If there is one thing nearly universal among commercial loan underwriters it is the experience of dealing with new business owners who believe sufficient funding is a guarantee of entrepreneurial success. It is not. And unfortunately, entrepreneurs with that mindset can find themselves in a lot of financial trouble if they don’t change their thinking. Business loans and other forms of financing are critical to business success, but money isn’t the answer to everything.
It is easy to step back and say to someone who is having personal financial problems that borrowing money may not be the best solution. So why is it that business owners have such a hard time applying the same principles to their entrepreneurial activities? Why is it that so many think that throwing money at a problem will automatically fix it?
A Bad Business Plan is Still Bad
Have you ever noticed that successful business experts recommend coming up with a solid business plan before pitching investors or applying for business loans? That’s because they know a thing or two about business plans. They know that a bad business plan is bad regardless of how much money funds it.
Writing a good business plan is not something that happens by accident. It is the result of a lot of research, a good measure of sound advice, plenty of thoughtful introspection, and lots of facts. It is also a plan subject to change as conditions dictate.
You can start with an excellent business plan but fail to adapt as needed. What started out as a solid plan suddenly becomes useless because the company is not responding to market realities. At that point, applying for more business loans may only be masking deeper problems that require systemic changes.
Loans Don’t Solve Receivables Problems
Another significant mistake a lot of business owners make is allowing receivables to control everything else. When those receivables do not generate enough cash flow, they start thinking business loans are a way to keep things afloat. This is one of the worst possible things company ownership can do.
Problems with receivables do not go away with the infusion of new funding. They might even get worse if company accountants and senior management use the influx of borrowed money as an excuse to back off on receivables. This creates a vicious cycle that may never end.
The best way to handle problems with receivables is to start working with customers to get them to pay sooner rather than later. Sometimes a few gentle reminders are all that’s needed to get them on track. Other times you have to crack the whip. In either case, you cannot give away the store and expect the business to succeed. You have to solve receivables problems before they consume the company.
There is No Substitute for Innovation
Entrepreneurial success in the early stages of a company is often linked to the age-old principle of finding a need and meeting it. But as any seasoned entrepreneur will tell you, it’s highly unlikely that the need a company was first established on will be a need in perpetuity. Things change. So do customer demands. This is why we innovate.
There is no substitute for innovation in the business world. A company that fails to innovate is one that may tread water for a while, but it will eventually sink under the weight of its own past. To keep growing you have to keep finding that next big thing. Business loans can be immensely helpful in this regard, but they are by no means a substitution for innovating.
Business Loans Are Only Temporary
Common sense dictates that business loans are only temporary. There is a date at which the company receives the loan and another date on which it is paid off. As such, business loans are only good for meeting temporary financial needs. But guess what? Your business is not a temporary enterprise. At least it should not be. If you want to achieve entrepreneurial success, you have to look at your business as an ongoing thing that will require constant and proactive development.
This means taking a long-term approach that considers the big picture as much as short-term goals and objectives. Remember that every short-term goal will ultimately lead to long-term success as it is met. It’s like walking. Combining 1,000 small steps eventually results in reaching your destination.
Succeeding in business without some sort of funding is nearly impossible to do. But business loans are not the answer to every challenge. They are also no guarantee of entrepreneurial success. There is a lot more that goes into business success than just borrowing money.