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Managing a business is never easy; every day, you need to deal with new sets of challenges that require immediate solutions. Among these, maintaining cash flow is the most challenging, particularly if the company relies upon selling physical products. Of course, lack of funds is the last thing that a company of that type wants, as without inventory, there is nothing to sell. An enduring question is how to find ways to reliably fund a business, regardless of its stage of growth or time in operation. As a principal of Star Funding, Inc., I’ve found, time and again, that the following ostensibly simple methods can be life savers — typically better and faster than traditional loans, and often with greater access to capital.
1. Friends and family
This is one of the oldest strategies in the book, of course, but worth its weight in gold if handled right. Borrowing from friends and family makes sense because these contacts are easily approachable and are in a position to offer flexible loan terms. If needed, you can also give them an incentive in the form of good ROI, free product and/or equity in the company.
Before asking, make sure to calculate the exact amount needed. It’s a good idea to create a sales projection that deducts expenses; the resulting sum should give you a reasonable estimate of the loan required, and such insight and transparency will be appreciated by those you will be approaching.
The next step is to create a unique pitch. Start casually, as you would under normal circumstances, describing the business, its goals and your achievements, then detail how the funds will assist you in achieving those goals. Take the opportunity to also discuss any risks associated with the investment, and don’t lie, because it will haunt you and your relationship if things get rough. In the event that interest starts to slack after such risks are detailed, calmly offer an incentive — perhaps a higher return on investment or potential equity.
2. Credit cards
According to the U.S. Small Business Administration, 46% of new and/or small businesses use credit cards for funding. They are certainly a quick way out of immediate financial trouble, and, if utilized prudently, can actually be a savvy move.
First and foremost, read the terms and conditions carefully. While most of us just skim through these, it is vitally important to realize that they ultimately decide the success and failure of this tactic. Make certain that everything in the terms is clear, and do not be the least bit hesitant to call the company and ask questions.
If your vendor doesn’t accept credit cards and you’re short on cash, consider vendor payment solutions like the one offered by American Express. A plus is that there’s no need to apply for a card to use the feature; instead, you buy products as usual and let American Express pay for the inventory. Accordingly, you will receive a single consolidated statement at the end of the billing cycle.
Related: The Basics of Using Credit Cards to Fund Your New Business
3. Purchase order finance
A purchase order is an order issued by the buyer to the seller. If accepted by the latter, it serves as an agreement to produce and deliver goods according to various terms. Before starting production, the seller requires cash up front or some guarantee of payment, however, not every business has funds at hand. This is where purchase order financing comes in handy — in which a third party is engaged to loan a supplier enough to fund a purchase order — a practical option for businesses that need immediate cash flow. It can work additionally because the payment cycle to receive payment from customers is typically lengthy.
Factoring is another option — a process similar to purchase order financing, and used mostly used by wholesalers who sell receivables to a finance company at a discount. In this method, the finance company takes on the responsibility of receiving the payment from the customer. Despite the differences in how each method works, they allow businesses to access large amounts of working capital in short periods of time.
Related: This Is How Purchase-Order Financing Can Unlock Your Small Business’s Potential
4. Vendor term negotiation
Arguably the easiest way to generate immediate cash flow is to ask your vendor(s) for lenient terms, and is a tactic particularly recommended for businesses that have a long-established relationship with their vendors. But even if you’re a new business, it never hurts to ask about alternate and deferred payment methods, as many vendors don’t advertise these options unless asked. Some also allow vendor financing, in which businesses purchase the product or service using the vendor’s capital. Also known as trade credit, it’s another practical method to buy time before you can generate enough cash to pay.
From a vendor’s perspective, helping customers with their cash flow makes sense. Not only does it help retain long-term business with them, it also boosts the sale of inventory, which is much better than selling nothing at all — a win-win for both vendor and buyer.
Related: How to Find and Work With Suppliers