Why These 5 Best Business Finance Tips for Small Businesses are the Keys to Making Money in 2022 There’s nothing quite like starting and running your own business. You make the rules, you set the pace, and the only boss you must answer to is you (and perhaps clients, partners, shareholders, investors, and the IRS — but that’s another story). Yes, owning your own business comes with many rewards. However, things can get dicey when it comes time to fund your business for growth or expansion. It can be downright scary if you need working capital for day-to-day operations to get you through some seasonality or if the company is just down. If you’re feeling anxious or even overwhelmed by the complexities of payroll, taxes, and business funding, relax and take a deep breath. Consider the following tips on financial management and how to get business financing. 1. Educate Yourself (#1 financial tip!) You can be a street-savvy entrepreneur or have an MBA from one of the more prestigious universities. Nothing in life can prepare you for what it takes to get small business financing until you go through the process yourself. I speak firsthand, bootstrapping many businesses on nothing but a credit card and a prayer. I’ve turned a $10,000 credit card charge into a monthly spend of $300K to $500,000 a month on advertising and paying it off in full at the end of every payment cycle. That’s called “managing small business finances,” if I say so myself! This bootstrapping was back in the late ’90s, and early 2000’s when the internet was still the wild, wild west, and indeed, traditional banks were not going to lend money to someone who was going to make a living off the internet. Believe me, I asked. The bankers looked at me like I had 3 heads. Not to brag or boast, but I deposited five and six figures a month into the business account. They just wouldn’t or couldn’t believe that any home-based business could make that money on the internet. Incredibly a new business less than one year old! So how did I get the funding to grow my business? What did I do? I just kept increasing my monthly credit card limits by providing bank statements and P&Ls. I managed my cash inflows, had a set budget, executed my business plan, and prayed it would all work. Did it work? Hell, yeah! Net income was in the mid to high five figures and low six figures a month. Month after month. Until the space that I was in shifted. What I was doing just didn’t work anymore. Fortunately, I minimized my exposure and risk by immediately pulling back as soon as things weren’t working as well as the month before. Lucky? Maybe. Would I recommend using a credit card to finance your business? It depends. Risk and reward. What’s your risk tolerance? You need to know that it will be harrowing if you’re wrong. My next small business finance lesson is a firsthand experience buying a brick-and-mortar business (in Florida). After closing the deal, I walked across the street to the bank where the company had its accounts. Although everything about the business was the same, except the “new” owners (me), the bank suddenly said they wanted to close the bank accounts—nothing to do with me, they said. They decided they didn’t “like” the business anymore. Can you imagine? Did I hear you right? Did you say you want to close the business bank account? Is the account flush with cash and has an emergency fund close to $200,000? Plus, personal funds backing that up? Yes, yes, and yes! Trust me; it had nothing to do with the “new” owners. That was me. It took several weeks of pleading with the bank to let me maintain the bank accounts to no avail. Imagine a bank not wanting to do business with an established company that regularly had 300 customers a day walking in to take advantage of its services? Is it no wonder business owners have such a love-hate relationship with their bank? However, through dogged determination and perseverance, I found an account manager in western Pennsylvania who had the authority to accept an account from Florida. Go figure. Here is more firsthand knowledge and financial tips. Are you getting the sense that I’m never short on business ideas? I was looking to fund a new venture, looked for investors, and called lenders. Goose-egg. It didn’t matter that I successfully sold my $15M business and two brick-and-mortar stores. Nope. I finally got introduced to a hedge fund manager that liked what I had to offer. He asked me how much I needed, and I told him I wanted $10M. He said he’d agree to $1M and have all the paperwork drawn up by his attorney the next day. I was just about ready to scream “YES” when he added: “Under one condition.” Oh no! What was the one condition? I personally guarantee the loan by putting up my house as collateral. Excited? Hell yes! Scared? You betcha! Later after I closed on the funding (FYI, I borrowed a total of $5M from the lender), he said the one and the ONLY reason he lent me the money is that when he asked for the personal guarantee, I didn’t hesitate for a second. So, the next time you ask someone to fund your business, be confident that you can, without any hesitation at all, say “YES” when they want that personal guarantee. (Now the good news is that I can show you how to get money without the traditional personal guarantees. That, my friends, is what happens when you’ve been at this for as long as I have). The great thing about education is that while there is nothing like firsthand knowledge getting it second hand from someone in the trenches who knows precisely what you’re going through works just as well and can save you a ton of time. Sorry for getting sidetracked. Back to the tips. In today’s fast-paced world of finance, there are various options for business loans. Non-traditional players like alternative and online lenders can offer different types of business loans. But not if you’re a startup. Virtually 100% of the time, you’ll be declined. While there are options for you if you’re relatively new in business, the more traditional route wants to see at least a 3-year track record, and they will want to see at least the last three years of personal and business tax returns plus a whole lot of other stuff. That’s all ok if you have the excellent credit (FICO score over 720 for newer businesses) to go along with it. If you don’t, well, you know what they say. “Fuggetaboutit!” These bank loans may offer the best rates and terms. However, applying for a loan can be daunting to anyone new at securing working capital or term loans. In addition, traditional bank loans or even SBA loans (loans backed by the small business administration)are challenging for small businesses to get approved. Why? It’s a good question, and I’ll tell you right now it has to do with; That’s right – money. Not the money you want to borrow. The money that the lenders want to make. It’s about their profits. You see, your loan is probably just not profitable enough for them to underwrite. How do you think the banks pay for their big-city skyscrapers? Who do you think supports the thousands of branches spread across the country, not to mention the employees who work at the branches? Then you have the TV commercials and the radio and print advertising, and you get the picture. If you haven’t guessed it, they are in the business of making money. That’s perfectly fine with me, and I want the banks to make money so they can stay in business. There’s a lot – well, maybe not a lot – but we need several things from the banks. I can not think of any off the top of my head, how about you? Anyway, they have a lot of fixed costs. All the things I just mentioned get factored into the cost of them underwriting your loan. It’s no wonder why they don’t want to deal with the little guy. Did you know that 99.7% of businesses have fewer than 500 workers, and 89% have less than 20 employees? Can you now see the challenges in front of most business owners? The business loan that you’re looking to secure just isn’t profitable enough for them. Whether it’s $15,000 or $150,000, the cost to underwrite is just too high for the risk the traditional lenders perceive. Is it fair? I don’t know. What do you think? 2. Alternative Sources of Business Finance Loans AKA Where to go When the Bank Says “NO!” There have always been alternative lenders. Factoring is probably the first kind of alternative lending to hit the world stage. It starts in the ancient days of Mesopotamia and continues through the 1300s, then when the Pilgrims start their settlements, the Industrial Revolution, though the World Wars to today. If you’re struggling to get financing for your company, you should consider looking to alternative lenders. These lenders now offer various business loans and programs to fit almost every business type and need. Alternative and online lenders are more willing to work with small businesses and even startups with a less established history. In addition, alternative lenders are more concerned with cash flow than credit score, and many are willing to provide funding for borrowers with a credit score as low as 500. In addition, alternative loans require no collateral, so there’s more potential for businesses with limited assets. Why are they so prevalent today? I think the answer is straightforward. The top alternative lenders all recognized one thing, and the old traditional curmudgeon world of banking no longer met today’s technology and demand. The model is broken. It doesn’t work. Plain and simple. It misses the mark because the emphasis is on the business owner’s credit score rather than the business’s health. It ignores that business owners must “manage” their finances differently than the average consumer. While the average consumer may have 3 – 5 credit cards, it’s not unusual for the business owner to have ten or more. The business owner can have more than one car and more than one property. The challenge is that they aren’t the perfect little round pegs for the round hole. As a result, their financial picture looks different. Trying to compare the business owner with the 9 to 5 worker not only doesn’t work, but it’s also flat out not fair. This newer landscape is where the best alternative lenders step into the picture and fill the wide gap created by the banker. Are there other choices besides alternative lenders? Sure. One option is to search for investors to sell equity in your business. Newer options for business funding include venture capital and crowdfunding. Venture capital typically comes from an investor willing to help you with startup funds in exchange for a certain percentage of your business. Venture Capital funding is notoriously difficult for any company to secure. Crowdfunding can also help you accumulate startup funds by getting your idea in front of more people who can pre-order your product or service before an official launch. Another option for raising capital is what I like to call the 3 F’s. I describe it as Family, Friends, and Fools. You can consider business credit cards. The cards not only help you establish business credit, but you can also possibly secure $25,000 to $100K or more in the business name depending on your credit rating or the credit of your partners. This strategy also enables your company to be recognized as a separate entity (vs. personal finance). A business credit card offers you the convenience of making the purchases you need, whether this means buying red noses for your mobile clown business or paper to send invoices for your homemade candles. The huge benefit here is it allows you to separate the business expenses from personal expenses. All you need is small business accounting software, and you’re off to the races. Remember, no matter what you do, it is vital that you not treat your business like a personal piggy bank, as it just doesn’t look good when you need additional funding. Try not to splurge on a fancy new Mercedes after realizing that first big monthly profit in your business. It just takes a little bit of essential financial planning. 3. Know Thy Numbers Do you ever watch Shark Tank? I love that show, and I can watch the same episode multiple times. Why? I can always pick up another tidbit from Mr. Cuban, Barbara, Mr. Wonderful, Lori, Daymond, or Robert. I love the interaction between the business owners and the investors. The psychological tension between the owner and the sharks becomes a case study. The owner is trying to get the highest valuation without offering too much of the company’s equity. The sharks are cutting through the sales BS (oh, I mean presentation) and stripping the company down to its nuts and bolts. But here’s the rub. It happens every time. Once the investor is “sold” on the idea, and sometimes it happens in just a few minutes, one of them, if not all of them, inevitably asks the very same question. As Lori always says, “When you walked in, I can tell the heroes from the zeroes.” Tell me about your numbers. Can you guess what happens if there is any hesitation? If you have watched any of the shows, you know what happens when they phumpher. They get crushed. Or as Kevin O’Leary famously says, Don’t be crushed like a cockroach. You must know your numbers. Cold 🥶 How can anyone invest or lend you money if you can’t explain your business with numbers? It’s simple. Be prepared to answer these questions. How much do you need? What do you need it for? What will the money do for you? What’s your ROI (Return on Investment). What are your margins? How much do you have in the bank now? I’m amazed how often I ask these questions to get an “I don’t know” answer on the other end of the phone. It’s not complicated, my friends. Let’s look at it from a different angle. If you invest $1 in your business, what sort of return will you see. In other words, how much will you make? Over what period? Daily, weekly, monthly? Is it quarterly, annually? Trust me. You want to know these things. If you cannot answer those basic questions, how else do you know how much you need and, perhaps more importantly, whether you can afford to pay it back? On the flip side, I’d venture to say that many business owners have turned down a loan because, in their opinion, the rate was too expensive. Sort of cutting off your nose to spite your face. Why do they do it? My opinion? They don’t know their numbers. I think the truth is that they could not calculate what the business loan would do for their company. From our analysis, they had the margins. Not only could they afford it, but they could also probably afford to borrow more, and it would enable their business to explode with profits, literally—what a shame. It’s not just Shark Tank. How about Marcus Lemonis on The Profit? I love this show big time! It’s so predictable. Forget about the office politics and nonesuch. I can’t wait until he sticks his nose into the books, and what does he find? Not what the owners told him initially. You can take that to the bank! The owner was either lying to Marcus or deluding themselves. Some things never change. Is it any wonder so many owners end up shooting themselves in the foot? Despite their best intentions in growing their company and profiting from it, they don’t know their numbers and, unfortunately, ultimately fail on some level. Whether you’re applying for a small business loan from a bank or alternative lender or seeking investments from outside sources, you must have accurate accounting for external and internal uses. You’ve got to know your numbers. They are the roadmap to your success. Do yourself a favor. Invest in accounting software to keep track. If you’re making a little money, spend it on a bookkeeper. Trust me. It’s not worth the extra time and aggravation of doing it yourself. Ask yourself this question. Do you make more money doing what you know versus the cost of what you pay a bookkeeper for doing the books? Think about the value of your time. Think about the importance of a bit of time off. Maybe you’re better off kicking back instead of spending a Friday night or weekend managing your income and expenses. To quote the famous and loveable Yogi Berra, 4. Good Times and Bad Times (You Know I’ve Had My Share) – Led Zeppelin Regardless of how well you may plan for the daily operations of your baby, it is impossible to know what lurks around the corner. Opportunities come at us daily. Sometimes they are disguised as problems, and it’s always just a matter of perception. Your best salesman just quit, and you’re devastated, or at least mildly upset. You wonder how you’re going to make this month’s numbers. You’ve got payroll rent, utilities, not to mention the order of new desks and chairs you just placed. On top of that, a few deals fell through, and your new client is taking up way too much of your staff’s time. You get the picture. You don’t know that both you and your best salesman are complacent, and when you hire the next guy, he doubles the previous production. All is good. All that stress for nothing. But I’ll tell you that you need preparation. I know that I’m always calculating. Calculating “what if’s.’ Some of the calculations are good, and some of them are not so good. The point is that I want to be in a financial situation where I can handle both scenarios. You never want to be in a position where you are desperate. You always want to be in a situation where you know you could use more money but don’t have to make more money. No lender wants to lend money to a desperate business. On the flip side, an investor will take full advantage of you if he smells blood in the water. You’ll end up in a compromising position and feel like you got the very short end of the stick. It may mean higher rates or shorter terms, and it may mean a daily payment rather than a monthly payment. Please understand it’s all about risk and reward. I know you believe in your baby. But will the bank believe in it? Did you take the time to be prepared and everything that it means? Businesses are exposed to any number of risks at a given time, including weather disasters, a shift in the market, an economic downturn, a new competitor taking over a significant market share, a problem with manufacturing, or million-other significant or minor issues. Can I tell you about a pet peeve of mine? I hate problems. Remember, it’s always a matter of perception. I like to think of them as challenges. Again, I digress. Small business owners considering how to finance a small business must take the time to think about contingencies. Small business loans may provide additional funds for a company in a time of crisis. They are fast and easy to come by when talking to one of the top alternative lenders in the marketplace. Understand that this isn’t mattress money. You don’t hold it back for a rainy day. This loan is money you invest in your business. Did I tell you that’s one of the things you must look at differently? You’re not borrowing money. You’re investing the money. What better thing to invest in than your business? Especially if you know your numbers. Where else can you control that ROI? Like any investment, there is a cost of the capital you use as part of that investment, and it’s just part of the big picture. If an emergency does arise and the funds aren’t available, other quick and easy funding sources can provide a lifeline. Another example is a merchant cash advance from one of the best alternative direct lenders. They can provide you with as much as $500,000 in as little as a day or two. The paperwork is minimal, and the funding is reasonably easy to secure. 5. The Two Most Important Words in Your Vocabulary Cash Flow Cash flow is one of the most challenging things for a small business owner to conquer. Accurate and timely data delivered by a solid and current accounting system can provide the foundation for a robust cash flow system. However, managing cash flow efficiently and effectively requires that you have a deep understanding of your business. You should realistically predict how much revenue you will receive in each season. Prepare timely financial statements so that you can forecast your business needs with greater accuracy. This step is necessary anyway when applying for business loans, so integrate these into your monthly review of your business so that you know your financial data better than the accountant. Lenders often refuse any type of business loan to businesses with unorganized financial records because this can be a sign of poor money management. You should have a clear understanding of your fixed and variable expenses. During the first few years in business, it is crucial not to over-expand too quickly. For example, obtaining a business loan to purchase an expensive piece of real estate may not be the most prudent decision if you are not sure the location will bring in the necessary foot traffic. Carefully consider the cash flow implications of purchasing decisions. Get ahead of the game so that you are not spending carelessly. You can expand later and splurge on investments that prove themselves worthy when the time is right, or you can genuinely afford the expenditure. THE BOTTOM LINE There are three basic things you need to be successful in business. You need: KNOWLEDGE, you need the TOOLS, and you need MONEY. Benjamin Franklin aptly stated, How true.