How to Know If Borrowing is Right for Your Business
Big bank lending to small businesses is increasing. In addition to traditional loans, you may find yourself receiving unsolicited credit card offers from major banks. While it’s nice to see a loosening of credit, the banks often – and the credit card companies always – loan money without truly assessing the credit worthiness of the small business borrower. Back in the day, a banker would do a detailed analysis of a business’ financials before issuing a loan. Today, many will not take the time and the only thing credit card companies are looking at is your credit history. If you’ve managed to make your payments, despite running an unprofitable business, they will probably give you a new card anyway. All of this makes it incumbent on you to understand if and when you should be increasing your company’s debt position. There are a variety of ratios that give you an indication of how much debt you can afford to carry, which I’ll briefly list below. However, before that you need to have a sense of how “steady” your industry is. If you’re in a business that is volatile, you need to approach any analysis from a very conservative point of view. If your income and growth are historically steady and predictable, you are probably in a position to handle more debt. When discussing stocks, analysts will often mention the debt/equity ratio. This is the amount of debt a company has divided by its net assets (assets minus liabilities). This ratio tells you how much the company is leveraged. A high number – above 50, for example – means the company is highly leveraged. A highly leveraged small business in a volatile market could be in trouble. Debt/equity ratios vary wildly between industries as you can see in this chart. Start with your debt/equity ratio. If it would go above 40 when you consider the amount of additional debt you want to take on, it could be too much. Here are other ratios to look at as you judge your ability to make interest and principal payments. Projected operating income/interest expense. Your operating income is your revenue minus expenses with the exception of interest payments and taxes. Experts recommend a number between 1.2 and 1.5. Theoretically you would cover interest with a ratio of 1, but that is cutting it too close to the bone. Projected net income plus depreciation/principal payment. This predicts your ability to pay back the principal on the loan. Anything lower than 1 spells trouble. Again, shoot for a number between 1.2 and 1.5. Current assets minus inventory/current liabilities. This is the “acid test ratio” and gives you a yardstick by which to measure your ability to meet your short-term obligations. It’s a worst-case scenario snapshot that compares your liquidity to your liability. It must be greater than 1. There are other ratios that serve to judge the credit worthiness of your company and give you an indication of how wise it would be to take on more debt. Ultimately, much of that analysis depends on how you would use the borrowed money. If you are using the cash to expand or get through a short-term cash flow shortfall, borrowing can make a lot of sense. If your cash flow problems are chronic, it’s a different...
read moreThanks for everything – now get out! When Founders Get Fired
We all know the scene: Donald Trump waggles his finger and points at one of the pseudo-celebrities on his “Celebrity Apprentice” reality TV show then utters those harsh words, “You’re fired!” It makes for good television, but despite the fact that it’s all done for entertainment and to help some charities, I think the moment must hurt badly for those who come under the gun. This painful scene has played out in the lives of many founders. They start their companies from scratch, working like dogs, then bring in investors who eventually decide that they aren’t the right people to take the business to the next level. It happened to Jobs, it can happen to you That smarts, but it’s happened to people as talented as Steve Jobs, who was forced out of Apple after he tried to get then-CEO John Sculley removed. His case proved that revenge is a dish best served cold when he ended up back in the driver’s seat several years later. Groupon founder Andrew Mason found himself ousted in February 2013 the day after his company reported a bigger than expected quarterly loss. The loss caused investors to doubt the entire business model on which Groupon was founded. However, Mason may have had the last laugh when he issued a memo to employees announcing his departure that read, “After 4 1/2 intense and wonderful years as CEO of Groupon, I’ve decided that I’d like to spend more time with my family. Just kidding – I was fired today.” Mason lost his job while Groupon was in the throes of establishing itself as a bona fide commercial entity; it was a young company. Sometimes leaders who have been at the helm for many years find themselves on the outs. That was the case with George Zimmerman who was the TV commercial face (“You’re going to like the way you look. I guarantee it!”) of The Men’s Warehouse for what seemed like a lifetime. Not ready for prime time? But whether in the formative years or when a company is mature, the basic reason founders are ousted is usually the same: Investors have no confidence in their ability to take the company to the next level. That could be establishing initial viability or profitability, or implementing changes required to compete in a changing marketplace. I don’t know if anyone keeps statistics on this, but it seems to be a common phenomenon in today’s tech-dominated startups. Here’s an Ousted Founder Hall of Shame: Noah Glass, Twitter Jerry Yang, Yahoo! Martin Eberhard, Tesla Mike Lazaridis and Jim Balsillie, Research in Motion (BlackBerry) Eduardo Saverin, Facebook co-founder Some go on to later success, as with Steve Jobs, but quite a few seem to be one-hit wonders, who are able to take a load of cash and live comfortably while they dabble in this and that. One key to not finding yourself fired from your own company is to do everything you can to stem off a surprise. Frankly, if business is going poorly you should never be surprised. If internal political machinations catch you unaware, you haven’t created the bonds and communication lines necessary to maintain control through rough times. Seeing the bigger picture But, as we leave this topic today let’s look at the issue from a wider...
read moreThis Week in Small Business: Floyd Mayweather, Ben and Jerry, and Net Neutrality
It looks like we have a neutral net now – whether it’s good or bad, time will tell – but both sides are presented below. I hope it makes us more productive, but in any case, this weeks’ edition includes a lot of productivity tips you can use right now. Leadership, Management and Productivity I suppose the FCC had to pass the new “Net Neutrality” regulations so we could find out what is in them. Some entrepreneurs think they will be beneficial to startups. However, many oppose the sweeping change and a legal fight is in the offing. Have you considered attending a small business conference conducted by the US government? Here are five reasons it may be worth the trip. What kind of vibe does your business give its customers? That may have something to do with why small biz owners admire Ben & Jerry’s more than Uber and even more than Apple. Do you have some customers that you just need to fire? Customer service guru Shep Hyken puts the situation in perspective and tells you when it’s okay to move on with a contentious customer. There’s even a business magazine called Street Fight, so maybe these leadership lessons from Floyd Mayweather are just what the doctor ordered. But if you’re fighting to keep your employees productive, is it time to employ some digital snoops? More on productivity: All harried small biz owners need to take a deep breath and review these 7 tips for better productivity. And before we leave the subject, small business owners are boosting productivity and lowering overhead by leveraging remote teams. Here are four ways to manage them. Every so often we need to take a look at how Obamacare is impacting small businesses and entrepreneurs. Here’s the view from the insurance industry. Also: If your business is offering employees a Health Reimbursement Arrangement (HRA) the IRS says it won’t start levying the $100-per-day-per-employee fines until July. Some of the big players in retail are investing heavily in both “clicks and bricks.” What can you learn from their strategies and challenges? See if you have these 15 websites bookmarked. Every small business owner should browse these and check out what they offer. Although she’s writing explicitly about clothing startups, much of what Liam Massaubi has to say about the main causes of failure apply to a wide range of small businesses. Marketing and sales Did you “work and play well with others” in Kindergarten? If so, you should be a natural at using “Together Marketing” in your business. If you can understand all the dimensions of social validation you’ll be better able to leverage it for the promotion of your business. Pinterest can be a difficult beast to tame. Here’s how one marketing firm is attacking the challenge. While we’re on the topic, here are more Pinterest insights. Is a Vulcan mind meld the next step in marketing? That may be going a little too far, but the science of neuromarketing and social influence is bringing new understanding and changes. Avoid these traps if you want to hire the best sales people for your team. Locally owned camera shop George’s Camera in San Diego has managed to stay relevant despite being surrounded by the big box world. Here’s how they’re doing it. Take...
read moreHow to Manage Your Business and Personal Credit Ratings
The boom in fundraising platforms such as Kickstarter and all the sites that connect startups with venture capitalists is giving entrepreneurs far more options than they had just a few years ago. However, borrowing money is still the way most small businesses get off the ground and about half the money borrowed is obtained in the business owner’s name. And to take it one step further, many times the loans come via the owner’s personal credit card. This illustrates two facts that small business owners need to understand: Your business credit worthiness will be in part determined by your personal FICO score, and Your personal credit worthiness can be ruined by a failed or struggling business venture. With this understanding, small business owners can better manage their position for borrowing. A good first step is to know your FICO score. Five elements are considered when assigning a FICO number. Here’s what they are and how much they contribute to the final score: Payment history, 35 percent, Total debt, 30 percent, Length of credit history, 15 percent, New credit accounts, 10 percent, and Types of credit, 10 percent. Obviously, having a long history of making payments on time and having a fairly low debt to income ratio are the most important elements. If you’re a Millennial without any credit history and think that someday soon you’ll want to start a venture, it may be a smart idea to establish credit that you can easily handle, so you’ll have a solid history in place for the day when you’ll need it. Separating business and personal credit If you want to separate your personal credit from your business credit, you need to incorporate so banks and other lenders can see your business as a separate entity. When you do this, your corporation gets its own Federal Tax Identification number. It then begins to create its own credit files which are separate of its ownership. Once you do that, setting up revolving accounts with local suppliers can be an easy way to start compiling a good credit history for your company. You need to know that it will take a strong credit history for your company before you’ll be able to “untie” your personal credit from your business. If your major suppliers or potential lenders think there is much risk in extending credit to your company, they will ask for your personal guarantee in one form or another. Finally, I’ve seen that bigger banks are starting to look more favorably on lending to small businesses in recent months. However, in the long term, it’s still smarter to establish a relationship with a good local or regional bank. They are the “go-to” lenders who understand your business and your market, and they are far more dependable in both good times and bad....
read more6 Tips To Get the Greatest Return From Your Conference Investment
I’ve been gearing up to attend a conference and if you’re anything like me, you’ve probably been to your share of conferences throughout the years. They can be great events that contribute to your long-term success or they can be a short-term waste of money. Here are some suggestions to make sure that the money you spend to attend conferences becomes a good investment. Know why you’re attending. This is the single most important thing to do if you want to get real value out of your time. Having a purpose will steer a variety of decisions – and that’s what I’ll discuss in my next points. Good reasons for conference attendance include: Networking, Getting up to speed on industry developments, Gathering inspiration, Checking up on the competition, and Making sales and marketing contacts. Now let’s explore these in greater detail. If you’re networking you will want to focus on events that bring you into close contact with others. Mixers and smaller group settings will be good. Keep your evenings free for impromptu gatherings. Also, participate by asking questions and go out of your way to introduce yourself. Have beautiful business cards always at the ready along with your one-sentence introduction. When it’s time to catch up on what’s going on in your industry, you need to carefully plan which sessions will be best. Also study the list of presenters and exhibitors to find the gold among all the dross. When you’re at sessions and immediately thereafter, sort out “ideas” from actionable items. Conferences offer a variety of ways to get inspiration. You may be thrashing about wondering where your next growth opportunity is. Ask others. See what other people are planning in your field. Maybe you need inspiration for your content marketing program. Attend talks by the most notable “thought leaders” and keep track of their big ideas. You can rework them for your own content, or just for fun take “contrary” positions: Mr. Expert thinks didgeridoos will continue to lead sales – I think their day has come and gone! You don’t need to don your trench coat, dark glasses and a wig to gather a little intelligence on your competition. Why not just engage them in conversation? Find common ground, perhaps mutual acquaintances. If you do find mutual friends, then they might be more sources for gathering a little information on your competitors. Sales and marketing professionals may want to cover a lot of ground, pulling people and companies into the top of their funnel, or they may need to spend some concentrated time with prospects that are further down the funnel. Further, despite how busy conference attendees can be, don’t be afraid to ask for the sale. If you don’t ask, you’ll never get it. Finally, no matter what your primary goal is, be sure you’re well rested and have spent sufficient time going over pre-conference materials to have a good mental roadmap of the event. Also, avoid too much alcohol and don’t plan on catching up with old school chums in your “free time.” Stay focused on your business goals. Image: The Next Web conference 2013 by Heisenberg Media, used under a Creative Commons Attribution-ShareAlike license....
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