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In her list of 10 Causes of Small Business Failure and How to Avoid Them Michelle Witham does an excellent job of discussing the common pitfalls for small business owners. It is interesting that out of the 10 reasons she discusses for small businesses failing, shortage of money comprises six of them. Not having enough money for advertising, not having enough money to get through the slow season, not having enough money for an emergency fund, and so on the list goes. Clearly, shortage of money is a major problem.

None of this is news to anyone who has ever tried to go into business for themselves. Everyone knows you need money. But, what does a small business do when it finds itself short of money? Many small business owners take that as a signal they need to go into debt. It may come in the form of a small business loan. Then again, it may be done through acquiring a credit card or through factoring their account payables. There are any number of options open to the small business owner who needs money, and every one of them is bad. Let’s take a look at a few facts.

By definition, if you own a small business, that means you are an individual who runs a business. According to the SBA, you have fewer than 500 employees and an annual revenue of under $5 million. Those are the maximum amounts of employees and revenue a Small Business can have. The average small business in America is much smaller than that.

Wherever you look in our society, people are telling you that you must go into debt to be successful in business. It is true that debt, to a limited degree, can be useful if used wisely. But don’t be fooled by the terminology. “Small Busiiness Loans,” “Small Business Lines of Credit,” “Small Business Credit Cards”–none of these things is what it appears. Though they are all different sources of money, they all share one very important thing in common–the requirements of qualifying for them and the responsibility of repaying them all fall on the personal credit record of the individual who owns the business.

Small business credit cards are issued in the personal name of the small business principal. A small business loan is an euphemism used by lending institutions to describe personal loans given to small business people. You may have an excellent credit rating and a solid business plan and still not be able to get a small business loan because you have no collateral. Even established business people can find themselves in this position, if they do not own enough tangible assets, such as houses or other property. In other words, the small business loan is not being granted on the status of your business at all. It’s being granted on your personal financial status.

With 6 out of the top 10 reasons for small businesses failing being related to shortage of money, you have to be extremely careful as you navigate through this mine field. You may think some sort of credit will resolve your problem. Let’s look at a few facts. When your business goes into debt to resolve cash flow issues,

1. You are allowing someone besides you to hold a claim on your business and how it operates.

There are no gift programs out there where someone gives you money and allows you to do
whatever you think best with it. Your entire business plan comes under scrutiny by the
lender. They evaluate that plan, not on the basis of what is best for your business, but on
the basis of how they are most likely to get their money back.

2. You must make regular monthly payments of principal and interest.

Very young companies often experience shortages in cash flow that may make such regular
payments difficult. Most lenders provide severe penalties for late or missed payments, which
may include charging late fees, taking possession of collateral, or calling the loan due early.

3. Its availability is often limited to established businesses.

Most banks tend to be fairly risk averse and proceed cautiously when making loans. As a
result, it may be difficult for a young business to obtain this sort of financing.

4. The amount of money available to small businesses is likely to be limited.

Credit or financiing acquired doesn’t usually meet all of the needs. So, the business ends up
with the same shortage of funds and another monthly payment on top of the ones they
already have.

Considering these facts, small business owners with cash flow problems should develop a strategy that would make sense for their own personal finances. In reality, that’s what a small business is–simply as extension of the owner’s personal finances. Because of that, you should do the following things:

1. Live within your means. If you can’t buy it, save for it until you can buy it.

2. Develop a business plan which includes needed investments, total cost of those investments,
strategy for saving for those investments, and a target date for making those investments.
When the time comes, if you have planned and executed the plan correctly, you will be able
to make the investments while remaining debt free.

3. Use credit only when you can pay it off within 30 days.

Remember–God can grow a weed overnight, but he takes years to build a solid oak tree. So, do you want your business to be the weed that springs up over night and dies just as quickly under a load of debt you could not handle? Or would you rather your business be a tree which took longer to grow, but which is solid all the way down to the root system because it is profitable and relatively debt free?

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