- Getting favorable terms on your accounts payable from your vendors.
Extended payment terms from your vendors will allow you to pay for goods and services after you have been paid by your customers. - It's an ideal form of business financing at typically very favorable cost.
- Unfortunately, it's not an easy as it sounds when you are a small or new company or when your suppliers are small or new companies themselves.
- Typically, those suppliers and vendors who offer the lowest price will not give you extended payments on top. Learn: Lowest price is NOT always the best value. Good terms and service often more than compensate the higher cost.
- What about government grants? They are an excellent source of money, if you can get them.
- They require no repayment. However there are some considerations.
- It is not easy to qualify. They are only granted when deemed important to further the objective of legislation and or the local government.
- Most grants are reserved for research and development and or projects that have desired community impact.
- Be very cautious if someone promises to get you a grant! Check with a trusted source. More often than not, you are wasting your time, possibly money!
- Asking family or friends for a gift, loan, or equity investment. They are an excellent source of money with typically good terms and conditions and without the need for collateral.
- It's a quick process with little paperwork (if any.)
- What you should think about... Reactions are often not rational.
- Be very clear upfront: is it a gift, loan, or equity investment?
- What if something goes wrong? The stakes are high. You may put a relation at risk!
- If they do loan you money, tie repayment to your cash flow and write a promissory note!
- Even if they are not a direct source of money, perhaps friends and relatives can function as co-signers or guarantors for a loan or provide for collateral.
- Using a credit line by loading up your credit cards. It's not very creative, but it's very quick and easy.
- You only pay for what you use.
- You're really getting unsecured credit, but it's expensive. It's high interest when you only pay the minimum.
- It must be treated as a loan. (It creates debts on books, involves periodical payments, and accumulates interest.)
- Asking your bank. Banks typically offer a broad spectrum of financing options: credit lines, installment loans, SBA loans, inventory funding, and home equity (refinancing), however, not all banks offer all programs, and terms and conditions vary by bank.
- The qualification criteria vary by type of program but are typically conservative and restrictive, especially for startups and young businesses.
- They have very strict guidelines and there is little-to-no-flexibility or outside-the-box thinking.
- It's sometimes hard-to-get money when you need it but easy and at decent rates when you don't.
- All ot the loans require collateral (and x percent own capital).
- Most business loans need a business history of two or more years.
- If you have good credit, you can take a personal loan.
- Equity financing through private investor (angel) or venture capital. They can provide significant capital but seek a high return.
- Investors require some ownership and some control over the business management.
- It requires a strong business plan, a proven business model (not speculative) and the business must be big (i.e. capital requirement in excess of $1,000,000) with significant annual sales potential and high profitability to attract any venture capitalist.
- Most venture capitalists specialize in certain business fields only (often technology driven.)
- It's typically a lengthy process until funding occurs.
- It's very difficult to find the right investor, and a "wrong partner" in your busniness can be very damaging.
- Home equity/refinancing second mortgage through a mortgage company. If you own a home and have already built sufficient equity, you can take this equity out by borrowing money against your home.
- There are different ways to get money: take equity as a lump sum, refinance at a lower interest rate, or use it as a line of credit where you only pay for what you take out progressively.
- It's the oldest trick in the book and a relatively easy and fairly quick process with limited paper work.
- You can still benefit from reasonably low interest rates. however, when the loan kicks in, you have monthly payments!
- You may want to think twice before you put your home at risk. If you use the money for your business and your business goes south, you might lose your home if you default on payments.
- Micro-loan through non-profit lending institutions. This was developed by SBA and is locally available through specific micro-loan providers.
- It's a good source for startup busninesses or repeat borrowers with lower capital requirements (typically up to $75,000).
- It requires 100 percent collateral for borrowed funds, but they normally accept more "creative" types of collateral than banks.
- The interest rates tend to be slightly higher than standard business loans, but the acquisition of a loan is easier than traditional banks thant are often reluctant to service small businesses or startups.
- Debt/equity financing through investment banks. This financing can be either a loan (debt) with monthly repayments, regardless of how your business is doing, or an equity participation in your company where the return for the investor is expected or a combination of both (part debt, part equity.)
- It's rather a complex structure with a lengthy process and usually is not easily available to small businesses.
- Similar to venture capital, it requires a strong business plan, a proven mamagement team, unique skills and attributes, and established business model (not speculative) and a strong market share potential.
- Equity financing can be attractive to startups, although as the business owner will often give up some control over the company.
- Other ways of getting money. Sell your assets if you own things, you can sell them! It's that simple. Jewelry, rugs, a pool table, fancy car, time shares, second properties, art, notes, etc.
- Borrow against insurance policies. Most insurance companies will lend you a high percentage of the cash value. Policies stay intact as long as you keep paying the premiums. They have fairly reasonable interest rates, since the rates are tied to key money market rate. The risk: if you died with a policy loan outstanding, the benefits might be diminished.
- There are about another 60 ways to improve your cash flow, one of them is
- FACTORING - This is where you sell your accounts receivable invoices (or in the case of Medical/Healthcare accounts receivable claims) , at a small discount to a factoring company in return for immediate cash. This way you don't have to wait for your customers to pay their invoices to you but rather get paid right away when you bill them. Also, this is not incurring any extra debt because it is " off balance sheet" funding and you also don't have to worry about making payments every month because it is not a loan, your accounts receivable invoices is the collateral. Even if you have been turned down by traditional lending institutions, and have poor credit, or a startup business. Using this method, there is no pre-determined maximum limit. This working capital arrangement is not limited in amount as many bank products are nor is it subject to banking regulations, and it gives you PREDICTABLE INCOME! Instead of going by your credit, it is based on your customer's credit worthiness. That is why it is best to factor your best paying customers' invoices. When factoring, think of it as a "PROMPT PAYMENT DISCOUT ". A Dunn/Bradsheet study had said that the average business owner would easily give their customers a 10% discount if they were to pay for services rendered in 2 days with cash. So when you hear the factor's fee for doing services with them, just think of you giving your customer a prompt payment discount, but in this case, it will be given to the underwriter/factoring company for the prompt payment of revenue/cash. This way you won't look at this fee as a lot of people do and think that it is too expensive, when it really isn't that at all. Not only that, but once you start to factor your invoices, when you pay your suppliers early and take advantage of those discounts for early payment, that even makes the cost of factoring almost to zero! Some reasons to factor.. PAYROLL, ADVERTISING, INVENTORY, EXPANSION, RENT/OVERHEAD, TAXES, BUSINESS DEVELOPMENT, AND EMERGENCY EXPENSES. The faster the business expands, the more cash it will need for working capital to keep operations progressing. Business owners can respond IMMEDIATELY to cover "unexpected expenses or opportunities" as they come to pass. Why Factoring is profitable: Perhaps the most IMPORTANT consideration the owner must be familiar with is the impact each financing vehicle has on the BOTTOM LINE. 1) DEBT- Is a LIABILITY and REDUCES THE NET WORTH of a company until the debt is repaid. 2) The INTEREST EXPENSE also REDUCES THE NET WORTH of the company, for those reasons and from a business point of view , debt for working capital purposes should be avoided if at all possible. BENEFITS: On the other hand, factoring impacts the balance sheet in a positive manner for 2 reasons. 1) Factoring becomes an ASSET, INCREASING THE NET WORTH of the company by REDUCING THE WORKING CAPITAL REQUIREMENT capital to almost nothing. 2) Because of the associated discount fee reducing the pretax profit, SIGNIFICANT TAX RELIEF INCREASES THE NET WORTH OF A COMPANY. FACTORING IS THE ONLY FINANCING VEHICLE THAT INCREASES THE NET WORTH & THE EQUITY POSITION OF A BUSINESS. If the business owner needs an influx of capital for any reason, a choice has to be made--DEBT OR FACTORING. It increases the equity position of a business wheras DEBT DOES NOT. Which is better? An improved BOTTOM LINE is ALWAYS MORE SATISFACTORY! Quite often, the business has no real choice because many banks offer personal or traditional loan products only to their customers with perfect credit, or those businesses that already have the working capital that they need at their disposal. It is always best to know the impact on the bottom line BEFORE applying for financing. So now you have a POWERFUL BUSINESS TOOL AT YOUR DISPOSAL, as long as you are a profitable company, it can work in 3 different ways..1) TO ENHANCE YOUR REVENUE WITH PREDICTABLE INCOME, 2) DECREASE CERTAIN EXPENSES, and 3) RUN YOUR BUSINESS MORE EFFICIENTLY WITH NO ADDED DEBT! THE 3 THINGS EVERY BUSINESS OWNER NEEDS!
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