Many entrepreneurs focus on developing their product, sales, and marketing but only think about financing when it becomes an issue. But if you neglect planning to finance growth until it becomes an issue, rapid success can quickly become rapid failure.
Here are some of the most common scenarios you may encounter on your pathway to success:
1. Not Planning for Financing Growth
A story line of success so often plays out as follows: You start out with an idea for a new business with limited cash but great enthusiasm. You take some orders, manufacture, and deliver your product and repeat the cycle. Your product gets popular and you land a dream order: now you need 50,000 units from your supplier instead of your usual 5,000. Now you need pre-shipment financing—the toughest money to get—fast. And after all your sales and marketing efforts, if you haven’t planned for it and can’t deliver, your reputation and business could be ruined. Growing businesses need flexible lenders informed in advance about your plans for growth.
2. Buying Too Much or Too Soon
Rapid growth entails the balancing skills of a trapeze artist when it comes to purchasing. Rapid growth can lead to unnecessary buying exuberance or running out of inventory. Bringing product in too late could mean missing customer deadlines. Bringing it in too soon could hurt your cash flow. And manufacturers may require minimum quantities far exceeding your short term requirements. Consider in advance the costs of storing inventory and how you’ll manage budget constraints while your cash is tied up. Work out lead times and build in leeway for unexpected delays. Finance professionals talk of “just-in-time” inventory management. Make sure you discuss with your lender some extended credit terms “just-in-case” the “just-in-time” doesn’t work out as planned. And if you’re not going to carry this particular inventory into the next season, close it out. Unless you’re selling fine wine, your inventory will not get better with age.
3. Your Needs Exceed Your Supplier’s Ability
Be aware of your suppliers’ limitations. If you start out with relatively small suppliers with limited capacity, the companies may not be able to support your possible rapid growth. Or your suppliers’ lead time requirements could get longer as your orders get bigger. And you cannot generate revenue without inventory. Letters of Credit guarantee payment to your supplier, who may then give you priority over other customers and can help your supplier get the merchandise needed to manufacture your order. It also helps to consider one or two additional or alternative sources of supply to protect your interests.
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