Are you expanding your small business? Then dump the debt
I hope you enjoyed last night's episode of "Crowd Rules." Once again, we saw three great small businesses, but in the end, the Hillsborough, N.C., beer company Mystery Brewing made the best case for an infusion of fresh capital. Its $50,000 prize will help the owners grow their business without adding to the debt they've incurred since start-up.
Businesses that are deeply in debt often make bad choices. Specifically, they make decisions out of desperation rather than based on what is needed for growth. Here are some steps small businesses can take to avoid making decisions based on their debt and instead make them to help their business expand.
1. Dump the High-Interest Debt
Not all entrepreneurs qualify for business loans with reasonable interest rates. So it's not uncommon to see them rely on credit cards to get a business off the ground, then continue to use them to expand.
We heard from a lot of small businesses, such as this week's Sky Fitness 24/7, that grew by maxing out high-interest credit cards. But just because a lot of people get their start-up capital this way doesn't mean it's a good idea.
Cards may assist in realizing short-term goals, but interest rates of 15 or 20 percent eventually can be crippling. So do what you can to dump the high-interest credit card. It's a ticking time bomb that can kill your business down the road.
2. Look for Bottlenecks
A jolt of capital can be transformational for a growing company, in part because it can get operations past those times when they can't keep up with demand. It's vital that such bottlenecks are cleared so that you don't miss a chance at new business and revenue because of a lack of capital.
Mystery Brewing is turning out a great product, but it's terribly underfunded. So even though it has an order backlog and plenty of production capacity, it doesn't have enough kegs to get its beer to buyers.
It's a problem that founder Erik Lars Myers could solve easily with a capital injection. Using new money to clear that bottleneck, he may boost revenue in the current month and also could make it possible to achieve similar results every month thereafter.
3. Achieve Efficiency
This tactic isn't quite the same as clearing bottlenecks, but it operates on a similar principle. There may be things your company could do better but can't because it doesn't have the money. A shot of fresh capital can be put to good use in this situation.
Is there a software system that would help you to process customers faster? Is there a machine that would automate part of your production process? If so, it's worth spending the money to make the improvement. A proven, repeatable process or procedure benefits every business.
4. Crank Up the Marketing Effort When the Time Is Right
Though DirtyGirl Disposal, Mystery Brewing and Sky Fitness 24/7 are very different businesses, they all have traits in common, including the need to bring in more customers—at the appropriate time.
A business that's successful should expand, but only if it's operating efficiently. I'm not saying you shouldn't strike while the iron's hot. Just make sure the cord's not frayed before you plug the iron in.
(Read More: The Important Role of Female Small Business Owners)
If you've gone through this list and you still have capital available, then—and only then—should you be dusting off your expansion plan. It's natural for any entrepreneur with a well-regarded concept to want to grow, but smart growth waits until a business is equipped to handle it.
(Pat Kiernan is a panelist on Crowd Rules, a NY1 News anchor and owner of PatsPapers.com, an online summary of U.S. news stories, delivered to subscribers via email every weekday morning.)