A growing business often creates a need for cash flow to keep up with expansion and move to the next level. The same is true for starting up a new business or financing the purchase of an existing business.
Here are some things to consider as the following sequence of events is common to many new and expanding businesses.
Short-Term Debt Squeeze
You start your business with a limited amount of capital and an abundance of good ideas and ambition. The sales activity has been adequate to produce a net profit. Inventory is larger than you intended. Accounts payable are past due to the point where some creditors want to ship C.O.D. only. To keep your creditors happy, you have been overdrawing your checking account to the dissatisfaction of your banker. You have a short-term note past due at the bank.
These are all symptoms of having too much short-term debt. This common type of cash squeeze can be avoided if you confine your company's growth to that which can be handled from retained earnings. If the cash retained in the business from last year's profits is $25,000 and inventory grows by twice that amount, somebody has to fund the expansion that cannot be funded by the retained earnings.
Long-Term Funding
If you can't provide additional capital and you don't want to bring in a partner, you need to look for long-term funding from one of the following sources:
Owner Provided Funds - Studies indicate that as much as 60% of all small business funding comes directly from the owner or their immediate family. Outside of your immediate family or friends, you may find funding from other private parties or from financial institutions.
Private Lenders - Outside private lenders can be problematic as they generally demand a higher rate of interest and may also want to own a percentage of the business.
Financial Institutions - Small businesses should remember that banks are not keen on taking risks. Although you may be very optimistic about your company's future and have a glowing cash flow projection, the banker is not likely to rely on it for loan purposes. You may have adequate collateral in terms of inventory or property, but if the banker feels that you will not have adequate after-tax net profits to service a loan, they are not likely to lend you money. Bankers do not want to liquidate your assets in satisfaction of their loan.
Small Business Administration - If financing is not otherwise available on reasonable terms, the Small Business Administration may be available to assist with its various loan programs.
Money Brokers - There are money brokers who advertise in various newspapers, business publications, and online. Many of these brokers want to be paid in advance to locate possible lenders for you. Be very cautious of any broker and ask for references and credentials. Any proposal by such brokers should be reviewed by both your attorney and your accountant before you sign anything.
If you would like more information on the business funding options available for your situation, feel free to contact our office.