Don't Go There

How important is money to the success of your business? Very. "Often it's not the lack of a business plan, lack of foresight or lack of competent management that leads to failure. Rather, it's a lack of capital--even in businesses that are thriving," says Larry London, managing director of Entrepreneurs Re$ource Group in Dunedin, Florida. "In fact, a survey of successful business owners [conducted last November by Geneva Business Bank] concluded that the largest potential trouble spot is when a company is experiencing rapid growth."

London says the eight most common mistakes made by entrepreneurs are:

• Failing to borrow funds

• Overlooking available financial resources

• Underestimating financial risks

• Ignoring the downside of having investors

• Making unrealistic estimates of your borrowing potential

• Neglecting to manage lender relationships

• Preparing a loan application under pressure

• Failing to forecast cash needs

There are a number of other common errors, of course, London adds. "Most notably, too many small businesses borrow relative to their cash flow and don't leave enough money to run the business. That is, the business owner borrows as much money as he knows he can repay based on cash flow. But with payments going to service that debt, the business doesn't have enough money left for growth."

More details are spelled out in a brochure London wrote, The 8 Biggest Financial Mistakes Business Owners Make--and How to Avoid Them. For a copy, call (888) 541-5417.

Fast Lane To Nowhere

Credit risks

Looking for high-growth customers to help propel your growth? Careful: They might actually hasten your demise. Most start-ups welcome virtually any new client--even better if it's a high-volume account. But what if one such prospect wants a line of credit and your credit search reveals inordinate growth rates? Sounds great, but it should give you reason to pause.

High-growth companies are often seen as good credit risks, but they must be evaluated closely because "they can quickly outstrip their resources, which in turn hinders them from keeping up with production," cautions Mahmud Haq, president and CEO of Compass International Services Inc., an accounts receivable management firm in New York City. A company growing 40 percent or more a year "can come crashing down just as quickly, leaving you and many other creditors holding the bag," adds Haq.

Before selling to high-growth customers, and especially before extending credit to them, Haq urges you to take the following measures to help ensure high growth doesn't mean high risk:

• How far? Go beyond your normal credit verification process when evaluating high-growth prospects. In addition to your normal credit guidelines and practices, get a credit report, collect all available financial and operating data, and get a thorough grasp of the company's business and operations. Some high-growth companies fixate on increasing production to the exclusion of all else. Assess whether the prospect provides adequate customer service, does a good job recruiting and training employees, and maintains control of payables and receivables.

• Why high growth? Do what's necessary to understand the factors behind the prospect's growth rate. Long-term rapid growth may simply indicate a competitive edge, superior sales force or other real advantage. If growth has not been long-term, and market advantages aren't apparent, you should investigate further.

• What philosophy? Spend extra time with the prospective customer. Talk to staff people at all levels to glean information on corporate attitude, goals, stability, trends, history and mission.

• Who's who? Look carefully at references, especially those lacking a long history with the prospect. Fast-track companies try to keep solid relationships with long-standing suppliers, so focus on the newest references, who may provide a more accurate picture of problems the company has had.

• Which way? How will the company fare in an adverse market? Study industry trends and conditions. Do you have more than one high-growth prospect or client in the same industry? All the more reason for close monitoring. Subscribe to trade publications to maintain an edge.

While fast-growing companies can be valuable clients--and many can attribute growth to planning and hard work--don't let growth rates lull you into a false sense of security.

Step To It

Tax facts

Do you know how many different business taxes you must pay? Which record-keeping process is most efficient? Do you compile all legally required information and avoid tracking and stockpiling useless data? These and other issues vital to entrepreneurs are covered in the Small Business Tax Education Program (STEP), a cooperative effort of the IRS and local organizations.

The comprehensive STEP program--much of which is free--is available through workshops, seminars and in-depth tax courses offered by community colleges, Small Business Development Centers, business associations and the IRS. Instructors provide training in starting a business, record-keeping, preparing business tax returns, self-employment tax issues and employee taxes. Entrepreneurs can also learn how to use Federal Tax Deposit Coupons, how to deal effectively with various IRS offices, and what help is available--and how to get it--from other federal, state and local agencies. Technical information on a series of tax topics specific to your business situation is also available.

While some courses are offered free of charge as a community service, those provided by educational facilities may end up costing you for materials and tuition. If you're preparing to start your own business, getting ready to hire your first employees or having a difficult time understanding your business tax rights and responsibilities, get in STEP by calling the IRS (800-829-1040). Ask for the Taxpayer Education Coordinator nearest you.

Defining Moment

Portfolio

A collection of investments, usually stocks, bonds and real estate. For some individuals and institutions, it's their entire holdings, consisting of both assets and liabilities.

Starting Small

By George M. Dawson

I need $7,500 for my desktop publishing business. Where do I get a small, small business loan?

It depends on your personal credit record, the age of your business, and your business income and available collateral.

Not a problem if you have an excellent personal credit history, a two-year business history, and the ability to make loan payments from your present income and use a car for collateral. You fit within the qualification margins for a short-term bank loan. Call it a personal loan, not a business loan, and set it up with your credit union.

However, if your credit record isn't so hot, plus you have a newer, break-even business that needs new customer revenue to make the payments, then you drop off the bank's page. Now your best chance is a community-based microlending organization. Most have an underlying goal: to help the businesses banks won't.

Some microlenders use SBA funds, so your local SBA district office can point you in the right direction. (Call 800-8-ASK-SBA.) Locate other, privately funded microlenders through your university-based Small Business/Minority Business Development Center. (Your local SBA office can help you find these, too, or call local universities.) Or try local government economic development agencies or grass-roots community action groups.

And, of course, there are your personal credit cards. (A footnote: You did apply for several new cards before you quit your full-time job, didn't you?) There's nothing more important in small-business borrowing than your personal credit report. That's why credit cards are my last choice--card issuers are quick to report problems.

Order your credit report every year--and always order it before applying for a loan or lease. Clean up the errors and have good justifications for any black or gray marks.

Contact Sources

Compass International Services Inc., (212) 967-7770

George M. Dawson (gdawson@txdirect.net) is a small-business consultant and author of Borrowing To Build Your Business: Getting Your Banker to Say "Yes" (Upstart Publishing, $16.95, 800-235-8866). E-mail him your questions at bsumag@entrepreneurmag.com

Paul DeCeglie (MrWritePDC@aol.com) is a former staff reporter for Journal of Commerce and American Banker.