Franchise Opportunities Blog
Is Your New Business Sufficiently Capitalized?
According to the SBA (Small Business Administration) the number one reason businesses fail is undercapitalization. When beginning to think about starting a new business, it’s human nature to take an optimistic view of the success of the business. Without this optimistic view and the belief that the business will be successful, no one would decide to start a business. While optimism is necessary, it must also be tempered with a realistic chance that the road to success and profits may not always go according to your business plan.
There can be unforeseen events that can impact your time to breakeven and profitability. For example, road construction in front of your newly opened coffee shop that reroutes morning traffic away from your shop for three months. Having enough working capital to weather events like this, or a slower than anticipated ramp up to breakeven is critical to your small businesses success.
The time to ensure you have sufficient working capital for unforeseen contingencies is when you first begin planning for the capital needs of your business. There is an old saying “Banks will lend you money when you don’t need it, but never when you do need it”. If your business has negative cash flow and you are short on reserves, it will be very difficult to get a bank to lend you additional working capital. In order to avoid this you need to anticipate the need for additional reserves in your initial loan request. Many times an entrepreneur will apply for the smallest loan amount they believe will get them to the Grand Opening, with no excess reserves if things don’t go according to the business plan. This is a recipe for trouble. Most bankers like to see a business plan and loan request that includes sufficient reserves if the business doesn’t ramp up as quickly as your projections.
As an entrepreneur it is important to be optimistic, however, it is equally important that your business plan and projections are realistic and have a plan for reserves if things don’t go according to projections.