An Edward Lowe Quick-Read Solution
Even if you don't want a traditional bank loan, or you're not seeking venture capital funds, there are several ways to get the cash to expand your business. This Quick-Read details several alternative financing plans, such as bartering, strategic partnerships and more.
Finding enough capital to expand your business is a move that calls for careful planning. Venture capital is not appropriate for every kind of business. Increasingly, entrepreneurs are using alternatives to the traditional bank loan, or are supplementing a loan with less conventional sources. These sources often cost more than a loan (because of interest payments) but yield the cash more quickly. Another option is to reduce your cash outlay by using alternative means of payment, and free some of your own capital for expansion.
These are not fall-back positions for the company with credit problems. If anything, many alternative financing techniques involve a closer partnership than you'd have with a traditional lender, so your good credit and reputation are necessary preconditions.
In this Quick-Read you will find:
SOLUTION [top]
Equity arrangements
If your aim is to free up existing cash, look for ways to add value instead of just cutting corners. For example, if your articles of incorporation permit it, you may want to sell shares of dividend-paying preferred stock or nonvoting stock to your family and friends. Many service providers, especially professionals, such as lawyers, accountants and consultants, and even some vendors, are willing to take stock as partial payment for services rendered. If you want to consider offering employee stock options in lieu of salary dollars, be sure to see the Quick-Read "Profit Sharing Options: Pros and Cons."
There is little stigma in letting a potential equity holder know you are short of cash, but you should also be willing to disclose your financial picture. You'll need to provide investors with details, such as your company's balance sheet and income statement, and the means for determining the value of their stock at any time. "I'd be suspicious if someone offered me equity without explaining why," says Jim Oliver, a CPA and business consultant in San Antonio, Texas, who has taken equity positions in two client companies. You'll also need to establish and communicate the stockholder rules for selling the stock — especially to whom it can be sold. (See the Quick-Read "Raising Your First Outside Capital.")
Strategic alliances
Another possibility is a joint operation with another company to share the cost of new equipment, office space, staff or special services, such as product development, sales and marketing. This is sometimes called a strategic nonequity partner.
Either way, a new equity holder or partner will inevitably want a say in the way you run your company. The arrangement will work best if your partner can offer expertise that will help your business grow, and you can do the same in return.
Leasing
Leasing equipment or property instead of purchasing it will give you a grip on your monthly costs. Leasing also allows you to take tax deductions for your payments up front, instead of taking depreciation later, so it can produce almost instant expansion capital from your income. Before you decide whether to lease or buy a high-cost capital item, be sure to do a spreadsheet comparison using methods laid out in the Quick-Read "How to Create a Budget."
Remember that the leasing industry is not well monitored. Some leasing companies have come under fire for failing to live up to the terms of agreements. Check with the Better Business Bureau to see if others have lodged complaints against the company, or go through the leasing division of a major bank.
Institutional investment
If cash up front is your goal, you might be able to set up a relationship with an institutional investor. This could be just an ordinary bank loan or a less traditional SBIC purchase of equity. Ask your banker about it. Banks or other cash-rich firms are sometimes willing to invest in small businesses that will look to them in the future for additional investment. Unlike venture capitalists, they are usually willing to accept a slow, steady return on their investment but will probably demand collateral.
Factoring
There are finance companies that will factor loans, i.e., pay you up front to take over your accounts receivable for a defined calendar period. Factoring should be a measure of last resort because, with the interest, you'll receive only about 60% to 90% of the amount you've billed, and your customers may blame you if they don't like the factor's collection techniques. First calculate whether a cash advance on a low-interest credit card would cost you less.
Prepayment
Get more cash to work with by offering your customers a discount if they pay in advance. Other ideas for improving your cash flow can be found in "How to Avoid a Cash Crunch."
Bartering
You might also cut some of your cash outflow by bartering goods and services. A barter broker will find what you need and arrange for you to pay it off in-kind for a commission of about 5%. Some will even give you cash for part of the value of what you supply. However, the IRS considers the value of barter as real as a cash payment, so make sure the tax you'll pay on this noncash income does not wipe out your initial savings. For more tips on finding a bartering network, see the Quick-Read "Select a Bartering Service."
Franchising
If you need capital to expand operations, consider letting a franchisee pay for the new facilities. See the Quick-Read "Franchising Your Business" for detailed suggestions.
REAL-LIFE EXAMPLE [top]
While leasing equipment is often a useful way to increase cash flow, Marilyn Schell, vice president of Cooney Industrial in Raynham, Mass., has found that it has additional benefits for a company that services its own equipment. Cooney, a 43-year-old company with annual revenues of about $14 million, sells and leases industrial equipment, such as forklifts, to warehouses. Cooney provides service and maintenance for its products. But until early 2000, the company owned its fleet of service vans and called on its staff mechanics if the vans needed repair.
"Some of our vans were getting old and expensive to repair, and it seemed like the mechanics were taking longer to work on them," says Schell. "About 85% of our own business is leased equipment, and we thought it might be a good idea because cash flow is important." With Citicorp's dealer finance division arranging the contract, the company began leasing 25 vans from Enterprise Auto Rentals, which provides maintenance as part of the package.
"We found it also gave our mechanics more time for billable jobs." She calculates that on average, 20 staff mechanics each added two hours of billed work a month, earning the company an extra $144 per mechanic, or about $3,000 each month.
"After six months, we hired five new mechanics and expanded our product line," she says. "And we hope to move into a larger space soon, now that we've freed up some money by leasing."
DO IT [top]
RESOURCES [top]
Books
Small Business Financing: How and Where to Get It: A CCH Business Owner's Toolkit Publication edited by Alice H. Magos (CCH, 1998).
Negotiating Business Equipment Leases, 2nd edition, by Richard M. Contino (AMACOM, 1998).
Where to Go When the Bank Says No: Alternatives For Financing Your Business by David R. Evanson (Bloomberg Press, 1998).
Articles
"20 Tips for Finding Money Now" by Jill Andresky Fraser, Inc., March 1999.
"Private Placement Offerings" by Andrew J. Sherman, EntreWorld.org.
"Negotiation: The Game of Give and Take: Your Guide for Landing a Fair Deal With Equity Investors" by Lisa Rauck, Entrepreneurial Edge, Edward Lowe Foundation, Volume 3 1998.
Internet
Small Business Administration
Click on Local Resources for SBA and SBDC locations. Local consultants often brainstorm with entrepreneurs about finance options.
International Reciprocal Trade Association
Site has links to member barter brokers.
Writer: Jan Alexander
This Quick-Read Solution was originally published in 2001.
Resources
U.S. Jobs 2006-2008
U.S. Jobs 1993-2008
Littleton Economic Gardening
Kauffman Foundation Research
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| Mark Lange: Economic Gardening Update for Collier County, FL (Naples) |  |
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