Fiducial | We help your business grow and be profitable.

by Renee Fellows

June 3, 2008— As the economy continues to tighten, small businesses are being faced with even more belt-tightening. The usual suspects of home equity loans and bank lines of credit are all but drying up. Where can a small business person turn when your banker can’t extend your line of credit?

Look for working capital from alternative sources, but be cautious. Bankruptcies hit an all time hit in the 12-months ending September 30, 2007 leaving more than 1.4 million consumers and businesses filing for credit protection through either chapter 11 reorganization or chapter 13 bankruptcy filings, according to the American Bankruptcy Institute. Even with more conventional financing options available, small businesses are faced with a challenging economy and difficult to meet borrowing terms.

The root cause? Many experts agree that the type of small business has shifted from shop owners and manufacturers toward high tech and service sectors that don’t have physical assets to attach to the loans as collateral. The result is a marketplace that can’t borrow to grow its businesses. That doesn’t mean that all is hopeless for American entrepreneurs. Below are some suggestions for revenue options to help boost your cash flow and take your business to the next level.

Micro-funding

Microloan organizations are often a win-win in the small business department. Microloans are Small Business Administration (SBA) loans funded by either government backed loans or private contributors who wish to give small business a hand in order to better the community. Microlending usually requires that business owners participate in training sessions on small business management, thereby helping to insure small business success (and repayment of their loan). When they say micro business loan, they really mean it. The downside is that microloans on average are very small. The maximum size of an SBA loan is $35,000 and the average loan size is about $13,000.

Look for an Angel

Equity financing through Angel Investors, wealthy individuals or networks that are willing to fund small business projects can provide substantial cash flow into your business, but at a price. If you’re willing to give up part ownership in your business and gain a vocal partner in how the company is run, then taking Angel cash may be a great option. Angels are the largest source of seed and start-up capital for businesses, investing $25.6 billion in businesses in 2006 according to the Center for Venture research at the University of New Hampshire. The bonus is that Angels join forces with your business for the long haul often adding much needed guidance and stability and they expect a lower return on their investment than traditional venture capital firms.

Use Your Assets

Equity in your home can be use for a lot more than a new kitchen. For most entrepreneurs, their home is the single largest investment they have. It’s also the easiest tool available to access capital for a new business venture. Interest rates on equity loans are quite low.

Talk to your Suppliers and Customers

A good option for a business that has a poor credit rating, and a realistic option overlooked by many small businesses is to use supplier/customer financing. Basically, your company will bill for part of the services or products that it sells upfront. In service industries like lawyers and advertising firms it is called a retainer. In product based companies it is called an advance deposit. While it may seem difficult to ask for these payments in advance, most customers will understand your level of cash outlay and won’t object to a partial payment upfront.

Go Wall Street

If your business is incorporated or looking to go public, selling stock can take several different forms and rapidly provide cash influx into the company. Initial public offerings (IPOs) are stock sales offered for the first time by previously privately held companies. An IPO is a possibility for a pre-existing business but not likely a viable solution for a new company. Remember that Sarbanes-Oxley rules will apply if you decide to go public and factor in those costs (which can be considerable) with the potential cash you can raise to determine if going public is truly the right choice for you.

Call Uncle Sam

Government Funded non profits lend money to businesses that create or retain full-time jobs in their regions. Local governments often offer incentives such as tax breaks or a discounted loan rate if you locate your business in their jurisdiction, often in an area zoned for economic redevelopment. The Small Business Administration also offers programs of loans and grants to help small businesses secure funding. Their most popular loan type is the 7(a) loan program:

The 7(a) loan is available for small businesses that may not otherwise qualify for financing through traditional banks and lenders. To qualify, you need to have solid cash flow, all vested parties must have at least 20% ownership in the business and you may need to secure personal property to secure the loan. The loan can be used for working capital, machinery and equipment, furniture and fixtures, land and building leasehold improvements and in some cases debt refinancing.

Factoring for Funds

If your collections are running seriously behind and cash is becoming the major concern of the business, factoring is an option. Factoring involves securing a loan, usually at extraordinarily high interest rates, against your accounts receivable. Typically, you’ll receive 80% of the invoice value upfront and the remaining value for the invoice once the client pays. There are many factoring companies out there willing to offer you this option, but beware; they are going to charge a substantial interest rate so be sure that you have exhausted all other options before going this route.

You may be a candidate for factoring if:

• You are in business for fewer than three years

• You have good growth prospects but poor cash flow

• Have several active accounts that are slow paying

Another type of factoring is Merchant Cash Services. It works similarly to factoring but instead of banking on your accounts receivables, cash advance companies give you a cash advance and then collect the repayment directly from you by taking a percentage of your Visa and MasterCard credit card sales. This works in a short term cash flow issue but will seriously prolong an issue of any length because are basically purchasing your future credit card sales at a discount leaving future sales short. The silver lining is that unlike traditional bank loans with a fixed monthly payment, cash advances are based on a percentage of your sales. If you have a bad month, the payment will reflect that as a percentage of the reduced sales figure.

Asset-based Credit Lines are revolving credit lines that are secured with accounts receivable and inventory. Similar to factoring above, the terms are higher than most other styles of loans but for small businesses in a crunch they are a viable option. Lenders are more eager to provide this type of loan because it enables the bank to seize the collateral if the borrower defaults.

Pull out the Plastic

Credit cards can become even more dangerous than factoring if not carefully managed and paid off. Beware of credit card deals that seem too good to be true, those that offer very low or no interest. There are several less than reputable credit card firms that entice business owners to transfer balances and then skyrocket interest payments if balances exceed credit limits or if payments are late. Even more traditional cards charge points over the prime rate and rollover monthly balances making timely affordable payments harder and harder to make. A good rule of thumb with business credit card purchases is to ask yourself ‘Is this purchase going to result in more income for the business in the next 90 days?’ If the answer is no, then perhaps you should rethink the charge or at least delay it to a time when cash flow looks a little better. Remember that you’re going to be paying fees against this charge for at least 90 days so you’ll want to make not only what you’ve spent on the item but also the financing costs as well. Read the fine print several times and fully understand the details of the card you’re considering before you send in that application and start running up your credit limit.

‘Necessity is the Mother of Invention’, so try investigating new lines of revenue. Rather than folding up your lemonade stand and going home, why not make lemonade and repackage it? Sometimes the best business opportunities come out of a time when times were the most difficult. Look at those lines that aren’t producing for your business, eliminate them and expand successful lines or develop a new one. Perhaps Italian ices are just the thing that will set your beach-front lemonade stand apart from all the competitors. When in doubt, think outside the stand.

Small business wasn’t meant to run inside a vacuum. It takes a team of strategically invested resources to build a small business and let it soar. To learn more about creative ways to finance and operate your small business, talk with a Fiducial Advisor by calling 866-Fiducial or visit the web at www.Fiducial.com.

Whatever your small business needs, your Fiducial tax and financial professional can analyze your situation and recommend an appropriate action plan. To locate a Fiducial office nearest you on fiducial.com, see the Zip Code Locator located in the upper right hand corner of the page. Do you have a particular topic that we should be writing about that can help your business? Please send your suggestions to: Howard.Margolis@fiducial.com.

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