Need Money?

A short time ago, we had a small get together and two local lenders gave some "Straight Talk" about what it takes to get bank financing for your small business. We had some great questions from the audience and Lisa Roberts from Champlain National Bank and Allen Racine from Glens Falls National Bank provided some information on fostering better relationships with your banking partners.

One of the items that we discussed included dispelling the myth that "Banks only want to lend you money when you don't need it and they don't want to lend to people who need money." This is not a new sentiment, nor does it relate to the so-called "credit crisis" of the past few years. Mark Twain is reported to have said, back in the 19th Century, "A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain."

Banks need to lend money to make money and my guess is that most commercial lenders out there would welcome an increase to their business loan portfolios. Yet at the same time, we have to remember that bankers only make money on their loans if the customer can make the loan payments.

Both bankers noted that what banks do is "manage risk." They lend, using resources from customer deposits, money their clients require today and expect to be able to pay back in the future. For the privilege of getting this money in advance, the borrower pays interest to the banks.

Of course, there are no guarantees of future performance, so the banks are assuming risk in using their assets. Bankers want to help their small business clients, but they also have a responsibility to their depositors to carefully assess risk and ensure those loans are paid back. They manage this risk by using what is often referred to as the five C's of financing:

* Character - the borrower's credit history and demonstrated ability to manage financial responsibilities
* Capital - the borrower's willingness to invest their own funds as a part of the project (banks don't want to own 100% of a venture)
* Capacity - the borrower's earning history. Should a deal not go as planned, does the borrower have the ability to still service loan payments?
* Conditions - does the local economy or borrower's knowledge of their industry demonstrate a likelihood of success? Like most intelligent investors, banks also tend to manage diversified portfolios and try not have too many loans in one particular industry.
* Collateral - does the borrower have something of value to guarantee the payback of the loan?

The best way to show banks that you are worth the risk of financing is to develop a clear business plan. An effective business plan will address not only why you need money, but also that you have developed a course of action to be able to make payments on the loan. As Allen Racine said, "Cash flow makes loan payments," so any good business plan will have a detailed cash flow analysis demonstrating that you have developed a plan to keep your business operating and the ability to still make loan payments.

Quite some time ago, I referenced Robert Kiyosaki's book, "Rich Dad, Poor Dad." In this book he references a simple process for cash flow that shows investing in assets that generate income. It is this process that every borrower should keep in mind when they approach a lender for financing. Income generation and cash flow analysis must be clearly identified.

Think of the typical proceeds of financing. Maybe the borrower needs money to purchase production equipment, to purchase more inventory, to cover accounts receivable for an interim period or just to have working capital for operations.

While it seems like I am stating the obvious, that equipment, inventory, accounts receivable and operating expenses must generate a profit above the cost of financing to justify the need for that money. An effective business will not only show how the funds will be spent, but specific benefits that will be achieved from the use of those proceeds.

So if you are purchasing equipment, there should be some analysis of the productivity that will be gained from that purchase. If you need inventory, there should be some analysis of your mark-up percentage and your expected turn rate on that inventory. If you need money for accounts receivables, you should show your average days receivables, along with your profit margin on those receivables.

The most difficult financing is for working capital, as this is the most unsecured level of financing. If your businesses' income can't cover operating expenses, there should be a clear reason why, but more importantly, a detailed timeline explaining the temporary nature of this and a plan of when the profit from operations will no longer require this level of working capital. If you can't do this, borrowing money will only create more expenses, and therefore, more trouble.

There is nothing wrong with going to a bank and presenting a plan that shows that you need money. That is as long as you are prepared to show that you figured out a way to generate even more income from the use of those funds. My clients often tell me they could make more money if they had access to money. Yet telling me and showing me are to different things. For those who need money, be prepared to show a plan that quantifies how you plan to generate more profit from those funds. If you need assistance, stop by your local SBDC and we would be glad to help you in those efforts.

Social Media Symphony

Today we sponsored a half day conference entitled "Demystifying Social Media." Our feature speakers included Joe Schaefer of Overit Media and SUNY Plattsburgh Communications Department Professors, Colleen Lemza & Dr. Jonathan Slater. We had 23 small business owners in attendance and some great information was shared by all.

I am by no means a social media maven and my lack of consistency posting to this site is one of the cardinal sins of blogging. Still, on occasion, I come up with a new posting and decide to share some information with my few faithful followers (thanks, Mom!) and those who happen to search the web for some business advice.

During my introduction to this event, I compared social media to a musical instrument. It is just a tool and what you get out of it is directly related to how skilled you are at using it. There are those people who use sites likes Facebook, Twitter and Linked In for fun or recreation. In their use of these social media tools, they have fun and make a lot of noise. Sometimes there is something catchy and entertaining, but more often than not, there is just noise. Sometimes, if it is out of tune, it can be downright annoying.

For small businesses who want to utilize social media as a tool to grow their revenues, they have to be careful to learn the proper techniques of using these instruments. Just using social media will not result in extra sales. Even though it can be a revolutionary marketing tool, the fundamentals of marketing remain the same.
You have to emotionally convince your potential customers that you have something that they value enough to purchase from your business. Those who effectively use social media, study the techniques to use these tools with care and continually refine their efforts to create beautiful messages that are harmonious with their customer's needs.

With social media, you are given tools to share messages about your business to the masses. If used effectively, you can create beautiful music that your customers can share with their networks of friends; sales can exponentially increase as they share your message with their friends. They may also take that extra step provide a testimonial that reinforces your message and provides instant credibility to your business. That's beautiful music.

Still, if used ineffectively, social media will not benefit your business. Social media is viral, which is good if your business message is catchy, like that #1 hit people want to hear over and over again. On the other hand, the viral nature of social media can be devastating if someone shares negative information about your business.


I don't want to scare you, the social media tools out there are fairly easy to use effectively. Some of you will be naturals at using these tools and others may need some instruction. I invite you to visit Dr. Slater's Google bookmark with some great articles on the effective use of social media.

Seth Godin, one of my favorite marketing gurus, once said, “Conversations among the members of your marketplace happen whether you like it or not. Good marketing encourages the right sort of conversations.” Like playing a musical instrument, there is an art to creating a good conversation about your business. If it doesn't come easy to you, consider working with some marketing professionals to help you craft that magic story. Then grab your social media instruments and create a symphony of success.

The Numbers Tell You What, Not Why

Financial management of a small business is a challenging endeavor. For any business to succeed, cash must flow and profitability must increase at a rate that provides a reasonable return on investment. Yet the fluid nature of a business sometimes makes keeping track of performance as easy as nailing Jello to a wall.

I often remind my clients that "you have to keep score if you want to win the game." Good financial management of a business begins with keeping good financial records. Knowing what to track is the most important part of developing an effective bookkeeping system. Most businesses only have a few "key performance indicators" that will provide the vital signs for success. Reviewing these indicators on a regular basis will help assess the true health of your business.

For those who do not have a strong accounting background, I would suggest a little bit of independent study with some industry reports of financial ratios you should watch pertaining to you specific business. Ratios tend to be a good measure to compare your business against industry standards and any good financial analysis would consider measures of liquidity, profitability and return on investment. If you are not familiar with these terms, no worries, there is always time to do a little self study, talk to your accounting professional or you can visit your local SBDC.

As someone who had no accounting background before going into business for myself, I often made decisions based on intuition of performance, not the facts. It is amazing how many small business owners are guilty of making that same mistake. Sometimes, a quick review of financial performance will help you recognize that your intuition may have been wrong.

The numbers don't lie and if you are keeping good financial records, the vital signs of your business will become glaringly apparent; and for many small business owners, it is not uncommon to find these vital signs conflict with the owner's intuitive measures of performance (which is usually the checkbook balance).

I often tell my clients that checking account balances and profit & loss statements only tell a partial picture of their businesses' well being. The balance sheet is the only financial document that tells the complete story of financial performance. Because of this, I strongly suggest you maintain a bookkeeping that allows you to review a fairly accurate balance sheet on a monthly basis. By paying attention to some trends of key performance indicators on your balance sheet, you will have a better idea of the true health of your business.

At a minimum, the review should include:

Liquidity - is your cash balance in your checking account increasing? Are inventory levels and accounts receivables increasing or decreasing?

Profitability - did you have more income than expenses for this period?

Return on Investment - is the percentage of profitability divided by your assets increasing or decreasing? You may also want to measure this against just your fixed assets.

Again, there is no need to worry if you do not understand some of the financial terms and ratios being discussed. There is always time to improve your financial knowledge and I guarantee that a better understanding of finance will help you make better business decisions.

Keep in mind that the numbers will only tell you the story of what has happened to your business to date. The numbers can't tell you why your performance has improved or declined. Knowing why your business has arrived at its current financial state is always going to be a challenge. Sometimes the reasons are very apparent, but other times, it may be a combination of factors. In some cases, the causes may be mismanagement and an honest assessment of your management decisions should be part of the process.

No matter what the reasons may be for your performance to date, there is always hope for a better future. Tomorrow's balance sheet is always going to differ from today's if you are conducting business. By learning the lessons of how your business has performed to date you can develop plans to improve for the future.

Once you have honestly addressed why your business is where it is, you will be better positioned to develop plans to grow and prosper in the future. Any effective plan should have a scorecard of what you intuitively think will happen. This way you can measure success and make adjustments if things don't go as planned.

Growing a successful business is a balance of measuring performance to date and developing new possibilities for a better future. As you study your performance, don't dwell only on the results; also think about what you are going to do better in the future. As Robert Kennedy once said, “There are those who look at things the way they are, and ask why... I dream of things that never were, and ask why not?”