Peter Drucker, the famous writer and management consultant, said that business all boils down to two things: innovation and marketing. Innovation does not mean you have to create a new widget that nobody has ever seen. Innovation can mean – and for most successful businesses normally means – adding value to an existing product or service. Marketing is obvious. If you have the coolest widget but nobody knows about it then your business with the cool widgets won’t be around very long. So let’s not turn this into rocket science. According to Drucker, business is quite simple. So does that mean he’s saying it’s easy? Absolutely not! Think about your business being all about innovation and marketing and you’ll not only make Uncle Pete happy but you’ll simplify your business and make it easier to make decisions about goals, direction, and daily practices.
If you ask most business owners today if they need some cash to start, build, or grow their businesses and the vast majority of them are going to give you a quick “Heck yeah” answer along with a look that says “what kind of question is that buddy!” So before we talk about all the free flowing money that’s being handed out (if you believe that I might have some over-priced real estate to sell you in some areas where the economy is bad) this is where you may not want to hear what this author has to say. Why? Because it may not be what you want to hear. I have seen thousands of people looking for money for their businesses and I’ve seen that most business owners do not borrow money for the RIGHT reason and the RIGHT way. Obtaining business financing is like anything else, it can be done the right way or the wrong way.
Am I going to use the funds borrowed for the right reasons and initiatives? What does this mean? Again, it’s probably simpler than you think. Are you using the borrowed funds for innovation or marketing purposes? Anything else puts you on a slippery slope. So let’s talk about these two purposes. There are some companies who have done such a good job with marketing or they’ve developed some great methods of distribution and the products are flying off the shelves. I realize this is rare but it does happen. If that’s you and you know there are areas of innovation or added value that need to improve then you can probably justify the financing to improve on your product, service, and the value-adds that keep clients and enhance their experience. I would stress to businesses who borrow money for innovative purposes to be careful if the cash-flow of the business is not solid because your new loan or line of credit brings with it the debt service payments that needs to be covered each month. This leads to the reason why most people should be obtaining financing. We like to call it RGA or Revenue Generating Activities. If you use your funding for the right RGA and you execute your plan then you’re heading down the right path. We’re only scratching the surface here but this takes us to the next important factor of how to obtain or access your business financing.
Keep in mind that we are only focusing on borrowing money or creating debt. We are not looking at equity solutions like venture capital, angel investors, private equity, etc. Equity means giving up ownership in your business and is almost always more expensive than forms of debt like loans and lines of credit.
There are 6 goals you should try to accomplish when borrowing money for your business:
1. Accessing capital – the “bottom line” here is that you want to be successful in getting some or all of the funding you need for your business.
2. Separate and preserve your personal and business credit – when you borrow money the right way you’ll keep those loans and lines of credit off your personal credit. By doing this you will preserve your good personal credit if you have good credit.
3. Achieve or maintain excellent personal credit – With the right plan you’ll be able to maintain your excellent personal credit by keeping loans and lines of credit under your business and keeping them off your personal credit report. Please note that you’ll likely be signing a PG or personal guarantee as the owner of the business but those loans and lines of credit – if they are properly originated by the right lender – should not show up on your personal credit unless you got behind on the payments. So don’t miss payments.
4. Cash flow friendly – Look for the lending solution that has the most reasonable monthly payment since the monthly payment will impact your cash-flow. When you access capital for your business, you will most likely NEED to generate cash-flow (such as RGA mentioned earlier) but your ultimate goal is to generate and increase your profits. Remember that cash-flow will keep the doors open for business but profits will generate a better life for you, your family, and your business.
5. Minimize interest expenses – You want to keep the interest costs as low as possible. I personally think that the cash-flow component and the separation of business and personal credit are more important than this but there are exceptions to every rule. Bottom line here is that when you know your credit and lending options then you will be empowered and confident in making decisive actions on what is best for your business. The by-product will be getting the best loan or line of credit for your situation.
6. Maximize tax benefits – I always ask people this question, “do you think that savvy, wealthy business people are missing out on tax benefits?” Probably not too many. I agree. So why should you? The common use of personal credit cards and personal loans get in the way here. They may not make it impossible to get a tax benefit from them but it’s much cleaner and easier if you have the right business loan product.