Challenge No. 4: Having Adequate Capital

Here are some thoughts on “Adequate Capital” to consider in developing a business plan:

"The first thing we did was to establish financing and credit relationships. Make a bank contact. A lot of our successes have been dependent on that relationship."

"Establish a good working relationship with one or more banks early in the game. There's always a large contract that comes up when you need working capital."

 "Have enough capital to withstand slow periods and competition ... all of those things that nobody told you were going to be there. Many people go into small businesses who have enough capital or enough assets to open the doors -- but not enough to withstand the pressure from competition and accounts receivable during all of that first year."

 Small business owners concur that having sufficient capital is essential to surviving the first year, which inevitably brings unforeseen challenges.

How much should you capitalize? Based on the experience of others, you should count on obtaining more than you think necessary: "Double your estimates of the cash you need to have during the first year," advised a retailer.

 

"Look at whatever you're going to do," advised another, "and then look at the worst possible thing that could happen. Prepare for the worst case scenario. Borrow twice as much as you think you're going to need. Or, have access to that amount."

 Credit lines are an important part of capitalizing a new venture, as indicated by some of the business owners quoted at the beginning of this section. A line of credit enables a company to meet ongoing capital requirements or to capitalize on business opportunities.

 However, obtaining credit from suppliers can be difficult for the new company. "In starting out a small company, you may have to pay cash for a while."

 To help tell their business story to potential creditors, many small business owners find maintaining a business credit report on their company helpful. "It gives you a standing in the community to be rated," believed one owner. In addition, owners recognize the value of keeping their company's report current.

 This difficulty in establishing credit is only temporary. "After they've done business with you for a while," assured the same owner, "they'll start giving you terms."

 Some small business owners perceive that suppliers are becoming even more discriminating about extending credit, demanding detailed financial information even from established customers. One way to meet this challenge, say owners, is to form basic business partnerships with bankers, local vendors, and Dun & Bradstreet, to keep your company's business information report as accurate as possible. Nothing is as important as to “Know Your Banker”.

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