How Small Business Owners Can Grow by Leveraging, De-leveraging and Leveraging Again
Small business owners know their numbers. They run their lives by what’s in the bank today and what’s due tomorrow. They can tell you about every nickel they spent, to whom it went and whether it was worth it. Business owners are walking, talking cash flow statements and know exactly what their P&L looks like.
Yet if you ask many small business owners what kind of shape his/her balance sheet is in, you’re likely to get a blank stare in return.
The Great Recession hit Main Street harder than most. That great relationship you had with your banker didn’t amount to much when your line of credit was called and you were forced to take money out of your retirement to fund payroll while you figured out your next move. Many small business owners – the ones who made it through the crisis – went into a deep hole and are just now beginning to dig out and see sunlight.
One of the things you had to ignore was your balance sheet. You pushed the limit of your vendor relationships, cut deals wherever possible and maybe even reduced headcount in an effort to stay lean and stay in business. Now that you’ve “righted the ship,” there are some nagging issues that need to be dealt with; the end of the year is the perfect time to do so.
Big businesses and the banking industry in America were bailed out. Small businesses simply weren’t. But there’s a lesson to be learned from what the big guys did and apply it to your own situation. Large institutions spent the past several years “de-leveraging” and working toxic assets and bad investments off of their balance sheets. They did so by utilizing government funds at nearly zero percent interest to maintain liquidity while writing off these troubled assets and making deals with banking partners. Unfortunately, small business owners don’t have this luxury - but they can work a similar process.
You want your numbers to be clean by year-end. One of the ways to do this is to revisit the short-term payables that turned into long-term liabilities by having a heart-to-heart with your suppliers. Most business owners are reluctant to fall short of their vendor obligations because they've worked so hard to establish a good working relationship.
But great vendor relationships are like marriages. The less you communicate and hope things get better, the more resentment builds and trust collapses.
The best thing a business owner can do when faced with hard times is communicate openly and honestly with creditors, no matter how uncomfortable the conversation. You might be surprised how willing and grateful your suppliers are to cut a favorable deal just to continue doing business with you. Remember that your business is vital to their success and keeping them in the dark can have a deleterious effect not only on your relationship moving forward, but on their business as well. The more open you are about your situation, the more they will appreciate it.
It might seem counterintuitive to try and obtain short-term financing to pay down debt. Replacing one obligation with another feels like kicking the can down the road. But reducing the balance due to a few of your suppliers and working out a payout by taking out a small business loan might be enough to get you through and see those seeds blossom into profits. Short-term financing deals that are unsecured are often turned around within days if you have the information you need to secure a loan and the confidence and discipline to pay it back. Understand that unsecured term loans typically carry higher interest rates than what traditional banks offer, but the speed allows you to work quickly to make the necessary deals with your suppliers and get back to work. The key is to make sure that you're not simply taking on more debt, but reducing your cash outflow to turn financing into a net positive for your company - not an additional negative.
Back to the Well
Working out creative debt reduction solutions with your suppliers by taking on short-term debt has a few benefits. First off, your vendors will appreciate taking in payments to help clean up their balance sheets. Your honesty will keep you in better standing than continuing to string them along.
Secondly, taking a short-term loan to pay these obligations demonstrates financial discipline your bank will appreciate. Reducing your balance sheet liabilities is critical when you look to secure financing such as a line of credit down the road. The hidden benefit to diligently paying down short-term debt is that it has a positive effect on your credit rating.
Taking on debt as a startup is an enormous risk. Using debt to grow an existing business is vital. Very few businesses are profitable enough to grow organically from cash flow and profits. So while it may seem odd to recommend taking on more debt after making it through such tumultuous times, it just might be what the doctor ordered. But because short-term, unsecured debt is expensive it’s important to see it as a temporary fix and not a long-term solution. Your goal should be to de-leverage like the big guys and improve your cash flow and credit risk profile. Then you can secure the financing you need to grow in the long run.
- Communicate openly with suppliers and make creative deals to reduce outstanding obligations.
- Bring on short-term, unsecured debt to pay workouts and reduce balance sheet liabilities.
- Stay faithful to the short-term debt payments and let your banker know your plan.
- Reducing balance sheet liabilities and gaining additional positive credit information has the dual effect of making you more attractive to traditional financing.
- Secure the working capital you need to hit your numbers and grow your business again.