most pet stores don't make it more than two years without turning over to new ownership or closing up shop altogether. And well you know the two most common "faults" or causes of business failure: poor management and under capitalization.

The second of the five critical elements of a new or established retail venture, financing, is probably the most common pitfall of any type of business. In this installment I will introduce important aspects of planning for and securing financing for your venture and hopefully help steer you clear of dollars minus sense disaster.


Without sound financial footing, through savings and/or borrowing, sufficient monies for the initial lease, set-up, stock, and cash reserves for net operating losses for the first couple of years (yes) will doom a new venture. Similarly, ongoing concerns frequently find that borrowing is a necessary expediency to growing their established business'¦ There are a few ways to go about this, with a hierarchy of desirability.

At First There Was: The Plan

And the plan was'¦ good, if it is accurate, significant and meaningful to all concerned parties. Here's where I must sing the praises of at least one government agency where the public gets back its money in value, The Small Business Administration. Yes the SBA does a tremendous amount of good for the country in toto. Instigating, inspiring and guiding many a start-up and business enlargement, adding many new employees with new and improved skills, providing for many a semi-last means of financial backing. But that's not why I'm plugging them here. Their biggest claim to fame as far as I'm (besides SCORE which I'll talk about much later) concerned is the written pro forma they require as an application for loan consideration. This "due diligence" essay is absolutely brilliant in what it demands of the folks completing it. That is, think up, develop, and commit to paper Business and Marketing Plans.

The principal elements/documents here are:

A business description: products, services to be offered, the intended customer base, market competition. The format, or proposed format of the business (e.g. partnership, S-type Corporation)

The present, if already established business history'¦ complete with records of finances; Profit and Loss Statements for given periods and a current Balance Sheet.

You and your partner's) background; personal and work bio's including formal education, related work experience and individual strengths.

What you will do with the money: your financial plans. Projections by months/years of major costs, sales, profits'¦ how you figure to be able to not only stay in business, but repay the loan. This is the most important area, where you describe what will make your business successful.

Every lending institution/entity has their format of the tactical and strategic elements defining your business and marketing plans'¦ My advice, fill out the SBA's plus any others you run across that are challenging. Better to reveal "the truth" to yourself about what "things" cost and what you might expect in terms of compensation before committing to a lease, equipment purchases'¦

The Best Form of Borrowing: None

This may seem almost un-American, but not only in my opinion, it's best to utilize your own capital'¦ if you can. As per the above urgings, such a sum of funds must be available as "liquid cash" to invest and float the business for as long as a couple of years'¦ yes, including a lack of "draw" to you (and your partner's)) as a paycheck. This is a/the hard reality. If your plan checks out fine though, boot-strap financing is definitely the best way to go. You're going it alone, so why not owe yourself for what you own?

Borrowing from Private Parties

Depending on your values, getting money from family and friends might be an agreeable to abhorrent idea. Such dealings should/must be approached and consummated as if these albeit amiable lenders were the same as banks. In writing, collateralized, and promptly paid with interest. To my mind and heart, the only real reason to initiate borrowing from business outlets is the twin circumstances of 1) paying a greater return to "insiders" who 2) have the means. If a bank or other third party lending institution wouldn't otherwise lend you the funds, do not proceed to go, do not collect $200 (or any) dollars. There is most likely something amiss with your ideas of using the funds if you can't convince these other parties of your ability to make their money work'¦ find out what it is and fix it in writing before borrowing a dime from friends or family. Trust me.

Banks of All Types

Perhaps the first place you look for money is your personal, even locally-based bank. This is a good start, but don't close your mind to the fact that there are different types and very different guidelines for lending amongst banking companies. Do start with the bank that you feel most comfortable with, but don't be discouraged if they turn your loan request down. Listen carefully to what their contacts say to you'¦ maybe the amount you're requesting is too small, too large, perhaps their perception is that you don't have sufficient collateral, or your game plans are deficient in some way. Ask what it would take to "make the deal work", and go on to another, perhaps larger banking institution (which I'll throw Credit Unions in the same box). Most folks are familiar only with consumer brand banks, there are commercial, and even entrepreneurial types as well. Be open to approaching them; they are only there for concerns such as yours and do indeed want to help you succeed.

There are many variations on the theme of bank borrowing; Credit Lines of different sorts, Inventory Loans, Accounts Receivable Loans and Factoring, Short Term Commercial Loans'¦ all have their up/downsides worth investigating, and even if you're incorporated, generally a demand of a Personal Guarantee of assets to back them.

Private & Venture Capital

This I'll list as my least desirable source of funds for a small business. Payment terms are the most unfavorable, collateral and personal guarantees the most severe with private and institutionalized venture capitalist lenders. For all but the biggest risk takers, if you can't finance your new or expanded business in any of the previous ways, I'd shelve the idea till it was possible.

Getting Help:

There are scads of helpers to aid you in your quest for cash. My favorite place to start once again is the SBA (contact them through the internet, or their local offices. Check the Government section of the phone book in your area/State). If there is a nearby branch of SCORE, the Service Corps of Retired Executives, by all means avail yourself of their experience.

How about your accountant's) and other professional paid help'¦ do you have a company attorney or a friend who is one? Have them help you review the proposed lending agreement (especially the Promissory Note in the banking biz). Be aware that these dealings are negotiable and don't sign unless you and your "management staff" understand and agree with all elements (time frame, credit limits, collateral'¦) of the borrowing documents.

A source of help that most people discount if they even think about it are "other" stores. Ask non-related businesses that you've befriended to grant you their insights as to how they "made it" financially. Who do they borrow from? Do they think a venture like the one you're proposing is sound? What do they consider might be the pitfalls?

In Conclusion:

In the many years of building our own retail outlets and aiding several other people in putting up theirs I've learned the primary failure traps of small business have much to do with lack of sound financial planning and securing adequate funds. Don't let this happen to you. Be on the constant outlook for new banking relationships and better terms for borrowing and lines of credit. Like the geological story of our wiry shrew ancestors and ponderous dinosaurs, in business it's the nimble and fleet that persist and expand. Avoid a "cash crisis" by having adequate financial resources at your disposal under favorable terms at all times.


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