Judy Ballast, Vice-President of Business Banking at Capital One, recently shared the wisdom and insight she’s gained as a specialist in small and mid-size businesses and their banking needs.
This week: the seven biggest banking mistakes small wellness businesses can make, plus three kinds of clients that give bankers nightmares.
Mistake #1: Throwing money at problems.
This one struck us as funny, coming from a banker. Judy says that “Small businesses often think that if they can just get a line of credit, that’ll fix all mistakes and cure all problems.”
First, owners need to be clear on whether the problem is one that additional financing can cure. If the business has a fundamental problem, money won’t cure it. Then, if additional financing is suitable, it’s important to match the type of financing to the business need.
For example, a line of credit is short-term financing that has to be paid back within twelve months. It’s a good choice for seasonal swings in cash flow like those a health club or fitness center might experience, but it’s probably not well-suited for a major facilities expansion.
Mistake #2: Forgetting the basics: making payroll and covering overhead.
Small business owners can get so excited about growing the business and working with customers that they fail to address the basics up front.
When you’re growing a business, you’ve got to know how you’re going to make payroll every month and how you’ll handle other overhead and fixed expenses like taxes, rent, and utilities. Only then can you sensibly plan for expansion and growth.
Entrepreneurs get excited when they see a new opportunity that may entail expanding their existing business, adding another location or starting a new, related business.
Their nature as entrepreneurs causes them to act too quickly on this great new opportunity before fully considering key questions:
- Is the location a good one for my business?
- What human capital and financial capital will I need to make this work, compared to my resources?
- What is the downside to doing this?
- Will it require too much of my time and resources, thus jeopardizing my existing business success?
- If a business is for sale, why does the owner want to sell?
- Is there something beneath the surface I need to know that is not working for them? If so, what’s the real problem?
For example, we spoke with a very successful family-oriented wellness center recently. They’re thinking about adding a corporate wellness division. However, when it comes to wellness, employers and consumers have very different needs and expectations. They’ll need to do lots of homework before they decide whether this potential growth opportunity is really a good investment of time and money. Perhaps they’d be better off regionally expanding their original family wellness concept.
Mistake #3: Spending too little on the right advertising, or too much on the wrong advertising.
Judy observes that “Small businesses often don’t spend enough on advertising. Or they spend it on the wrong things and without thinking ahead of time about the return they’ll get.”
Focus advertising and networking on publications or organizations that are related to your business for best results.
Advertising your yoga studio on a billboard next to a major highway will definitely get lots of drive-by traffic. But most of those drivers don’t live or work anywhere near your facility. Odds are, your billboard investment won’t pay off. Many wellness businesses run newspaper ads with little to show for the expense. On the other hand, a promotion to nearby office workers built around complimentary lunch seminars may pay off very quickly.
Judy provides another example: “Child care centers need to reach parents of young children through church organizations, sports groups, community events and sponsorships, and publications that specifically focus on the young family. Advertising in an expensive area-wide daily newspaper is not a good use of advertising dollars for this type of client. Yet, not advertising at all would be a recipe for failure as well.”
Mistake #4: Poor choice of location and business name.
Does your name say what you do? Is your business physically located within sight of drivers and pedestrians in your market segment?
Judy believes that this is especially important in retail, where consumers often spontaneously make purchase decisions when they pass by and happen to notice your business.
She shared several examples of retailers tucked back in hard-to-spot corners of strip malls, virtually invisible to drive-by traffic and pedestrians.
At Radial, we’ve noticed that many undercapitalized wellness businesses choose lower-rent locations with poor visibility, often in shopping districts not well-suited to their target clientele. If you can’t afford an appropriate location, that’s a red flag that your business plan needs tuning.
Mistake #5: Small business owners often come to the bank too late.
Judy’s advice is that it’s better to develop a banking relationship before you experience a serious cash flow crunch. Then, if your business hits some financial bumps, go ahead and talk to your banker. Don’t delay, hoping that things will work themselves out.
Keeping your banker up to speed on what’s going on with your business makes it possible for them to help you before it’s a crisis. Good bankers have a wealth of knowledge in addition to the financial products and services offered by their institution. However, if you wait until the wolf is at the door, the situation may be too risky for the bank to help. So don’t wait until you’re about to be evicted to ask for ideas.
The biggest concern business owners face is how they are going to meet their regular monthly rent, utilities, payroll & tax deposits. They often depend on credit card settlements to their bank account or collection of accounts receivable to meet these obligations.
Judy’s recommendation: Cash “cushions” of at least 3 times the fixed expense amount should exist so business owners are not dependent on collecting overdue accounts receivable (“the check is in the mail”) or delayed credit card settlements to meet their weekly, bi-weekly or monthly obligations.
Have a line of credit already established so you know emergency funds are available. In addition, talk to your banker about supplementing bank financing sources with financing from someone who specializes in businesses like yours. Don’t wait until the emergency arises.
Mistake #6: Giving away the “keys to the kingdom” without checks and balances.
Judy’s seen many small businesses hire friends, family, and other trusted individuals and give them total access to the assets and accounts of the business without any checks or balances.
In one case, a close and trusted relative embezzled funds for over two years before the theft was detected. When embezzlement occurs over such an extended period, there’s little the bank can do to help recover the funds.
Mistake #7: Hiring friends and family who don’t have the right skills.
The time to let your little brother practice using his newly-minted marketing degree is not when you’ve just opened a new business.
We’ve seen several businesses struggle to establish themselves while trying to overcome a key skill deficiency.
For example, we spoke recently with the owner of an Internet nutritional retailer recently who was faced with erroneous financial data. The issue: his cousin kept the books, but was not trained in bookkeeping and had never used accounting software before. In another case, a relative of one of the owners was responsible for billing health club memberships, but consistently made customer-affecting errors.
If you do find yourself in this situation, grit your teeth and face the situation head-on. If it’s business-affecting, you can’t afford to ignore it. We rarely see these situations “fix” themselves.
A Banker’s Worst Nightmares
We asked Judy about the worst client from a banker’s perspective.
Here’s what she says:
1) “Firefighters”. These business owners don’t plan. “Everything’s an emergency, everything’s a crisis at the last minute,” according to Judy. And what’s worse, lack of planning is usually an issue throughout every aspect of their business.
2) Dysfunctional business models. Some business owners are extremely passionate about their businesses and really want them to succeed…but the business model itself just doesn’t work.
For example, many experts “sell” their model for building a very profitable business through multi-level marketing. For example, we’ve seen a number of these built around the sale of trendy nutritional products, skin-care and weight-related products. However, these business models have a high failure rate or very long business success cycles. They often primarily benefit only the experts who are selling their advice via workshops, videos and audios.
3) Owners who try to do it all themselves. Judy recommends that “Small business owners need a team — someone to help them develop a sound business and financial plan, a good accountant and an attorney who specializes in business and a business coach or mentor who can objectively assist with ideas or solutions that don’t seem obvious.”
Got banking questions for Judy? E-mail her at firstname.lastname@example.org and she’ll be happy to chat with you.