A recent Profit Minded post featured our conversation with Jay DesMarteau, head of small business banking at TD Bank, about how small business owners can face down financial stress with a real-world financial plan. Here, in part two of our interview, DesMarteau shares advice for accessing capital when you need it. He offers tips for setting yourself up to get through temporary periods when expenses outweigh revenues, as well as for planning for long-term growth.
Following DesMarteau's earlier advice for putting a financial plan in place will help you identify the gaps in your business cycle—whether they be week-long or month-long intervals—when you will not have enough income to cover your costs. "These are times when you don't have money coming from customers on the revenue side but your expenses are still there," DesMarteau says. "You have to pay employees, and you might have to buy inventory that takes time to convert into a product you can sell."
Of course, business owners can eradicate a lot of stress by being prepared for those times. DesMarteau points to three ways to do that.
1. A cash reserve. It might sound obvious, but for some businesses, just a savings account can carry the business through those gap periods. DesMarteau points out, "When you're doing your model, be sure your cash balance doesn't go below zero."
2. A line of credit. Just as homeowners can get lines of credit against their homes, a business owner can establish a line of credit against the business. "You can call up your banker and say, 'I need $10,000 deposited today to my account,' and you can write checks on that account right away," DesMarteau says. "You don't pay anything when the balance is zero, and you draw on it as needed. The balance of your loan is there till you pay it back."
DesMarteau warns, however, that because lines of credit are tied to your business credit, you're going to need at least a two- or three-year record to demonstrate to the bank that your business income is greater than your expenses. "If you don't have that it's difficult to get a line of credit," he says. "This is designed for more established businesses."
3. A Small Business Administration loan. If you haven't been in business long enough or if you're in the process of rectifying some operational issues, then an SBA loan may help you out, DesMarteau suggests. Applying for one, he says, is no different than applying for a line of credit. "Just come in to the bank and say you need a line of credit." Most banks, he says, will help you figure out which you qualify for.
Once you've covered your short-term financial gaps, DesMarteau says you can turn your attention to shoring up longer-term capital and to strategizing to realize your business goals. Here are three more things to consider:
1. Improve the terms of your debt. Interest rates, as everyone knows, are currently excellent, DesMarteau says. Is a vehicle part of your business? Do you own business real estate? "By refinancing, you can really save yourself a lot of money," he says. "Talk to people about ways to restructure the terms and interest rates to minimize your payments."
What if you don't have the credit rating to get approved for a refinanced loan right now? "The Fed has said it will keep rates suppressed through 2014, and most economists I read and hear from are saying it will probably be 2015, so you have a good window of time to refinance," DesMarteau says. He suggests checking in with your banker every quarter or 6 months to see if they dynamics have changed.
That being said, "Don't go to the bank today to find out if you're credit worthy if you need the money tomorrow," DesMarteau adds. "It's like going to a doctor. Talk to your banker every 6 or 12 months about how credit-worthy you are. As you're thinking through your dreams and how you want to grow, talk that over with your banker to figure out the right strategy."
2. Take equity from a refinancing to grow your business. "It's another way to get capital," DesMarteau says, "but make sure you have a working capital purpose for it." If you only need short-term revenue or to tie in your expenses a little more cleanly, refer to one of those first three short-term options, not a mortgage refinance. But if you want to take say, but another truck for your business, consider rolling that into a refinanced mortgage for a lower interest rate.
3. Keep costs down while establishing your revenue line. As many as half of all businesses fail in the first year, DesMarteau points out. "If you get through that second year you're more likely to make it." Banks look more favorably on a business that has survived two years. Therefore, he says, "If you've just started out, ask yourself, 'How do I keep my cost base low while I establish my revenue line?'" Try out a temp before you lock in a full-time employee, or find other ways to test the water to increase your odds of survival, he suggests.
"I see a lot of businesses get overambitious. They think the revenue is going to come," DesMarteau says. "They think, 'build it and it will come,' but it doesn't come, or it doesn't come at the magnitude and at the speed at which they thought it would." Your expenses are there every month, and getting people to switch product or buy into your brand might take longer than you thought. His best advice to keep your financial stress at bay: "Prove the revenue line before you take on a lot of cost."