Small Business Financing Problems and How to Solve Them

Many, if not most, small businesses will experience financing problems at some point during their life. How well management deals with these problems will go a long way to determining the ultimate success or failure of the business. There’s an old saying in business; “Cash is king”, and so it is. There are many instances of businesses being profitable on paper only to be unable to sustain operations due to poor cash flow management.

The financing problems created by improper cash flow management are ranked high on the list of problems faced by business owners. In fact, the 2007 Small Business Survival Index ranks financing problems up on the list of small business problems along with taxes (which can create financial problems of their own), government regulation compliance, legal threats, and finding quality employees.

If your small business is experiencing financing problems, what can you do to solve them? You have several options. You can bring in more revenue, reduce expenses, or become more efficient at managing your cash flow. In most cases you would better served by doing all three. Let’s look at these solutions and how to achieve them.

Increasing revenue is certainly a worthy goal of every business, but may not in itself lead to a solution for your small business’s financing problems. This is because in many cases additional funds are necessary to support the larger operations that create the additional revenue. For example, if you have a contracting business, you’ll need more staffing to take on additional work, which will lead to a short term cash flow problem until collections catch up with your increased labor costs.

This can be seen for manufacturing businesses as well. As your business grows and production levels rise, your business will incur additional plant, equipment and labor costs to support the larger number of orders you’re receiving. Until your receivables catch up with your increased costs you will have financing problems.

This means that increasing revenue isn’t always a solution to cash flow problems,and can actually exacerbate them. Increasing revenue to solve small business financial problems is desirable in the long term, but will only help in the short term if the revenue increase can be obtained without substantially increasing costs or if your business operates on a chiefly cash basis. If you extend credit to your customers, the additional costs required to grow your revenue can easily lead you into a cash position that gets worse before it gets better.

What about reducing costs as a solution to improving financing problems? For most businesses, reducing costs, if it can be achieved without reducing revenue, or reducing costs associated with unprofitable revenue is of utmost importance. Not only do costs directly impact the bottom line, they can reduce the operating efficiency of the business, large or small. Traditionally the largest business expense is labor. While this rule isn’t always true, the majority of business owners can attest to the fact that labor costs are what keep them awake at night. The problem is reducing labor costs while protecting revenue.

The other cost that is especially troubling for many small business owners is taxes. In fact the American Institute of Certified Public Accountants (AICPA), who would be a position to know about such matters, ranked taxation issues as one of the three leading causes of small business bankruptcies. Reducing the tax burden by any legal means is vital to the long term success of your small business. This alone can reduce your financial problems to the point where cash flow problems disappear altogether.

Many small business use some form of financing to finance growth or smooth out the bumps in their cash flow picture. Weather the cash flow problems are caused by expanding operations, inefficiencies, or seasonal business cycles financing is another valuable tool available to the business owner to solve their cash flow issues. Financing solutions for small businesses are available in many forms, including lines of credit, loans, and additional investment provided through either equity or debt financing.

No matter the other problems faced by your small business, it’s clear that financing problems will always rank high on the list of problems faced by small business owners. It’s how well you deal with these problems that will determine the success you experience in your small business.

4 Key Tips to Help Increase Your Chances of Getting Small Business Financing

As a small business owner your ability to secure small business financing will in fact determine how successful you are. Unfortunately, few business owners know how to improve their chances of getting a business loan which is why when the time comes they are not able to secure the loan they need to keep their business running.

Tip no. 1: Familiarize yourself with the bankers in your community’s financial institutions

Prior to applying for a loan you should find out exactly which institutions in your community issue loans to businesses like yours. Not every bank specializes in giving business loans and those that do may only lend money to businesses in certain industries. Some lenders only lend to businesses that are at a certain stage of their business cycle. This is why it is important that you only work with bankers who are familiar with your industry. One big reason why you should work with banks that know about your industry is because they can give you some solid business advice. This advice stems for their experience working with other businesses in your industry and so they have come to understand the problems they face.

Tip no. 2: You should be able to easily describe your business’s “Value Proposition”

You need to able to clearly communicate what value proposition you have. You should work on drafting a business plan that outlines three main scenarios i.e. worst case, most likely, and best case. You will want the banker to clearly understand all three of these scenarios. You should also be ready to discuss in great detail the assumptions that you make in each of these scenarios.

Tip no. 3: Weigh risks and benefits

If you want to get small business financing you need to start seeing things from the bank’s perspective. Banks see things in terms of risk and benefit. You need to have a solid and viable plan which will mitigate the risks. Bankers do risk analysis regardless of if you do it or not but being prepared for it means that you stand a better chance of being considered.

Tip no. 4: Two ways to be able to repay the small business loan

Bankers always like small business borrowers who put forth a primary and secondary source of repayment. As a small business owner you are in the best position to determine all possible repayment alternatives. However, you should discuss the options with your banker. Secondary sources of repayment include the pledging of personal or business collateral. The more certain a banker is the higher your chances are of getting the loan.

Applying for and getting a small business loan can be a time consuming and tiresome chore. However, all business owners will have to apply for a business loan at least once during their time as businessmen. So, it is always a good idea to know what you’re getting yourself into prior to applying for a loan.

How to Obtain Small Business Loans When Banks Say No

We provided advice a few years ago about what actions business owners should consider if their bank rejected a small business financing request. The earlier advice is now likely to be especially relevant for many businesses since banks are currently saying “no” more frequently than they have in decades because of a deteriorating commercial lending environment.

A bank saying “no” can actually lead to an overall improvement in commercial financing options under many circumstances, although a business owner is not likely to hope for the business loan rejection in the first place. With requests for needed business financing and working capital, small business owners are increasingly hearing their bank say “no”. Most commercial borrowers are often not sure what to do next since such an awkward situation represents uncharted waters for them.

Even for long-term and profitable customers, banks are routinely saying “no” to small businesses. It is now common to hear phrases such as “thinking outside the bank” and “business loans without banks” when talking about strategies small business owners might need to analyze because this has become such a widespread commercial lending problem.

When contemplating the possibility of banks saying “no”, there are two especially common financing situations likely to materialize for businesses. One of these involves working capital loans (including commercial lines of credit) and the other commercial real estate financing. Recent nationwide commercial lending reports clearly show a drastic reduction in commercial loans for working capital loans and commercial mortgage loans, although it is true that a small number of banks are still proving to be reliable sources for some business financing options.

Small businesses have only rarely pursued the option of replacing their bank. There is little recourse but to pursue such a path when their bank says “no” to routine requests for business financing, and astute business owners need to quickly accept this harsh reality. Improvements to the overall financial health of a business will be achieved in a pleasantly surprising number of cases even though this search for new commercial finance alternatives is undertaken under protest by most commercial borrowers. It should not be overlooked that one or two banks often operate in a near monopoly environment in many communities and cities. When small business owners have literally been forced to find new business finance options, they are often pleased to discover that they can not only replace existing bank financing satisfactorily but also improve their bottom line in the transition.

A prudent starting point for commercial borrowers to adequately evaluate how to get working capital and other business loans when their bank says “no” is likely to be a lengthy conversation with a small business financing expert. Finding and selecting such an expert will not be a quick or easy task for business owners, but this step is likely to be critical to eventual success in formulating a strategy for obtaining new sources of effective commercial finance funding. Ensuring that the commercial financing expert chosen is totally independent and not affiliated in any way with the bank which said “no” is an especially crucial aspect not to be overlooked in locating a reliable expert to help.