Archive for March, 2016

It’s a common frustration for small business owners that banks seem only willing to finance companies that don’t need it. It’s pretty standard that to get a bank loan a business has to have multiple consecutive quarters of profitability. That seemed pretty conservative to me, but after a couple years of working with bootstrap small businesses I’m beginning to see why that might be necessary protection.
Bootstrapped startup and young businesses are wonderfully creative in their ability to make-do. As a business grows and generates more resources, it doesn’t become profitable right away. Those early years of business growth end up steadily funding capacity building. As a business has more resources, those resources go not only into growth through marketing, or asset building with equipment and facilities, but professionalization where previously there’s been make-do.
Obvious and common sources of “hidden funding” are underpayment or non-payment of founders or early staff. Understaffing and working folks long but unsustainable hours is common. Family members might work in the business for free. When building financial models, staffing is one category where educated guesses can be made about what it should be to support a target level of business, and so this one is less hidden, but still difficult to assess.
Making do with word-of-mouth advertising can work when a business is small, but to grow into a fundable company it will need to move beyond personal social networks and be able to develop a clientele based on its marketing & sales reach. That costs more money and changes margins on sales. Upgrades of equipment and facilities are likely in search of more efficient process, or lower risk.
Professionalization where there is currently make-do is a more subtle version that requires more attention. Bookkeeping needs to be done by a bookkeeper, not Aunt Jane. Software and technology needs to be legally purchased with regular investments for backups, replacements and upgrades. Office furniture and facilities, if cobbled together from craigslist, is a very likely expenditure as a company becomes able to afford it. Rent may be subsidized by a supportive launching business or relative.
How much growing funds are dedicated to upgrades and improvements before they’re ready to be peeled off to fund additional financing is going to vary a little bit from company to company. Does this CEO feel pinched by their 2nd hand desk or do they take pride in their own thriftiness? Is their affordable tech support person a local gem or are they having to wait for more profitability to afford better service? It does seem impossible as an outsider to assess what remains as not-yet-funded internal capacity in any given company. Instead, insisting that a company generate cashflow for a sustained period is a very tangible measure of its ability, and that CEO’s willingness, to operate at a given internal capacity level.

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