NASE on Micro-Business

Borrowing vs. business model

Posted on: May 8, 2009

With banks and regulators more concerned with balance sheets than lending and the news that according to the federal government, Bank of America needs to raise a $33.9 billion cushion in case of any further economic downturn, it looks harder and harder for small businesses to gain access to financing they need.

What is a business owner to do?  According to a New York Times interview with Doug Tatum, a consultant specializing in the finance issues faced by growing companies, business owners need to stop thinking about borrowing money.

Money quote: “Entrepreneurs have a limited amount of bandwidth, and they have to quit wasting their time chasing the impossible. They need to think about how they can change their business model to become profitable. That’s where the capital to grow will come from.”

Do you think Tatum is right? Are you making changes to your business model instead of pursuing loans?

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2 Responses to "Borrowing vs. business model"

As a general statement, I mostly agree with that.

What many small businesses need is customers and sales, not debt. Overall, I feel there is too much media attention on lending, and it gives the wrong impression about where your head should be as a business owner. It’s almost as if you begin to feel that there’s something wrong with you if you aren’t looking for a loan.

Loans are not THE answer to everything that ails a business — although you’d hardly know that judging from how much media ink and policy attention in Washington is paid to loans, loans, loans!

However, any general statement has exceptions. Some solid businesses that already have sound business models need money to even out cash flow dips, or need to find substantial sums of money to expand and get those new customers and increase sales, etc. So I also don’t think you can just dismiss away the need for funding with a flip of the hand. Some businesses will need loans, for sure.

— Anita

There are too many so-called entrepreneurs who financed the start-up of their business with borrowed cash from their home equity line or with credit cards when money was flowing freely.

Little or to no planning was done on the feasibility of the business and they still don’t know what a break-even analysis or business model is. They opened their doors and expected to make money hand over fist.

Unfortunately these businesses are the first to fail, and it’s down to a Darwinian survival of the fittest for the near future.

If a solid model and track record exists, and it’s just a matter of cashflow ‘dips’, then loans are an alternative. But money should not be funneled into a poor decision to begin with.

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