Three Big Lessons I Have Learned About Small Biz Financing

Over the last 10 years I have gone through many ups and downs when it comes to business cycles, hiring, clients, business models and about 30 other things. The one thing constant that needed to be there in order for my business to continue was that I need to keep the money coming in and that at some points I needed small business financing. I have learned three big lessons in small business financing that might not seem like your typical financing advice but they are lessons hard learned.

Lesson #1 – Debt is a Vampire that will suck the lifeblood from your company

There will always be good times and there will inevitably be not so good times. The old adage “people will give you money when you don’t need it” is so true I can not even tell you. I have made the mistake of using personal credit cards to fund my business and getting myself in massive debt. Yeah, fun.

Since cash is the lifeblood of any business, I make the parallel that debt is a vampire. You think most of the time it is helping support your business but with interest payments and monthly bills that might be tough to pay once and a while, it can suck the life out of your company and stunt potential growth.

Lesson #2 – You don’t need to have debt to be a “normal” company

I remember early on in the life of my business I had brought on a person to be managing partner of one of our services groups. He was really good with finance and it was something I needed help with because I was busy doing client work and business development. One of the things he remarked that we didn’t have any debt and that in order to grow we should take some on because that is what “normal” companies do.

A part of me had my doubts but we did take on debt in the form of lines of credit or leases but after a while what realized is that since he had no obligation to these debts it was easy to add it on. The “other people’s money” or OPM style of finance might have worked for some people but not when you are a small business with limited cash flow.

The reality is that you don’t have to take on debt to be a growing company. You can watch and trim your budget and save money to create your own line of credit. This leads me right to lesson #3….

Lesson #3 – Have six months of cash for whatever you are planning

This is an interesting on and one that I learned the hard way once unforeseen circumstances (Internet bubble bursting) and tragedy on 9/11 caused me to lay off everyone because we only had two months of cash left. When we were hiring we had lots of contracts and used our lines of credit to float the payroll and leases. We even looked into using retirement accounts to fund the business (I would not recommend this) and eventually we calculated that all the interest payments would have actually paid for another person which would have been more valuable to increase or productivity but also our billings.

So we went on a debt diet and over the course of three years we paid off all the debts and leases, early if we could and added staff only when we had six months of cash for their salary package. We used contractors for a while because it was easier to utilize people for specific tasks and not have the overhead.

We recently have adopted the policy to use cash flow and create our own virtual lines of credit. This rule of having six months of cash built up to do something allows us to take on new things but deal with the payment cycles of clients and how fast new employees get up to speed. It is working and I would recommend every business look into experimenting with this approach.

What Lessons Have You Learned?

So these lessons are some big ones I have learned and about 100 other tiny ones. What have you learned running your small business that would be important to share? Leave a comment.

This entry was posted on Wednesday, March 31st, 2010 at 11:00 am and is filed under small business. You can follow any responses to this entry through the RSS 2.0 feed.


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