My colleague Steve Roth with Roth Consulting is our guest blog writer this week.
Steve has a ton of expertise when it comes to successfully running a business. I found Steve’s article to be useful and provide some hope for all you entrepreneurs out there who are looking to take your new and exciting idea to market.
Doing it the Right Way – Building a Financial Base Before Driving Growth by Steve Roth
Recently someone asked me for my No. 1 “nugget” of wisdom for small businesses after 30 years involved in seed investing, start-ups and consulting to entrepreneurs and small businesses. The simple answer is to Raise the Money First.
Business owners and entrepreneurs must build the required financial base before attempting to increase revenues, hire new employees or launch new products. Unfortunately, the majority fail to take the time to raise the funds necessary to support growth, then run out of cash before they see results, then try and raise money and find that no one will come to their rescue.
Don’t Become a Victim to Impatience – Raise the Money First!
There are, however, examples of business owners who have done it right (and hope for those of you who are in a similar place!). This article is about one such successful experience where hard work, patience and the discipline to wait before growing will result in a doubling of revenues and new jobs for 35 to 50 professionals in less than a year’s time. The lessons here can be applied to any company in any industry and at any stage of development since under-capitalization will bring an early end to all such ventures.
The company had been in business for over 10 years, provides a broad range of educational services, in many different institutional settings, combining direct services with curriculum development.
The company’s founder believed in the need for an excellent written business plan and had invested considerable time and effort in such a plan, making it relatively simple for outside parties (e.g., bankers, investors, channel partners and its management team) to understand the Company, its mission and key economic drivers. The plan helped differentiate it from 95% of firms of its size.
On paper and in person it’s an excellent company, with a strong social mission, an excellent plan and a growing market. It should have been easy to finance but that was not the case!
The macro-economic problems of 2007 – 2009 had literally frozen lending to small businesses. The same major money center bank that was eager to provide a loan in 2006 showed no interest in 2009 despite the fact that the company was 3 times larger, profitable and cash flow positive. The same was true for three other money center banks all of which were running advertising programs about their corporate commitment to lend to small businesses.
Their interest in lending was sheer nonsense and very depressing for any entrepreneur or small business owner. The bankers were always excited about the company but the answer consistently came back as no credit at all – a zero! How can a company in business for over a decade, with seven figure revenues and 50 employees be so hard to finance?
The impact on the company and its founder were understandably frustrating and trying. The process of seeking funds leaves one open to criticism and it is never easy for a successful entrepreneur to hear the word “No” when it relates to themselves and their company. The process dragged on for almost a year and by the end the founder was close to being ready to stop dealing with banks altogether and move forward with the growth plan despite the lack of funding.
However, understanding that funding was a pre-requisite to long-term success, as called out in the Business Plan, caused the Founder to be patient and keep trying. In the spring of 2010 the Company was able to close two loans, a term loan backed by the U.S. SBA, and a working capital loan from a smaller and more focused lender who really was lending.
The two new lending relationships provided the foundation for new business and, within three months, the Company had closed the largest single contract in its history. This new business will essentially double its employment; permit investment in new facilities, lines of business and products. The process took far longer than it should have and required more in terms of time and money than originally planned.
However, when growth accelerated again in the Fall of 2010, the bank was able to increase the working capital facility by 60% thereby ensuring the Company the financial “muscle” required to drive revenue growth.
Remember, Patience, Dedication and Prudence Win Every Time. Thanks Steve for this great piece of advice.
Check out the array of business courses Steve is teaching starting in January 2011 at The Educators’ Institute in downtown Oakland, CA and learn how to take your business to a new level of success.
You can also contact Steve at sroth@consultroth.com or visit his website to learn more about how he works one-on-one with entrepreneurs to successfully manage and grow their companies.
To your success!
Michele
