Building competitive and comparative advantages for small businesses in this immediate, interrupted and interconnected global economy Series 1

Startups. You have two options. The liability pill or capital pill. Which one will you take? Here are some key considerations.

How much money do I need to start a business? How much money should I borrow?

I get these questions and hear it asked all the time. On calls with clients talking about their aspirations and their operations, I’ve even heard bankers (not the skilled one’s, unfortunately) ask, well Mr./Mrs. customer how much do you want to borrow? A banker ever asks you this, please be incredibly careful and weary. They should come to you with a number on how much you need based on data driven insights, considerations and calculations.

If you are an entrepreneur, start-up, small business or mid-size business owner and you are looking for financing, and say you never had financing before, please do not go for the big amounts first. I know it’s tempting, but please do not do that.

You should start off small. Consider starting off with a business credit card to build the business and your personal credit score to be well over 680, and showing a strong history of paying ability.

Don’t go for the large lines of credit or asset secured lines until you need it, really, and are able to support the debt service. I will make sure not use industry jargon, but debt service means the debt your business owes and your company’s cash flow ability to pay the current debt.

I like businesses starting off with $1,000 - $10,000 business credit cards to build their usage to paying off debt on time history. See it’s all about numbers and data for lenders and investors. It’s all about risk management and profits too. If you come to a bank with a strong usage and pay off debt history, you are looked as low potential of default, which is good.

Consider revolving (meaning you have access to a fixed amount of money that your business can use, pay off or pay towards, and the business can continue to use it) or a fixed loan (meaning you are given a fixed amount, and your business pays it off with principal and interest payments, and then that is it. No more loan to access unless you apply for a new fixed loan).

Banks and non-bank financial institutions offer unsecured financing up to $100,000 or more, and asset-based financing for various amounts, depending on the collateral, cash flow of business, profitability of business, sales growth of business, and more. Given this, as a business owner, you do not have to request the maximum amount. You should build your cash flow up to support the amount of lending you seek. I am not going to give rules of thumb, but I want you to know that banks are cash flow lenders and want to know if your business can cash flow and pay its debt service all within its risk appetite.

How you run your business is important to lenders and investors

There are four functions of management and leadership that business owners must master.

First is planning, strategic planning. You don’t have to have an MBA to run a business, but you should plan how the business will win cash flows and profits at each stage of the business cycle: Seed. Growth. Maturity. Exit. Plan for everything, as many scenarios as you can imagine. Write it down, and include the planning notes in your strategic business plan, marketing plan, communications plan, and more to share with lenders, investors, your board of directors, and bankers.

Second is organizing. Look at this on two fronts – personal and business. You have to be organized personally to be seeking to follow your passion and create a business enterprise. You should be organized as a business owner as you manage multiple situations, both internal and external, and focus on cash flow generating activities to drive growth and profitability.

Third is leading. Showing up every day to grind and follow your passion is important. But not enough. You must look at leading as activities you can do, as a business owner, to drive enterprise value, customer value, employee value, community value, world value, and therefore drive your business’ differentiation – which is key in this global economy.

Be curious. Be humble. Seek to learn something new every day. Position yourself to be constantly developing, and create a learning and feedback culture within your organization. Lastly, be in the business and on the business. Many business leaders are in the business more than on the business, which leads to my next point. Lenders and capitalists love well run companies and ones with a strong culture.

Fourth is control. It takes strategic leadership to run a successful business, team and enterprise. As a Professor of Strategic Leadership at the American College of Financial Services, I tell my students all the time that strategic leadership does not end when this course ends, in fact it just begins and it’s all about execution from here. Knowing the cash flow targets is key to understanding any short falls that may arise from operations, which will dictate the need for capital or financing.

Knowing options to finance your dreams is particularly important. Knowing what lenders look for is a game changer.