"Take a walk around the block and ask, 'What could go wrong?'"
It ain't easy getting money these days, thanks to the credit crunch spawned by the subprime lending mess. In an effort to shore up cash themselves, banks and other lending institutions have tightened their credit standards and imposed more stringent loan terms, making it tougher than ever to get approved for a loan or line of credit. But there are other ways you can get working capital to fund a temporary lull in cash flow. Business owners should use caution, however, as easier money almost always comes with higher risk. But when done right, the following strategies could help you stay afloat until the next check comes in.
Sell your receivables
You can get an immediate lump sum by selling a fixed amount of your business’s future credit and debit card receivables at a discount to an alternative funding company such as AdvanceMe. The quickly earned money isn’t cheap: In exchange for $75,000 in cash, for example, you might need to agree to sell $100,000 in future receivables. But you won’t need collateral, and the total price tag is both transparent and fixed, says Glenn Goldman, CEO of AdvanceMe's parent company, Capital Access Network. Also, because your payment, or "retrieval," is taken as a percentage of daily receivables, it will be lower when sales are down, giving you a bit of breathing room. AdvanceMe looks at several factors to determine the total amount it will front, including your company’s maturity, sales and industry health, but it puts less focus on traditional consumer measures, such as FICO scores.
Leverage your investments
Another quick and easy way to get working capital is to margin your blue chips. Say you have $100,000 invested in stocks with a brokerage house; assuming you've applied for margin privileges—a process that takes just a few days—you can typically get up to half that amount almost immediately and at a fairly cheap interest rate. But beware: Margin loans carry a significant risk. If the value of the stocks you hold should decline during the time of your loan, you may have to put additional cash into your account to make up the difference. If you can't, your broker might have to liquidate some of the stock to make up for the decline. The key is to use this tactic for temporary cash needs when the payback is still in sight, and to pragmatically analyze the risk upfront. "You don’t want to price your loan to perfection," says Arthur Nintzel, a financial advisor with Merrill Lynch. "Take a walk around the block and ask, 'What could go wrong?’"
Sell your purchase orders
If you're trying to grow your business on a tight budget, consider obtaining purchase order financing to secure your next big order. With this kind of asset-based lending, the lender receives a percentage of the cost of the goods in exchange for fronting the funds for inventory. Purchase order financing "attempts to address the issue of a company growing so rapidly that cash flow can't sustain growth," says Jason Goldberg, vice president of marketing for Westgate Financial. As long as you have a signed purchase order from a creditworthy account in hand, and your gross margin is at least 35 percent, you can often get financing for nearly the entire process. Though the 3 percent to 8 percent fee is a significant cut, it may make strategic sense in a situation where the business owner wouldn't otherwise be able to bid on a project or accept an order from a large, new client. In times when credit is scarce, says Goldberg, it's an opportunity "to leverage the ability to sell product."
—By C.J. Prince, a writer specializing in business and finance. Reach her at firstname.lastname@example.org.
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