One of the largest complaints that the business community has is the lack of capital available for business. But I think this isn’t correct, because there is plenty of capital out there. It just isn’t being used effectively. Small businesses are great job creators and are flexible enough to be able to boot-strap where necessary so they often times don’t need much capital. But there is a flip side to that coin that no one talks about. Small business owners are notorious for being emotionally involved in their business. They get so much ego and emotion wrapped up in their business, they can’t walk away when its time.
They typically don’t understand the concept “risk versus reward”. If they are making ANY profit, they assume they should continue operating their business. But smart business people know that “some” profit is not the same as a reasonable return on invested capital and time.
You see this same problem a lot in the retail investment world. In that world, this is referred to as “behavioral finance” and many, many people are studying the inherent irrationality of consumers and their investment decisions. The same problem effects small business owners because, by definition, the money and time you invest in your business is no different than the decision to invest in a mutual fund. It might feel different, which is why people don’t analyze it properly, but it really isn’t.
So how much capital is invested in your business?
Is it being used effectively?
Can this business be closed and the capital reallocated elsewhere?
If people really looked hard at these questions, we could likely free up all the capital we would need to fund profitable business.