Tuesday, October 27, 2009

Does my business need a line of credit?

A line of credit, sometimes called revolving debt, enables a company to draw against a pool of money as it needs to. That line of credit is invaluable for protecting your business from emergencies and stalled cash flow, because it extends the cash available in the business checking account to the upper limit of the loan contract. Essentially, the line of credit is assurance by a bank that as long as your company is financially healthy, it can borrow money whenever it needs to.

This form of short-term borrowing is an excellent way to establish a relationship with a bank and demonstrate the creditworthiness of your business—especially if you have but don’t use the line of credit. Moreover, by virtue of having this relationship, your banker can become a sort of silent partner, giving you business operation advice as well as money.

You’ll find many variables in a line of credit, such as the period of time (short or intermediate), whether it is renewable or nonrenewable, and whether it has a fixed or fluctuating rate of interest.

A short-term line of credit typically is 60 to 120 days, whereas an intermediate-term line may be as short as one year or as long as three. You’re most likely to want the line of credit to purchase inventory and to pay operating costs—not to purchase equipment or real estate. The Small Business Administration offers qualified small businesses CAP Lines loans to meet their short-term and cyclical working-capital needs. The five programs are called Seasonal Line, Contract Line, Builders Line, Standard Asset-Based Line, and Small Asset-Based Line. For more information, visit www.sba.gov/financing/fr7aloan.html.

To negotiate a credit line with your bank, prepare to hand over your current financial statements, latest tax returns, and a statement of projected cash flow.

What collateral will you use to secure your loan? You’ll need more than the assets you may be purchasing with it, such as the company’s accounts receivable, equipment, and real estate. The loan agreement and related documents will be designed to ensure that your loan payments are on time and have priority over non-critical expenses, dividends and employee bonuses.

This is a key point for avoiding confusion and resentment over what your bank is willing to do for you. Some small business owners may think that the loan officer does not understand their business requirements. At the same time, the loan officer may not think that the borrower is making realistic projections for anticipated cash flow, profitability, and the like.

As loans go, banks tend to view line-of-credit loans as low risk, so they carry the lowest interest rate. The bank may reserve the right to cancel the loan if it thinks your business is in jeopardy. You’ll make interest payments monthly, regardless of when you expect to pay off the principal. For an annual fee, most banks will allow one-year lines of credit to renew almost automatically. However, they may require the credit line to be fully paid off for between seven and 30 days each contract year.

Richard Strug
Greater Princeton Area SCORE (Chapter 631)
Serving Mercer and Middlesex Counties

Tuesday, October 20, 2009

What is Working Capital, and what does it tell me about my business?

As the owner of a small business, you may think it has little in common with a large corporation. While it is true that you will likely rely more on trade credit, bank financing, lease financing and personal equity, your long-term investment decisions require the same kind of analysis used by large firms. The key is understanding those factors that affect financial decisions, how they apply to your business’s short- and long-term goals and strategies, and any other influences that may be unique to your situation.

Working capital is the difference between current assets and current liabilities. Lack of close control on working capital is one cause of business failure. The small business owner must be constantly alert to changes in working capital, the reasons for them, and any resulting business implications.

It is helpful for the owner to think of working capital in terms of its six components:

1) Cash and equivalents. This most liquid form of working capital requires constant supervision. A good cash budgeting system addresses many important considerations: whether the cash level is adequate to meet current expenses as they come due; timing of cash inflow, cash outflow and peak cash needs; amount to borrow to meet cash shortfalls; and the timing of repayment of loans.
2) Accounts receivable. Almost all businesses extend credit to their customers. Make sure the amount of accounts receivable is reasonable in relation to sales and that receivables are being collected promptly. Identify slow-paying customers and have a strategy for dealing with them.
3) Inventory. Inventory often constitutes as much as 50 percent of a firm’s current assets. Is the inventory level reasonable compared with sales and the nature of the business? Know the rate of inventory turnover compared with other companies in your type of business.
4) Accounts payable. Financing by trade is common in small business and is one of the major sources of funds for entrepreneurs. Understand whether your business’s payment policy is helping or hurting your credit rating. Know the timing pattern between payment of accounts payable and collections of accounts receivable.
5) Notes payable. Notes to banks or other financial sources represent a popular alternative financing source. Note whether the amount of borrowing is reasonable compared to the equity financing of the firm. Look at when payments are due and whether the money will be there to make these payments on schedule.
6) Accrued expenses and taxes payable. These are obligations of the firm at any given time and represent expenses already obligated, even if payment is not yet issued.

Richard Strug
Greater Princeton Area SCORE (Chapter 631)
Serving Mercer and Middlesex Counties

Tuesday, October 13, 2009

Is Internet advertising right for my business?

Internet search advertising is one of the fastest-growing outlets for businesses of all sizes. And no wonder. Thanks to the convergence of search engine technology and high-speed Internet connections, customers in search of information about a particular product or service can have literally hundreds of answers in seconds.

Businesses who want added visibility often invest in small, text-only ads that appear atop or alongside the search engine results. Such ads are ideal for small businesses, as they offer tremendous flexibility to control costs and can be tailored to specific search keywords such as geographic area or a specific product/service.

Internet ads also allow small business owners to test various marketing approaches almost instantly. For example, florists can quickly change from prom to wedding season or an air conditioning service can exploit an early heat wave. What’s more, results from these types of ads can be tracked, and return on investment measured in tremendous detail never available with traditional print types of advertising.

If your business uses a Web site to sell or market products and services, online marketing will be critical to your success. Targeted ads attached to keyword search results are the clear winner among Web-based marketing methods. Their simplicity, low cost and popularity among small businesses have pushed flashy banners aside as the main method for connecting buyers and merchants online.

Best of all, Internet advertising is relatively simple to implement. In the two most popular search ad outlets—Google AdWords at www.google.com/ads and Yahoo! Search Marketing at http://searchmarketing.yahoo.com, you bid on the keywords or phrases for your campaigns. The higher the bid, the higher your ad will be listed in the paid results. You pay only when someone clicks your ad and visits your site. A prospect that reads your brief ad but doesn’t click it costs you nothing.

Both Google and Yahoo have built-in tools to help you monitor track the effectiveness of your Internet ad campaign. One important statistic is the “click-through rate”—how often the ad is clicked in proportion to how often it appears. Ads with high rates are obviously good; low-rated ads should probably be modified or deleted to maximize cost-effectiveness. In addition, Google also offers free “Google Analytics” that can help analyze your Web site statistics


Richard Strug
Greater Princeton Area SCORE (Chapter 631)
Serving Mercer and Middlesex Counties

Tuesday, October 6, 2009

What's the best way to build customer loyalty?

The competitive nature of today’s business world may be intimidating to the small business owner. If a competitor cuts prices or offers other incentives, you may feel tempted to do the same in order to hold on to your customers, even if it puts the stability of your business at risk.

Though cost is important to customers today, it is but one component of a larger, more important attribute ….. value. If your business provides value through service, responsiveness, and going the “extra mile,” your customers will respond with loyalty, regardless of what your competition does.

Building loyalty through value is something small business owners have been good at for centuries, because they are better able to cultivate relationships with their customers. They focus not just on selling to them, but also keeping them. That kind of stability is more efficient and predictable for everyone involved.

So how to create loyalty? Building loyalty is not a marketing matter, so don’t look there for help. To foster customer loyalty, a small business needs a strategy that keeps patrons coming back. It starts with basics that are sometimes overlooked. Thanking customers for their business, for example, goes a long way; but try going beyond a few spoken words. Write some thank you notes and letters. Make them personal and sincere. Just let them know you appreciate their business.

Creating value will help boost loyalty. Ask customers if there is anything else you could be doing for them. Then, after they tell you, do it. When you lose a customer, you should consider it unacceptable. Find out why it happened and then work to prevent it from happening again.

Remember, too, that your customers’ needs are always changing, and that they may find attributes or “extras” in other business that put your service elements at a disadvantage. Take ease of access, for example. Make sure all your touch points— your phones, website, store layout, etc.—operate with your customer’s needs in mind. Visiting competitors’ locations and sites may alert you to areas where you may be behind, and spark ideas for making a good service or process even better. If your customers like what they find at your business, they’ll keep coming back for more.

Richard Strug
Greater Princeton Area SCORE (Chapter 631)
Serving Mercer and Middlesex Counties