Money is a simultaneous necessity and sore spot for business owners. Many leaders of small- or medium-sized companies have trouble obtaining funding, and keeping money cycling can pose problems. A 2018 CB Insights analysis showed that 29 percent of failed startups ran out of money, and small businesses earn between 20 and 28 percent of their income during the holiday season.
These stats highlight the precarious financial position most growing businesses find themselves in. Many of the options available to them are short-term fixes, money that’s accessible for brief windows of time as emergency funds. The current economy is set up to reward businesses that are already financially successful and merely witness those trying to achieve stability or growth.
That means short-term fixes won’t solve the problem. Small- and medium-sized businesses need long-term strategic financial plans to help them stay solvent — and stay in business.
Assessing Where They Stand
The first step is to determine where these growing businesses stand currently. Using a company’s monthly cash flow report to determine the business’s net burn rate will help the company see how much it’s actually spending on a monthly basis.
That past figure can then influence future figures: cash flow projections. These should already be included in a business’s budget, but assessing the hard costs and predicting how they’ll change is imperative for comparing what’s current with what will be needed. Many expenses are fixed — like rent — but consider whether you plan to hire more employees and will, therefore, need a bigger space. Higher rent and more employees can significantly increase your needs.
The stage of the business needs to be considered in making these assessments, as well as the economy — if an industry has seen deflated sales as a whole, a growing company will have scaled-down expectations of how quickly growth will occur. Likewise, a business that cornered a niche market and has been making many more sales than expected needs to adjust its view of how much money it will have to spend to maintain its pace.
Making Ends Meet Over the Long Term
Without taking this longer view of business needs, owners find themselves needing money in a pinch. The downside — besides the stress it can cause the owner and her employees — is that seeking additional funds at the last minute is never a last-minute endeavor. It can take weeks or even months to compile the financials, obtain the documentation, and fill out the applications needed for loans from traditional financial institutions. Quick fixes are anything but quick.
It’s essential to predict how much money will be needed over the next five years — while this amount will undoubtedly shift, obtaining a stream of money that can be accessed over that span of time is a much better investment for small or medium businesses. The trick is finding long-term financing, which may be down unexpected avenues.
Online lending, like bank loans, can offer expansive funding for a business, from one-time loans to lines of credit that are accessible when a company needs it. Online lending, however, tends to have less stringent requirements than traditional lenders as far as revenue, tenure, and credit ratings are concerned. Online lending platforms typically have fewer layers of reviews, and some now range up to $250,000. Best of all for larger established businesses that still struggle with accessing capital — despite making millions of dollars’ worth of revenue — these lenders assess more than credit history and don’t usually ask for extensive collateral.
Remain at Home, an at-home healthcare company specializing in skilled companion care, services patients who receive government-sponsored healthcare beyond typical Medicare or Medicaid services. While “government-sponsored” means payment is guaranteed by Uncle Sam, the payments don’t always arrive when they’re expected. Yet, because the company’s primary collateral is its people, banks are unwilling to offer the company unsecured loans. Remain at Home’s founder, Brian Carrigan, turned to an online lending platform, Kabbage, to access an ongoing line of credit of $250,000 to cover substantial operational costs across multiple U.S. locations. The company sees Kabbage as a strategic financial partner offering a solution he was unable to find in other traditional or alternative lenders.
Home Equity Lines of Credit
Home equity lines of credit can be obtained through a variety of lenders; these loans use the equity an owner has built up in her home as security for a revolving line of credit. HELOCs often come with lower interest rates than other loans, and a line of credit only accrues interest as it’s used. The draw periods are typically long, around 10 years, and homeowners can often borrow up to 85 percent of the value of their home, minus the amount owed.
Senna House Buyers, a Houston-based house buying company, used a HELOC to finance its growth. Its owner, Sam Craven, obtained a $25,000 line of credit on his primary home, which helped fuel 300 deals for the company. He utilized the equity sitting in his house to fund his business and was later able to sell the house at a profit after paying off the line of credit.
Business Credit Cards
Anyone with a credit card knows it’s a risky way to finance an entire business, but business credit cards can help with individual “strides” of a long-term financial plan. Business credit cards ask owners to jump through fewer hoops to qualify, have high credit limits, and often offer deals on starting interest rates and bonus rewards; the best options also offer cash back. Business credit cards create a separation between a business owner’s personal finances and business finances, strengthening the owner’s ability to build and access credit over the long haul.
One marketing agency used a business credit card to fund a series of campaigns for clients; the firm didn’t have the cash to immediately pay for the advertising spots needed or the filming required, but it knew payment would come on the other side. After the campaign sprints were done and the deliverables had been sent, the clients paid, and the agency immediately paid off its credit card balance — with the campaigns convincing two clients to extend their contracts.
Long-term financial planning is essential to help owners of small and medium growing businesses spot problems before they occur, and it empowers them to get the funding they’ll need in the future now. Getting out of the cycle of short-term fixes not only helps businesses survive, but it also ensures they thrive.