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As reported by the Wall Street Journal, small and medium size businesses continue to have limited access to credit. According to Federal Reserve Chairman, Ben Bernanke,
“The formation and growth of small businesses depends critically on access to credit,” Mr. Bernanke said in the text of his remarks. “Unfortunately, those businesses report that credit conditions remain very difficult.”
Absent credit availability in the form of small business lending, businesses must actively manage their cash conversion cycle, which is the time it takes to convert a business’s cash consuming activities into cash payments. In other words, businesses must manage to a low cash conversion cycle which means having cash tied up in business operations for as few days as possible. Clearly, a shallow credit market highlights the importance of managing to a low cash conversion cycle as this may be one of the few ways for businesses to have the liquidity necessary to fund their operations.
How do you manage your cash conversion cycle? Focusing on revenues and expenses is important. However, equally important, and perhaps more complex is developing a better understanding of your business’s working capital situation. Analyze your accounts receivable and accounts payable outstanding days, including inventory, to understand how movements in each affect your cash conversion cycle. Good cash cycle conversion management equates to better revenue cycle management which equates to an increase in the health of a company. For more information on cash cycle conversion, click here. Additionally, consider solutions from companies such as Ftrans which provide full accounts receivable management solutions.
It’s not that banks don’t want to see a small business recovery. In fact, they are indeed under political pressure to lend to SMBs and help build the recovery.
Yet, Our research indicates that the community banks that typically serve SMBs just aren’t structured to handle the the highly specialized risk assessments required to successfully underwrite C&I loans. Nor are they staffed right now to properly manage the rigorous monitoring of these loans.
Dan Drechsel, Ftrans CEO, explains further.
Next: Banks say they aren’t lending because there is no demand. Do you believe that?
This is the first post in a series on funding small and medium sized businesses; first-hand accounts from people who have been through it from knocking down SBA loans hurtles, to how venture capitalists and private equity partners think, to what’s new in getting an old school line of credit.
In this one-on-one, I spoke with Michael King, serial entrepreneur. He’s currently a Regional Sales Manager with Ftrans, helping small business owners finance their growth opportunities with accounts receivable financing.
The small business owner is an American icon. All kinds of Americans dream of owning their own business. How did you get started? What personally lured you?
When I started in the importing and wholesale distribution industry in the mid 80’s, going to China and India and Asia was exotic and different and not that many people did it. From about 1986 to 2006 I was involved in importing products for the home, seasonal decorations and gift products, eventually owning two businesses in that space. We sold to independent retailers and to major big box retailers as well. We hired designers, went to factories in Asia to make our products and sold them to retailers in America.
I’m interested in hearing more about the business you started from scratch. Looking back, how well were you able to predict your cash needs?
Having gone through the ups and downs of owning a business before, and successfully handling it, I thought, with the right partners, we could grow to a decent size. Our target was $1 million in the first year which we reached.
In that industry, even with a lot of experience and very competent partners, you have to find the right product and get in front of the right customers. Product lifecycles last maybe three years. It’s almost a fashion industry. You might have $6 million in sales one year and if you don’t guess right on a trend, your sales might be $1 million the next year. When you start out, you plan for the worst case scenario –and the worst case may actually be selling a whole bunch. You’ll owe a lot to your vendors for inventory and you can have your cash all tied up in accounts receivable.
You bootstrapped this business. What was that like?
They call it bootstrapping because you’re pulling your business up by your own bootstraps. Even with an industry reputation, if you want your business to stand on its own, you have to prove that you have the management skills, the need and the collateral in the form of receivables to be able to get lines of credit.
Starting out, to get us through the first six months, I used my own money. I used credit cards. I went to my family and I was fortunate enough to get some money there. My other partners did the same. But to fund the business cycle of buying inventory and selling it to customers on account, we had to get our vendors to let us pay on terms, too. We had a track record and a bit of a reputation in the industry that helped as well.
After about six months, we’d had good results and at that point we were able to use our AR to get financing with Ftrans. That worked for us because in addition to getting access to capital more quickly, Ftrans took over many of the administrative burdens of managing our receivables.
What were some of the decisions you made early on that you think had an impact on your ability to be successful?
We planned big, but we tried to keep internal costs variable. Using outsourcing is a good way to do that; we used third party warehouses and accounts receivable outsourcing. Try to be as efficient as you can. Empower the employees you have with the right technology so you get the most out of a few employees. You try to maintain as much flexibility as you can from a cost standpoint so that you can maintain your profitability at whatever sales level you hit.
Experience is important. It pays to know who is going to buy your product, how to talk to them and to know what their needs are. If I didn’t have certain skills in my own skills set, such as design or sourcing skills, for example, I was willing to bring in partners who did.
I always hear about small business owners who are constantly scrambling to find cash. How were you getting stretched cash wise?
The industry normal is net 30 days and they don’t get too worried about paying you for 45 days or so. My DSO was 47 to 50. Target demanded net 90 on new stores and net 60 for established stores. I‘ve heard stories of retailers demanding even longer than that. It helped that one of our partners was well known by one of our big vendors and they sold to us on terms. It was like an interest free loan.
You mentioned that some of your capital came from family and I’m curious about that. Was it in the form of a loan or as an investor? What would you tell someone who was going to invest with a family member?
Well, you have to be very careful about that! In my case it was in the form of a loan. Fortunately, I was able to pay it back. Obviously, you take a lot of risk in damaging your personal relationships in doing that type of thing. It wasn’t a ton of money, in my case, but it was some money and it was very important. Obviously, if you can find partners or get debt financing, I would always suggest doing that before approaching family members or friends. Personal relationships are too important to ruin over some type of business venture and I’ve seen it happen.
If someone in your family approached you and said “I’m starting a business and I’d like you to invest.” As a former small business owner, what would persuade you to invest?
It would be more now than it used to be! I realize what is needed in terms of properly managing the financial side, having good internal cost controls and financial skills and savvy. Not just having a good idea with market demand and a differentiating competitive advantage, but the ability to run the business side of it. And I wouldn’t give more than I could comfortably lose.
Was there ever a time when you thought, “This is not going to work?” When it became a real gut check? What did you do?
I went to my vendors and tried to get better terms. I always tried to be respectful and keep a mutually profitable relationship with my vendors, but I explained that it would help me grow my business and help my loyalty with them. Sometimes you have to not take salary yourself. There were times I did have to reduce staff. There were always hard choices.
There’s nothing like real life business experience. If you planned to start another business, what did you learn from your initial experience that you would always have in mind?
I would look at private equity or the angel environment and try to get bigger faster rather than relying on retained earnings or debt to grow the business. I wouldn’t try to do it all myself. I would be more careful about picking a business with strong margins, smarter about analyzing competitive pressures. I got in the import business because I liked to travel and I did a lot of that. I lucked into a way to make money but I don’t think that space exists now the way it did then.
You think you’d ever start another business again?
Absolutely! I plan on it! I’d definitely be an entrepreneur again. I liked wearing a lot of different hats. I don’t know about the stock market being the path to retirement. I’m probably going to have a couple of small businesses that are running well. I come from a family of business owners; it’s in my blood a little.
More on Bootstrapping:
Sandra Chesnutt is a Marketing Senior Manager with Ftrans. Ftrans combines outsourced accounts receivable management with fast and affordable access to funding – providing small and medium businesses the cash they need to grow and take advantage of market opportunities.
No, we’re not referring to accounts receivable and credit automation, even though we encourage this and a tie in does exist. To be specific, we are referring to missing in “marketing automation.” Most businesses, regardless of size, either have a web presence or are contemplating one. Many of these businesses have no idea who is visiting them or how to nurture their visitors towards conversion.
Over the last few years, SaaS firms such as Pardot and Marketo have made significant progress in offering comprehensive, cost effective marketing automation solutions to small and medium size businesses. For as little as $500/month with no contract, a business can implement Pardot and really supercharge the management of their web traffic and leads.
Automate to intelligently interact with your visitors; know how they are getting to your website; know what content is valuable to them; offer the right solution at the right time; and if you have a CRM system, make sure the MA system integrates with it.
Now, tying marketing automation to a credit automation solution such as offered by Ftrans can greatly improve decisions about interacting with visitors and prospects. For example, based on the business credit score of the visitor, coupled with their level of interaction with your website, your business can quickly determine how to prioritize subsequent interactions with the visitor in an effort to convert them to a qualified lead and then client.
Now that you may not be able to run out and get a HELOC to finance your business, you may be taking a look around: where to find available, affordable credit. Nothing like a crisis to make clear the obvious. The cheapest credit in the world is AP. So how do you get more of it?
In our business, we look at the credit of buyers and potential buyers for our clients all day long. These businesses range in size from Exxon to Exton Country Store in Exton, PA, and can share with you what you must do to get approved by your vendors.
1) Keep your nose clean – i.e., no liens, especially tax liens
2) Pay your bills consistently
3) Keep your AP less than your AR – your balance sheet is a snapshot of your business
4) Your availability of credit – i.e., liquidity souces
This critical information is gathered and reported by a small group, primarily Equifax, Experian, D&B, but the information can have giant implications for you. If you’re a small business it’s critical to know how they work….
Upshot: Make your financial statements available to convince your vendors to give you credit. It’s cheap, plentiful and may be your best source of financing right now.
