According to the Small Business Administration, the primary reason small businesses fail to grow — especially women- and minority-owned small businesses — is lack of capital. Small businesses rarely have access to external funds from public markets, so they are forced to rely on banks for capital.
A poll conducted by the Small Business Majority found that 90% of small-business owners said lack of access to sufficient capital and credit was one of the biggest challenges they faced. This is a huge problem because without sufficient capital you cannot grow your business. I experienced this first-hand when I owned my business, so I know how frustrating it is.
What frustrates me even more, though — after years of advising and training small-business owners — are small-business owners who can get capital but have no idea what to do with it.
You first need to determine exactly how much capital you need. If you need $57,000, do not round up and say you need $60,000. Apply for what you need and not a cent more.
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You also need to know what form of capital is best suited for your needs. Perhaps a line of credit makes more sense than a loan. With a line of credit, you are likely to pay less in interest because you will not get a lump sum, as you would with a loan.
In addition to deciding how much capital you need, you also need to know two more things:
-- What the money will be used for. (Be specific!)
-- What effect the money will have.
Assume you get a $100,000 loan to run your business but spend only $10,000 of it and leave the rest in the bank. Although you are earning 1% on the $90,000 in the bank, you are paying a 4% or 5% finance charge on the amount you borrowed. In this example, since you did not need $100,000, you would have been much better off getting a line of credit.
I cannot emphasize this point enough: Capital or credit should propel your business forward! What good does it do to go into debt and get a $100,000 note, spend it, and be no better off? Before you dismiss this, thinking no one would do this, think again. I am emphasizing this because I have seen people do this. Worse still, I have seen the same people do it over and over.
Too many small-business owners get capital in hopes of digging themselves out of a financial hole, but what usually happens is, they quickly fall into another one. Why? Because they did not figure out why they fell into the first hole.
Perhaps their estimate was wrong or they managed their project poorly or their workers were slow—whatever the reason, if they do not know what caused the initial problem, new capital will not solve their problem.
I completely understand needing funds to move your business forward, but I learned from my experience and I learned from other people’s experiences that the cliché is true: You should not throw good money after bad. It is tempting when you see no other way out, but when you use new money to pay for old mistakes, you are slowly — but surely — putting yourself out of business.
Marvin Carolina Jr. is a vice president for JE Dunn Construction. He can be reached at email@example.com.