by Lara O’Connor Hodgson, President & CEO, NOW Corp
Where is the Fuel for the Engine of the Economy?
“Small businesses are the engine of the economy,” is not an uncommon phrase. Yet for many small business owners growth seems elusive. It is as if the engine has no fuel. Countless reports, as well as business owners themselves, claim that the “fuel” they are lacking is capital and most equate the word “capital” to the word “debt” or to the word “equity.” But those are not synonyms. Debt and Equity are forms of capital but they are not the only forms of capital to enable growth for most businesses.
Lack of Capital – the Sticky Floor Holding Down Small Businesses?
The force that prevents many young people from reaching their potential is not a glass ceiling, it is instead a sticky floor. Similarly, many businesses, and especially small businesses, fail to grow and reach their potential because the force that is holding them back is not the force they think. The truth is that more businesses GROW out of business than GO out of business.
The 4 C’s of Growth: The Traditional Approach
A company requires four things to grow (The 4 C’s of Growth):
– Capital (you need money to make money)
– Capacity (people, equipment, facilities and inventory)
– Customers (the lifeblood of any company)
Without commitment of time and resources, from all involved, a business cannot even get started, much less grow. Capital is required to build capacity and capacity is necessary to deliver a good or service to customers.
Many business owners approach the 4C’s in a linear fashion. Some drive growth by first focusing on acquiring customers. It is exciting to close that big deal and get a customer, but then the business must deliver and that shifts the focus to capacity. Acquiring the raw materials and the assets needed to produce and deliver a good or service requires capital. This demand-driven linear approach often leads a company to grow to death.
The 4 C’s of Growth: The Better Approach
In contrast, others take a supply-driven approach and start by raising a great deal of equity capital in order to build out their capacity infrastructure and then they shift their focus to acquiring customers. Not all businesses or owners are a fit for large equity funding.
In order to scale each in parallel one must look closer at the type of capital used. All capital is not created equal. The key is to use the right type of capital at the right time for the right use. Some forms of capital are designed to fund the business and other forms are better suited to run the business. How a business is funded and how it is run are two completely different things.
Traditional Goods and Financial Supply Chain
In the graphic to the left, the left-to-right flow depicts how a business is run. A product or service is sold and delivered. Payment is received and the revenue generated (cash flow from operations) is used to operate the business. Some of those dollars leave the business in the form of expenses and others stay in the business to produce/deliver the next good or service and start the flow again.
Capital Challenges With Business Growth
As businesses grow they often experience challenges with this flow or “working capital problems.” In some cases the challenge comes from the fact that money must be expended to acquire materials, equipment and other resources in order to produce the good/service and get paid. Common solutions that alleviate this problem are debt and/or equity. The proceeds of the loan or the equity sale go into the company’s own assets that are later turned into cash. Examples of this are a loan to purchase equipment or facilities or contract/PO financing.
However, a more common issue that causes businesses of all types, of all sizes and across all industries to grow to death is delayed or late payment (any payment not received when the good or service is delivered.) Once a product or service is delivered, it often takes 30, 60 and even 90 days or more to get paid. The left to right flow quite literally stops because payments are not flowing in. Most business owners don’t realize that when they deliver a good or service and they send an invoice requesting payment at a later date, they have actually made a free loan to their customer.
Businesses lend more than they ever borrow and it is this fact that prevents most businesses from growing. Attempting to address this issue by borrowing money or selling equity does not remove the burden of being a lender; it actually enables the business to lend more to their customers. To make it worse, most businesses lend money to their customers for free (no interest is collected) while they borrow the money to fund it at some cost greater than zero. The math just doesn’t work.
Driving Growth By Changing the Payments Paradigm
The best way to drive growth is to remove the anchor that is holding the business back (large customers that don’t prepay or pay immediately upon receipt of a good or service) and to enable the business to actually get paid immediately. There are two ways to do this:
- Require customers to pay immediately upon receipt of a good or service. This is the way B2C merchants solved the problem. Fifty years ago retailers used to fund consumers with “tabs” or house accounts. The introduction of the credit card system enabled merchants to get paid immediately (without using debt or factoring) but enabled consumers to pay later. If a business or government customer is willing to pay by credit card or purchasing card, it can solve the problem and enable the supplier to grow (NOTE: be sure payment by credit or purchasing card is done immediately. If they wait 30+ days and then pay by card, you are double paying.)
- In many cases the business or government customer would prefer not to pay with a credit card or purchasing card. If this is the case then the business that is selling the good or service can use a payment system like NOWaccount to get paid immediately (just as if they had been paid with a card) even though their business or government customer still gets an invoice, still pays on their own schedule, still makes payment to their supplier but remits payment to a PO box or account controlled by NOW and the supplier pays a one-time 3% service charge.
Getting paid immediately changes everything and enables a business to grow exponentially without strapping their balance sheet with debt or liabilities. Using a payment system that enables immediate payment can become a business’s greatest sales tool because it enables the business to:
– Confidently take on new customers and larger contracts knowing payment will be immediate and there is no risk of nonpayment
– Offer extended terms to business & government customers in exchange for larger orders
– Use terms as a negotiating point in competitive bid situations instead of just negotiating price
– Pay sales commissions immediately
Using the right capital at the right time for the right use enables that big customer that is currently the anchor holding your business back to become the turbocharger for your business.
Finally the engine has fuel – the right fuel!