Tag Archive for 'capital'

Business Growth: An Irony in the Marketplace

Here’s a scenario that plays out in the marketplace every day in Small Business, USA:

“My business is really growing these days,” a small business owner confides to his friend, “but we’re still experiencing negative cash during the month.”

And then, with that deer-in-the-headlights look on his face, he completes his concern, “I thought by now, with sales and profits up, cash flow would be the least of my worries. I used to be afraid I couldn’t grow my business; now I’m worried that our growth will collapse it.”

This entrepreneur’s lament is one of the great ironies of the marketplace: A small business in danger of failure as a result of extreme success.

Beware Blasingame’s Razor: It’s redundant to say, “Undercapitalized small business.”

This maxim is especially true for growing small companies, because sales volume growth depletes cash in two dramatic but predictable ways:

1. When the business is growing, organizational upgrades are to be expected in order to handle the new demands ­ new vehicles, staff, technology, etc. Of course, you must fund these things, often while the exciting new sales growth is merely on paper, and not yet in the bank.

2. Selling to customers on an open account - where payment for work or products is collected after delivery - is essentially making loans to customers. And while it’s true that your vendors may let you do the same, typically they allow you less time to pay them than you allow your customers to pay you. This difference between when you pay and when you collect mathematically creates negative cash.

Here’s how to manage these two challenges:

1. Growth plans must be compatible with the ability to fund that growth. Too often we think that the big growth hurdle is to get customers to say yes. But we must consider the impact of sales growth on cash flow before delivering a proposal. And don’t be surprised if the answer to this equation shows that you actually have to turn down some business.

2. Don’t use operating cash to fund acquisition of capital assets that have a life expectancy of more than 2 years. Capital purchases should probably be funded by bank debt, and the interest you pay is the wages of Blasingame’s Razor.

If you don’t like debt, or paying interest, that should motivate you to leave profits in the business as retained earnings, which is ultimately the best way to overcome Blasingame’s Razor.

3. Do a better job of collecting receivables on time. Understanding the relationship between Accounts Receivable Days and Accounts Payable Days is an “ah-ha” moment for any small business owner. Sustained growth cannot happen without continuous and regular monitoring of this ratio.

Write this on a rock…. If your business is growing nicely, congratulations. But beware Blasingame’s Razor. It is possible to succeed yourself right out of business.

RESULTS: Where would you go for a business loan?

The Question:

If you needed a business loan for for equipment or working capital, which of these sources would you go to first?

16% - One of the major national banks
69% - A local community bank
12% - A credit union
3% - Crowdsourcing loan
Jim’s Comments:
As you can see, almost 7 of 10 of our small business audience use community banks for business loans. This is interesting because according to the Independent Community Bankers of America (ICBA), nationally almost 6 of 10 small business loans are made by community banks. The big news for this poll is that crowdfunding registered for the first time. The number is small, but this credit source essentially didn’t exist a couple of years ago.

I’m going to have more to say about this, including the implications of all of the responses for small businesses and credit organizations in my Feature Article next week. Stay tuned.

RESULTS: Would your business be a prospect for outside investor capital?

The Question:
Would your business ever be a prospect for outside investor capital?

15% - Yes, our long-term growth plans is to acquire venture capital.
8% - Yes, but only angel investors we can buy out later.
0% - We want to acquire investor capital but don’t know how.
0% - We’ve already acquired outside investor capital.
77% - We don’t need no shtinkin’ investors.

Jim’s Comments:
As I’ve said - and written - many times, most small businesses are not prospects for outside investor capital. It’s difficult to get, it’s not practical to manage, it’s troublesome to account for, it can be maddening to deal with the investors, and the long-term expectations of the founders and investors are almost always different. So I wasn’t surprised when over three-fourths of our respondents said, “We don’t need no shtinkin’ investors.” And I wasn’t surprised that 15% said they were planning to pursue outside investors in the long term. But I’ll wager that of that group, a very small percentage will actually finalize an outside investment capital deal.

When you get a few minutes, go to this link and read some of the articles on capital acquisition.

Thanks for participating this week. And be sure to give us your position on our new poll below.

RESULTS: Would you consider raising capital from a crowd funding source?

The Question:
Would you consider raising capital from a crowd funding source?

30% — I might consider crowdfunding.
67% — I would not consider crowdfunding.
3% — I considered crowdfunding, but decided against it.
0% — I have already used crowdfunding.

Jim’s Comments:
It’s interesting that none of our respondents has yet used this capital source.  I have to admit, my thoughts on how relevant crowdfunding will be for most small businesses in the previous three Feature Articles may have influenced some of you. Because as you can see, two thirds of you would not consider crowdfunding. It will definitely be an option for some; just not as universally applied across the sector as traditional sources, like bank loans.

Remember, the best source of small business capital is profits you earn from doing business with customers and have the discipline to leave in the business as retained earnings. The beautiful irony of that capitalization plan is that management behavior is the most attractive to bankers.

Is crowdfunding investment capital right for your business?

In previous columns I introduced three crowdfunding sources including donation fundraising, startup transactions, and lending. Now let’s talk about the fourth and most problematic method: raising capital from investors.

Historically, small businesses acquired investor capital from two sources: venture capital and angel investors. So when crowdfunding popped up on our radar, many in the entrepreneurial universe got excited thinking the Internet could be used as a lever for investor capital as it has for other business applications. Here are four reasons why I was not among this group.

1.  Securities Laws
Remember those two crowdfunding markers identified in my previous columns, “innumerable and anonymous?” Well, they’re the most problematic in raising investor funds because, by definition, the public (people you don’t know) has access to Internet offerings. U.S. securities laws are enormously restrictive about selling investments to the public, and the approval process is prohibitively expensive for most startups. Plus, even as part of Obama’s 2012 JOBS Act, the Securities and Exchange Commission (SEC) has yet to approve crowdfunding for investors and won’t say when rulemaking will happen.

2.  Financial reporting
One of the essential markers of investing is financial reporting. Alas, one of the markers of the small business sector is poor financial recordkeeping. When small businesses learn the level of disclosure required for crowdfunding investment, most will not pursue this path.

3.  Minority shareholders
Investors become shareholders. A crowdfunding offering is likely to create many shareholders. When small business owners understand the maintenance expense and effort to comply with mandated reporting to shareholders, most will seek other capital sources.

4.  Exit strategies
Small business owners love their businesses, but most don’t have an exit strategy. Since capital is not romantic, it’s unlikely that a small business owner’s idea of an exit will align with that of crowdfunding investors. And with no after-market for these shares, crowdfunding creates an inherent exit expectation conflict, which will be a non-starter.

When and if SEC rulemaking occurs, crowdfunding equity will benefit some entrepreneurs. But I predict this capital source won’t be a high percentage option for most small businesses. Crowdfunding is part of the future of small business capitalization, but it’s not for everyone.

Write this on a rock … Don’t count on crowdfunding to replace your banking relationships.

Jim Blasingame is the author of the award-winning book, “The Age of the Customer: Prepare for the Moment of Relevance.”


Crowd funding is not new, but crowdfunding is

Crowd funding is not new, but crowdfunding is. Completely intuitive, both terms mean funds conveyed by a crowd to a solicitor.

Crowd funding is actually traditional banking, insurance, stock markets, charities and the like, where the crowds are relatively small and absolutely defined. Now a new word, crowdfunding is very similar except that it’s conducted on the Internet where the crowds are innumerable and possibly anonymous.

It’s largely due to those two words, innumerable and anonymous, that crowdfunding has caught on to the point where several online platforms now aggregate funds seekers with funding crowds. Now with crowdfunding, the Internet simultaneously facilitates and disrupts our experiences with what I call the Four Cs of Modern Society: Connect, Communicate, Communities and Commerce.

So far, crowdfunding fits primarily into two categories:

Contributions/Fundraising

This is where an emotional connection motivates members of a crowd to give to a cause, project, idea, ideal, etc.  Besides the emotional motivation, merchandise like a T-shirt or first album, for example, are likely to be involved as a token of thanks. This crowdfunding form is nothing more than donations.

Business funding

This money goes to a commercial venture, often a startup, with the expectation of receiving a first-of-its-kind product or future discount. The crowd knows the funds partially pay for the merchandise and partly capitalize the venture to which this crowd also has an emotional connection. This is business funding in the form of a commercial transaction, not investment.

Recently, crowdfunding has nudged closer to debt and equity capitalization. Peer-to-peer lending is an emerging form of crowdfunding, while the investment model still has legal and practical hurdles.

It’s clear that the future of small business capitalization will look a lot different than it does today. But for most small businesses the jury is still out on how the crowdfunding options will be part of their capitalization future.

In my next column I’ll use a practical approach and some tough love to reveal the challenges facing both the debt and equity sides of crowdfunding.  Ironically, those two advantages of crowdfunding mentioned earlier, innumerable and anonymous, will manifest as potential barriers as we discuss the more sophisticated forms of crowdfunding.

Write this on a rock…

Crowdfunding is just new tools to accomplish traditional fundraising and capitalization.




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