Money seems like such a straightforward concept.  It’s a store of value and a medium of exchange.  Every business balance sheet is simply an allocation of funding sources into asset categories.  Just like building a house, however, small business owners need to think in terms of foundations, framing, and finishes.  Money’s suitability for use is paramount and arranging funding may be more like a trip to Baskin-Robbins than your local bank. 

Commodities Not Homogeneous

Several decades ago, I worked with a large lumber broker in Memphis, TN.  It was a multi-generational business that brokered loads of hardwoods from the Mid-South region all over the world.  Great people and experts in their field.  I had an elementary knowledge of varieties of wood when I started with the account, primarily that some woods are harder than others.  I quickly learned that that oak is not OAK.  There was red oak and white oak.  And there were grades – number one oak, and number two oak, and so on.  Spray that thought across the entire classification of lumber and you could get dizzy with all the possibilities.   

My banking career took me into some interesting places.  Tobacco auctions.  Aggregate materials purveyors – rock, gravel, even sand.  Metals.  At the most esoteric level, specialty chemicals for metal plating and electronics industries.  That was my first introduction to rare earth elements.  I thought Sister Rita Xavier had beaten the periodic table into me in high school, but I learned all kind of practical chemistry from that client.  Now I fully understand that commodities of any kind are not homogeneous.  There are always distinct properties that influence grades, which in turn drive suitability for various uses. 

Money Is The Same Way

The irony is that all that time I was dealing a commodity – money.  Looking back, I think my earliest recognition that there might be different kinds of money was my dad pulling me aside when I had something big going on and pushing a little “walking around money” into my hand.  In more desperate moments, I would pull out all the sofa cushions and root around for “sofa change”.  Banking taught me terms like “funny money” and “bait money” – the dark side. 

Here are a few flavors of money from my experience and some funding considerations.  In my view, money is a little like Stockholm Syndrome – it takes on the characteristics of the people who hold it. 

Easy Money  

Danger Will Robinson!  No matter how passionate you are about your dream, easy money will do more to kill your dream than fulfill it.  When you hear slogans like “We always say yes”, it means the holder of this money is playing a game in which they are charging borrowers so much for money that they can be indiscriminate to risk.  They will load you up and refuse to make eye contact with you when it all comes crumbling down.  In most cases, the hard but right thing to do is work on underlying profitability issues, not take easy money as a band-aid. 

Patient Money  

Patient money is like a lifelong friend – always there for you and gracious when you make poor decisions.  You get the maximum flexibility to navigate your business through storms, and your source is there to celebrate with you when you have nailed it.  Patient money is the foundation of the balance sheet you are building.   

Not surprisingly, this will usually be your OWN money.  Equity you put into the business to start, or earnings you retained over the years.  But I also put most bank money in this class, especially SBA-guaranteed loans with extended, flexible terms.  Trade credit from long-term supplier relationships also fits. 

Getting patient money takes time and effort to build relationships and trust with providers, but patient money is also more accessible than most people think.  I would be so determined to get this kind of money that I would never stop trying.   

Hot Money

In a word, restlessness.  More words: always seems to be a better deal down the street with higher returns.   

Hot money providers will drop you as soon as they can if they can get more elsewhere.  In banking, hot money usually came from CD rate shoppers.  We still needed hot money at times, and your business will as well, especially if you are growing like crazy.   

The danger is in suitability for use.  If you need true equity in your company, do not agree to demand notes, six month or one-year notes from friends and family, or structured oneyear paybacks from online lenders.  It will be expensive and will leave you lonely and hurting if you wanted something long-term. 

For whatever it’s worth, bank regulators now stress a core funding ratio to assess the health of a bank.  Over-dependence on hot money is undesirable. 

Controlling Money  

I always think of the movie Arthur when I think of controlling money – lots of strings attached.  Don’t get me wrong.  There is nothing wrong with structure.  Some lenders just need structure to make sure they get their money back.  But there is something soul robbing about this kind of money.  

It may start innocently as a loan, then convert to stock.  Or angel investors flutter down for a piece of your action.  Or, you just sell off a big chunk to Mark Cuban.  From that point on, the decisions are not exclusively yours to make.  That might be ok with you, even better than ok if you are not the best decision maker in the world.  Things will just be different.  Controlling money often looks like patient money but lacks the graciousness and flexibility of a lifelong friend.  Ask hard questions before taking. 

House Money 

House money means you have been winning!  I was not aware of this variety of money until I went to Las Vegas for the first time.  I learned quickly that people love to play with other people’s money.  They morph into wild-eyed risk takers.  It’s amazing how conservative we can be when we are working out of the envelope Momma gave us before you got on the plane.   

When your business has a big year, carve out some profit to take some chances.  You earned the right and your business will reap long-term benefits from the risk-taking.