by Liberty CapitalApril 25, 2012
Many business owners must decided whether to use cash at hand or borrow short-term working capital to cover operating expenses including expansion capital. What should should small business owners do?
Most small business owners would love not to have to borrow and live off the “fat of the business”, so to speak. But, unfortunately, the reality of the situation is that small business owners are surviving with a limited cash flow with nothing to spare, just barely hanging on hoping things will turn around soon.
There are those that are beginning to see a turn for the better, but for the most part owners have to downsize to make ends meet. They have no other options if they wish to make it through these troubled economic times.
From a lender’s perspective having cash in the bank is key to being able to borrow – it takes money to get money . Having cash in the bank gives the impression that all is well. Borrowing under these conditions becomes a business venture, not an act of desperation. When there is little money in the coffers, the bank is not likely to approve a loan.
Many small businesses still haven’t learned anything from the changing bank policies concerning personal and business accounts and credit card limits. In some cases banks have turned business maxed out lines of credit into term notes and extended the terms and payments to make these affordable for their clients, hoping to get something back on the dollar.
Many banks are lending again but only to those with stellar credit. Most small businesses still don’t qualify for loans through traditional banking institutions. Banks aren’t the only institutions that are lending now, though. Insurance companies are also an alternative source of business funding but they too require the good credit that traditional banks do.
The lack of good credit history is the main reason for the rise of alternative funding . We are here to fill that financial gap left by the recessionary economy.
Alternative loan processing is quite different from traditional processing. There are more alternative products available, including personal credit cards and personal equity to name a few.
New lenders such as private investors, hedge funds are seizing the opportunity to get into small business lending. Because they are new to the market, they are willing to take greater risks when lending.
The most popular form of alternative business funding is office equipment leasing. Leasing office equipment is the best way to save money. Don’t pay out-of-pocket for depreciating assets, make monthly financing payments. Whether you have money in the bank or not, you shouldn’t expend your ready money for some fixed asset, unless you have no other options.
Factoring is another form of alternative financing . Factoring uses future income from invoices. You can leverage your future cash flow for a discounted rate today.
The newest product is the merchant cash advance. Merchant cash advance is similar to factoring but instead of using invoicing, future credit card sales are considered for a discounted rate as well. Both are advances on future revenue. To qualify for these two factoring products, you must have future income to be able to repay.
If you wanted to buy inventory you would have previously depended on a line of credit. Since they are a rare commodity, you might wonder if you should just use cash on hand. Using your savings, though, could leave you in a precarious position if conditions changed and you needed emergency funds. If you only have $50k cash you could only buy $50k worth of inventory. Let’s say this inventory brings $120k in revenue. If you borrow another $50k and payback is $60k, you now have a $50k initial investment. Your return is $130k. It would make more sense to borrow. The rate of return is, of course, a factor, but having cash as your cushion will allow you to get through financially challenging times. The number one reason businesses go out of business is lack of operating capital.
The lesson here is to utilize your business cash wisely. The economy can change suddenly and only hard cash can help you immediately. If you buy equipment using ready money, thinking that as an asset you can just sell, don’t forget the depreciation, as the equipment won’t be worth its buying price. Depreciation is like interest rates. Most small business owners are worried about borrowing at a high rate but are not concerned with depreciation costs which reduce your asset’s value. If you can borrow instead of paying cash, think about what we have discussed previously.
If you need a guideline of what investments you should borrow on and what you should pay cash for, I have listed a simple guideline below.
Fixed assets such as office machinery and equipment should be leased for at least 3 yrs. For big ticket items that aren’t leasable such as moving expenses, buying another business or buying out partners, there are 18-month business loans available. Borrowing for Inventory is always a “yes”. Don’t use your money to make money. Use other people’s money, because that’s good business. You will have a larger inventory and a higher rate of return for your money.
Small business owners should only keep cash as a cushion. Don’t let your funds become depleted to the point where you can’t afford to borrow. Borrow while you still can have the ability to get approved!
News Source: http://www.free-press-release.com/news-should-i-hold-onto-my-cash-and-borrow-short-term-working-capital-1335391752.html
Official Website: http://www.libertycapitalgroup.com/
|Company:||Liberty Capital Group, Inc|
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