Funding tips can help small businesses grow

Francisco Tovar was like most struggling, small business owners in 2009. His business sold nonperishable Latin products on Amazon, as well as his own site thelatinproducts.com.

His biggest seller was molcajetes (think mortal and pestle) and he had three employees, a couple of whom were related to him. And like millions of other small businesses, Tovar’s needed cash to grow.

His Marietta-based business was told “no” by the banks faster than he could cash a check. So he went looking for other options to grow his business.

Tovar’s story is not unique, as this is one of the most financially challenging times in history to be a small business owner.

On the one hand, more people are following their entrepreneurial spirit and starting their own business. Technology has significantly lowered the cost of starting a business, and small businesses are growing and adding new jobs to our economy at a much faster pace than larger corporations.

Despite the growth of small businesses, bank lending to small and medium businesses has steadily declined over the last decade. Since the 2008 financial crisis, banks have become more conservative in their lending standards in order to protect their balance sheets.

More importantly, banks have not kept up with advances in technology. Banks primarily process loan applications manually and are not yet effectively leveraging technology to develop a holistic view of the health of small businesses.

In 2012, banks still rely on the FICO score, a 42-year-old metric introduced by Fair Isaac in 1970. The problem is that the score measures the individual and not business performance. To big banks, everybody is just a credit score.

What can a small business owner do to grow in this environment? Here are some tips that I’ve learned and seen from customers since starting Kabbage, an Atlanta startup that offers capital to small businesses to grow. These tips can help you set up your business, raise funds and teach you how to use your funding most effectively.

Separate personal finances from business finances

Set your business up the right way from the beginning. Separate your personal and business finances.

There are the obvious benefits of making it easier to man- age your taxes and bill payments, but there is more to it than that.

The dirty secret of using personal credit to help build your business is that you’re actually hurting your credit score by over-utilizing personal credit.

Since most small businesses are over leveraged on personal credit, this negatively impacts their credit score, thus making it even more difficult to get financing from more traditional financial institutions and raising your overall cost of personal credit.

Talk to everyone ... friends, family and fools

There are pros and cons of taking money from family, friends or others you know well.

But if you’re starting a new business, it’s not a bad place to start. Have a plan that details how you’re going to build your business and start making enough money to pay them back.

Document their investment properly so everyone knows what they’re getting into. Is it debt? Are they buying a piece of your new company? Having this documented is helpful later so there is no room for people to forget the original deal.

Don’t expect much from the banks for a startup business. Unfortunately, all too often the only deal they will have for you is the opportunity to lend you $10 if you give them $10 first.

It’s not particularly helpful; if you already had the money you needed why would you be talking to a bank?

Return on investment vs. annual percentage rate

How much is too much to pay for cash to grow your business? When you start to evaluate business-financing options, consider the ROI on that funding. How much money can you make with that capital and how quickly? Business credit should be a revenue-generating asset and used as such. If you get the funding you need quickly, will you be able to turn it around instantly by buying inventory at a great deal and reselling it for a strong profit?

Spend your money wisely: Serving your customers

If you are an online busi- ness, don’t spend money on nice desks and office space. Save your money and spend it instead on great customer service, a new website, and marketing programs that reach your customers.

Focus first on free marketing and building a social following. Facebook, Foursquare and Twitter, as well as many other similar companies, essentially provide a customer service platform for free. Use them.

Be creative: Consider bartering

In all aspects of business, to be successful you will need to rely on your vendors and partners. Consider exchanging business services with another business owner based on the value of the service you provide.

For example, if you offer online marketing and advertising services to clients but need IT consulting to get your office set up, considering swapping your services with an IT firm that needs marketing.

Plan for seasonality and cash flow

Think through and plan for the times of the year when you have the highest customer demand for your business. Then plan accordingly and stock up on inventory or employee availability in advance of this peak seasonality to ensure that you ride the biggest waves in demand.

If you are an online seller, your peak seasonality is October-December, so you should be stocking up on inventory in June to August, not September and October when there are few deals available to buy that inventory.

Make sure that you have built up cash reserves to carry you through these peak times of seasonality. And negotiate contracts with vendors to allow for longer payment terms during key parts of the year. It is always surprising to me how many companies don’t ask their vendors for special terms — try asking them to extend payment terms to 60 or 90 days during times of peak seasonality.

So, what happens when you get all this right? Look at Tovar just a few short years later. He has increased his sales by over 300 percent and now has 18 employees to support his business.

He now sells heavily on eBay as well. He’s a great example of how a small business can take off with a shot of capital.

Marc Gorlin