Top Reason Small Businesses Fail – Under Capitalized

Having an original idea about a product or service is often step one to starting a business. Childhood aspirations to open a restaurant because you love to cook or become a builder because you love working with your hands are just several reasons why people look to start their own business. Hopefully as they mature and learn they are given the proper tools that allow them to gain enough knowledge and understanding that they are successful.

Colleges and universities attempt to arm you with the background for whatever it is you aspire to build but cannot teach you everything. While you may know where and how to start there is always something that is forgotten and when you forget or don’t know that often means it will cost. While you may be the greatest chef in the world it doesn’t mean you are the greatest restaurant owner or because you can build a house from the ground up doesn’t mean you know how to sell it or know how to determine supply thresholds.

Under Capitalized Small businesses

The overall top reason why small businesses fail is due to being under capitalized. Not having the capital to grow, hire new people that will allow your business to grow, or not having the capital for inventory to profit from is a death blow to anyone. Things that are overlooked during the start up phase will come back to haunt you and will most of the time cost. Having a capital reserve is an absolute necessity or having a strong relationship with your bank can often save a business. Eventually, your business will plateau and you may not have the capital available to help you not only get over a “hump” but also to maintain cash flows for daily business operations. One small emergency can cause you to deviate from your current cash allocations and cause you to spend elsewhere while exposing your business to a future downfall. A strong bank relationship will give you the freedom to concentrate on growing your business knowing that your bank is there should you require a fast influx of capital.

Alternative Financing Sources

If your bank informs you early on that they would not be able to accommodate a possible financial need through a line of credit you do have options. Alternative banks/lenders are available through merchant advances, factoring, or asset based funding. While often more expensive than a typical bank loan, they do provide immediate help to any short term business problem. Short term is the magic word when utilizing an alternative loan. Most times the term is between 4-7 months and repayments are made daily Monday through Friday directly from your bank account. These are available but should be used with caution. Unless you have an immediate need you should not take on this type of business funding. Ultimately though, a business that is under capitalized is doomed to fail. At the onset, plan for as many mistakes as possible and allocate funds accordingly to have available in the future. You will need it.

Posted by sbf in Alternative Business Financing on March 24, 2014