Cash Is Tight - What To Do?

February 18, 2009 by: Enogg

cashsqueezedpigYour business is in a cash crunch right now. Let’s not go to death and dying. Let’s not go to doomsday talk. Let’s keep a level head and remember why you got into business in the first place. Let’s remember the good times. Let’s remember the fun. And, let’s remember the basics and by all means, let’s get back to business!

With our level heads screwed back on, let’s turn off the TV. Turn off CNN. Turn off CNBC and Bloomberg. Sorry guys, turn them off. Occasionally you can turn on the radio but make sure it is to your favorite music station. If the station doesn’t pass the toe-tapping-test, change the station. Those are the rules. And, if you need to sing, sing out loud. Go on. Do it in your car. Sing while you walk. Just don’t sing while you talk. That’s a bit too crazy.

Shake the cobwebs out of your head. Let’s get back to basics.

Your business is strapped for cash you say. What can you do?

1.    Lower all expenses. Think about your expenses differently. Start thinking in terms of percentages. For instance, reduce costs by 10%. It’s easier to deal with smaller, more manageable decreases rather than hitting a daunting large number. Review your budgets. Specifically, look at your fixed costs and your variable costs. In each department, find ways to reduce each cost center by 10%.

2.    Leverage your vendors and customers more effectively. Shorten your cash flow cycle by a predetermined percentage. Pull in your Accounts Receivable and push out your Accounts Payable. This will free up some cash and make your business more efficient.  It never hurts to ask for longer A/P terms, especially if it guarantees payment.

Additionally, this provides some breathing room and demonstrates to the bank that you are making adjustments during the difficult times. This will strengthen your creditworthiness.

3.    Consider leasing your capital equipment. A non-bank owned leasing (see Equipment Finance Providers) company might not be as strict as your banker. At least consider this option but make sure to read the lease contract closely and understand your end of lease obligations.

In an operating lease, you pay 89% (or less) of the equipment price determined by an internal rate of return, spread over a certain term (usually 2-3 years). For accounting purposes, the lease payment can be written off as a business expense. An operating lease has to meet four FASB 13 criteria. Speak with your accountant on this to ensure you have an operating lease.

A capital lease is typically a straight financing. A sale-leaseback of existing equipment may help free up additional cash tied up in a previous purchase. For accounting purposes, a capital lease allows you to take the interest write off and depreciation of the asset.

4.    Find senior bank financing if necessary. Get creative. You may need to provide personal guarantees, cross collateralization or other common credit enhancers.

Purchasing Receivable Insurance can enhance a working capital line of credit tied to Accounts Receivable. This will increase the banks comfort level and perhaps a larger borrowing margin. Some banks may consider 100% of insured receivables as a collateral base.

5.    Government Programs. If you don’t quite qualify for bank financing, but fit into the criteria, consider some of the governments programs or other non-profit alternatives. Check into an SBA loan, which is designed for small companies but can be expensive and clunky. Even consider finding grant money, especially if a minority owned business or you are enhancing the community or you are bringing to market a useful product or service.

A USDA loan, used with larger companies, can be less expensive and more flexible than an SBA loan. However, the company must be located in a “rural” or less populated area.

Make sure to find a good CPA to help find government subsidies and tax credits. Certainly there are all types of tax incentives for environment, minority owned, historical and emerging markets.

6.    Refinance. If you own real estate consider a sale-leaseback. Or, if still paying a mortgage, ask the bank to refinance your real estate with a five-year, interest only note and a balloon payment at the end. This will lower your cash outlay and at the end of five years, when things have improved, you can refinance the balloon payment

7.    Consider alternative financing like, friends, family and dare I say it, other fools. Ouch. But don’t be too ready to give up your equity. Before giving up today’s equity, which can be worth far more in the future, make sure to measure the cost of giving away today’s equity to the cost of debt financing. In most cases, it will be cheaper to get a loan from friends, family and investors than to give away tomorrow’s equity.

Owners may have to inject more cash into the business. The business may have to fall back on the strength of the business partners’ personal lines of credit and cash reserves.

But there are a host of issues when obtaining funds from your friends, family and investors. Certainly your friends and family want to help if they can. Investors typically want to see an appreciable upside and return on investment. There are always strings attached so tread lightly here. Make sure you know the cost of financing, both intrinsically and realistically.

Remember why you started your business. You will be OK. You will get through the tough times. You are not alone.

From the Desk of Enogg.

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