Here’s the good news. There are many free business plan templates and free classes that force you into the discipline of planning. And there are a variety of funding sources in addition to bank financing that require no prior credit or less than favorable credit. My favorite is factoring.

Hope Is Not A Strategy For Success
Anyone who’s thinking of launching a business should read Hope Is Not A Strategy, by Ted Gee. The title speaks volumes. There’s another popular business strategy that encourages you to, “…do what you love, and the money will automatically follow.” But if you want to be successful in business, you need to embrace the idea that success consists of 1% inspiration and 99% perspiration.

And the first sweaty task is a WRITTEN business plan.

You MUST Have A Written Business Plan
Based on a study by Jessie Hagen of US Bank, 78% of businesses fail due to lack of a well-developed business plan.

I highly recommend a structured planning course that’s several weeks long, because you delve deeply into each major component of your plan. And more important you are forced to spend time each week developing out each individual section with specific detail for your business. Your instructor and class mates are an invaluable source of professional feedback from a fresh perspective.

A key and often overlooked component of the overall plan is the marketing strategy. 64% of business owners minimize the importance of properly promoting their business. I love the idea of, “…if you build it, then they will swarm to your door and beat it down.” But if you want to be successful in business, you need to embrace the idea that success consists of 1% inspiration and 99% perspiration. Yes, you just heard me say that. And yes, you’ll continue to hear me say that.

Here are just a few considerations for your marketing strategy. Studies show that we’re bombarded by thousands of advertisements each day. And your message has 1.8 seconds to intrigue your prospect enough to stop and listen to your entire message. So you must effectively communicate your product benefits to the right people in the right place at the right time. And speak to their unique needs and wants, not the product attributes that you’d like to offer. It’s all about your customer. A critical starting point is your positioning statement. It’s based on your USP (unique selling proposition), and “positions” you against your competition. It’s important to constantly monitor current and emerging competitors; and make sure you provide different benefits like higher quality, speed, convenience, better service, or lower price.

It’s 3.5 times more expensive to gain a new customer than to retain an existing customer. So include a strong RM (relationship marketing) program, which improves LTV (lifetime value), and maximizes ROI. These tactics retain, up-sell, and cross-sell your customers. And referrals are an inexpensive source of highly qualified leads. Finally, always measure your marketing tactics. Analyze results, then learn and adapt to ever changing market conditions.

You MUST Have Adequate Funding
82% of businesses fail within their first 2 years due to under capitalization and poor cash flow management.

Conduct sound financial planning and research, and understand the financial dynamics of the product category. What is your business model? How do you make money? Show your plan to a financial expert and get their counsel. And don’t hesitate to get a second opinion. Smart business people know when to ask for and take good advice.

Financing Without Borrowing
Lending criteria are tighter than ever, but there are non-bank credit vehicles worth considering. One non-bank alternative is factoring, or accounts receivable financing. This is the process of selling your outstanding receivables for cash, which can take as little as 24 hours. Then the Factor works with your customer’s accounts payable department, while you focus on your business. One reason Factors are popular is that they work with established as well as emerging firms not yet attractive to traditional lenders. Plus, they don’t routinely impose tight credit line caps like lenders.

Factoring is common in Europe and Asia, and becoming more popular in the US. This increasing consumer demand is forcing the industry to become more competitive. Here’s how to take advantage of this popular way to raise capital. Many firms such as temporary staffing, manufacturers, printers, construction, security guard and custodial firms – any group with substantial front end labor or material expense – use Factors to cover high fixed costs and support new business.

Factors consider these industries to be good opportunities, because they routinely have credit-worthy customers and invoices that rarely result in trade disputes. So as long as your customer stays current with the tax man and provides valid invoices, then most Factors see you as a routine, low maintenance candidate.

A consulting firm like Capital Consulting Group can help you evaluate a variety of Factors, and negotiate the best deal to support your long-term growth. We work with a stable of Factors, so we have the experience to translate complex proposals into apples-to-apples comparisons that are easy for you to evaluate.

Phyllis Brown is a Principal and Cash Flow Strategist at Capital Consulting Group. A consulting firm whose specialty is locating and evaluating the best factors to support your long-term growth. She provides an independent perspective, because she represents her clients – not any one factor. (212) 472-3081 direct line.

The Quick Example

A simple example is credit card rates and fees, with which we’re all very familiar. You make an informed decision to accept a credit card offer based on the APR (annual percentage rate), and your projections for revolving vs. transacting activity. This calculation provides you with a projected annual expense for using your credit card for monthly purchases. If you project a high volume of revolving, then you’ll choose a low APR. But if your cash flow is stable, then the APR is irrelevant as you pay in full each month. Or some consumers and/or small business people use their card to the full credit limit every two weeks, and pay their balance in full twice per month without waiting for the monthly bill. This pay-as-you-go approach isn’t recommended unless you closely monitor your spending, in order to stay below the credit limit and avoid over limit fees.

But there are a number of issues to consider in addition to APR. Teaser rates may increase after the initial term. The bank will charge over limit fees, balance transfer fees, late fees, etc. In addition if payments are late a default rate can take effect, which could exceed 24% in this tight credit environment. Plus credit lines can be reduced if when balances consistently exceed 40% of the full credit limit. And APR and/or fees can increase at any time, as long as the credit card company provides written notice and the option for you to stop using the card until the balance is paid in full. So for all practical purposes the card was just cancelled, and your line of credit just disappeared.

So it’s important to look always at the effective rate, which includes additional fees on top of APR.

Rate is the First of Several Questions

This same analysis is required for all financial service products.

So let’s go beyond rate, because that’s just the starting point. The next step is to calculate the effective rate, so you know the actual cost. Then the most important question is, “What is the real cost to my business if I don’t optimize my cash flow?” This answer comes from your cost/benefit analysis; an analysis that projects an increase or decrease in bottom line profit after expenses, including cost of funds. It shows the gain or loss from more immediately available cash; which you can use to meet payroll expense and taxes, get prompt payment discounts, bid on new contracts, protect your credit rating, and launch new products or new marketing campaigns. In other words continue to grow your business, even in a tough economy.

A good financial vehicle for optimizing your cash flow is Factoring, which is the process of selling your outstanding invoices. Factoring provides two strong benefits. First, you’ll get your cash within 24-48 hours. Instead of waiting 30-60-90 days. And second, this is not a bank credit product so there are no interest payments. Factors work with emerging firms, that aren’t yet attractive to traditional lenders, like banks. Plus, Factors don’t routinely impose tight credit line caps like lenders.

Calculating Effective Rate

Here are the questions to ask in addition to base rate when you meet with a Factor:

• Does the Factor require term limits or volume requirements?
• Can you get better pricing if you can commit to a specified timeframe or minimum volumes?
• Does the Factor require that you factor all of your invoices?
• Can invoices age prior to factoring, which reduces your discount rate?
• Does the Factor pro-rate fees to reflect faster payments from your customer? Or do you pay one fee with a 30 day minimum even if your customer pays within 10 days or 2 weeks?
• Does the Factor use batch accounting or individual invoice accounting?
• How are non-factored receipts handled?
• Do transaction fees stop accruing immediately when you customer pays the invoice? Or after a check clearance delay?
• Do your reserve payments get released immediately or on a monthly basis?
• Does the Factor require invoice repurchase after 60 days or 120 days?
• Does the Factor require a personal guarantee? Or is this unnecessary?
• Is the program full recourse? Or non-recourse?

And remember to complete your cost/benefit analysis using this effective rate for your cost of funds expense, so you can quantify the impact on your long-term growth.

The Good News - Factors Are Competing For Your Business

It seems like wherever you turn, there’s a Factor touting its service. Many factors are vying for the same business - yours. So you have the luxury of a buyers’ market.

Factoring is common in Europe and Asia, and becoming more popular in the US. Many types of firms sell their invoices. Companies like consulting or advertising agencies, temporary staffing, manufacturers, printers, hotel resorts, etc. Any firm with front end labor or material expense that could use immediate cash to cover high fixed costs and support new business.

Here’s An Easy Way to Evaluate a Factor’s Proposal

If you’re like most business people, then time is a precious commodity.  A consulting firm like Capital Consulting Group can help you evaluate a variety of proposals, and negotiate the best deal to support your long-term growth. We work with a stable of Factors, and translate proposals into apples-to-apples comparisons that are easy for you to evaluate. My job is to save you time, so you can focus on what you do best. Grow your business.

Phyllis Brown is a Principal and Cash Flow Strategist at Capital Consulting Group. A consulting firm whose specialty is locating and evaluating the best factors to support your long-term growth. She provides an independent perspective, because she represents her clients - not any one factor. (212) 472-3081 direct line.