In March 2016, The Alternative Board surveyed hundreds of business owners to learn more about how they funded their business and what they learned from their funding experiences. According to the results, the large majority of business owners (80%) got their businesses off the ground via self-funding, then primarily turned to bank loans (62%) for additional cash flow and growth.
The survey results reveal what these business owners learned from borrowing capital and how you can apply their insight and experiences to borrowing successfully for your own business. Based on this quarter’s industry research, here are the top 7 funding tips for entrepreneurs from entrepreneurs:
Be sure you have a strong relationship with more than one bank
According to 57% of business owners surveyed, borrowing from banks is getting harder. To give yourself the upperhand, TAB Member Simon Banks, President of Sampson Products Ltd suggests treating potential lenders like potential suppliers. “Always have at least two quoting to gain your business,” says Banks. “Lenders may well be reluctant to negotiate rates, but if challenged they may move on securities, guarantees and other fees.”
Be well prepared
As with all things business, when taking out business loans, planning is key. A good rule of thumb is not to borrow money unless you are absolutely positive that it will benefit your business. TAB Member Brad Hickerson, Owner of Fast-Pak Supply Corp, recommends you understand what you’re asking for and why. “For example, you can justify a $1,000,000 loan when you’re buying a machine that will help your business provide $2,000,000 in new sales.”
Borrow before you are desperate
Looking back, business owners wish they borrowed more (29%) rather than less (11%). Of the business owners surveyed, several stressed the importance of taking out loans before they become a necessity. “Get loans or credit lines setup when you don't need them,” says TAB Member John Hill, CEO of Allegiance Technology. “Then, when you are ready to put them to use, have a specific plan on how the money will help grow your business.”
“Don’t overspend your capital,” says TAB member Jeffrey Robinson, President & Owner of Efficiency Systems Co., Inc. “There’s no need to drive expensive cars or have large expense accounts. No matter how good you think your business’s prospects are, unexpected expenses, like bankrupt customers who can’t pay and dishonest employees – can and will come up.”According to Robinson, conservative spending also relates to being vigilant about your bookkeeping. “Always be aware of your bank accounts. Don’t give other people in your office check signing ability, unless they can be completely trusted.”
Only borrow for strategic initiatives
TAB Member Dave Younge, Owner of Progressive Stamping only establishes lines of credit for help with temporary cash shortfalls and quick opportunistic purchases – and only when he knows he can repay within six months or less. “Borrowing should only be used for fixed assets that will have lasting value. Borrowing for a marketing campaign or hiring is like using credit to buy groceries.”
Establish a substantial relationship with your investor
Be transparent with your investors from the very beginning to ensure the smoothest possible transaction. Don’t opt for the first investor that comes your way. “Pick a banker like a spouse,” says TAB Member Mark Nonweiler, Owner of P. Nonweiler Co. “It works best if it is like a lifetime career commitment.”As with any healthy relationship, honest communication is key. “Talk to your lenders. Share plans and progress on a regular basis,” says TAB Member Kristine Van Cleve, President of Dental Prosthetic Services. “Help them see you as a person and part of the community – not just a loan application. Keep the relationship ongoing.”
Don’t forget to factor interest fees
Seek out funds with historically low interest rates, and be aware of the effects of sudden rises in interest rates on your business. “If you are having difficulty with profitability under low interest rates,” says TAB Member James Teat, Owner of Axcess Technology Source. “Just imagine what a 2, 4, or 6% increase will do to your business and its ability to be competitive.”
Across the board, the number one tip business owners had to share regarding funding was to be prepared. Know why you’re taking out money, how it will positively affect your business, and how you will pay it back. Having a concrete strategic plan allows you to identify all of these factors when opportunities present themselves. That way, if an amazing business opportunity comes up, you’ll know whether it’s worth the additional funding or not. The Alternative Board works with business owners to help them develop a strategic plan for their vision.
TAB’s executive peer advisory model provides business owners with firsthand advice from other business owners – just like the tips in this blog post. If you’re interested in learning from the experiences of other business owners, get in touch with a local TAB board.