Credit Cont.

The best financing, of course, is self financing from savings.  That said, there is not always enough savings to begin and develop a new business.  There are grants that are offered for many types of businesses that are developing new technologies, have some unique goal that will benefit a good cause, or are going to be minority-owned-and-operated companies.  One option that has been very successful is the SBA loan guaranty program, which I have used with success.  When exploring either of these options, make sure you have your business plan completed, as well as current financial statements, if you want to receive serious consideration.  A good resource to help you put your documents together is S.C.O.R.E, which is a network of over 10,500 retired business executives who volunteer their time to help new business owners.  SBA loans are usually easier to get if you have a contract, or the promise of a contract, on which you can base the loan.

We will keep an eye on the banking sector, so that we can provide you with the most current information.  The government is putting more pressure on banks to make local loans to small businesses.  Currently, it is still very tough to get these loans.  The best plan is to grow slow and steady and don’t take on more debt than you can pay off easily. I have found that employees can be a great source of generosity when building a small business.  Many people are just as excited about growing a new business as you are.  Try creating some ownership for key people in exchange for a reduced salary for a specified period.  This allows you to stretch your cash while building a loyal team.

Credit cards can be a source of working capital, if they are managed properly.  If you can’t pay the balance off at the end of the month you shouldn’t use them, since the interest will create additional expense.  Use cards that give you air miles, which will help when you have to travel for business purposes.  One of my companies was able to get 20 or 30 free trips per year by using our points.  Also, your vendors are a huge source of capital. Always try to set up 30-day payment terms to stretch your cash. This will conserve your cash for emergencies or opportunities that come up unexpectedly.

One other source of capital, which is usually very expensive but effective when you need it, is factoring.  This is a form of financing in which you sell off your receivables to a factoring company.  They will buy the invoices from you upon shipment of the goods.  They will then forward a major portion of the payment usually 80-90 percent to your account immediately.  When they get paid from your customer they will forward the balance less their fee, which is based on the time it takes them to get paid.  This works well if you have large customers who are credit-worthy and you have large payroll expenses to meet on a weekly basis.  It is not a great long-term solution, since you eventually want to receive full payment from your customers without incurring an additional fee.  Think of it as an option to obtain cash that is needed quickly for short-term operating expenses.

Remember that credit used properly can help you establish and grow your company, but when used improperly, it can destroy that very same business!