5 Ways to Maximize Cash Flow: Part 5: Using Financing to Get Ready, Get Set, and Grow!

The idea that keeping the cash flowing through the company coffers is easier said than done is a sentiment that many business owners are far too familiar with. In order to give businesses the steady infusion of cash they need to get started, stay afloat, or grow to the next level, savvy owners do their utmost to utilize OPM—other people’s money—to finance their operations. Generally, this is done in one of two ways, either through debt (via a loan or line of credit) or equity (selling someone a stake in the business). Whichever path is chosen, the idea is to minimize the cost of acquiring that money to ensure that cash flow remains maximized in the process. Let’s examine just a few ways to get the most out of the money you finance while spending less to acquire it in the first place.

1. Saving/Borrowing from yourself – Yes, utilizing savings is considered a financing method—in fact, it’s a strategy that is the most basic way to finance your business. The only “fee” involved is your lost opportunity cost—that is, what you risk by selecting one financial option (investing in your business, in this case) rather than another, whether it’s simply earning interest or deciding to invest elsewhere. In other words, the concept looks at the financial path you take and, on that basis, compares what is lost with what is gained. Still, because there’s nothing to repay, using money you’ve saved has no effect on your cash flow, which is particularly helpful in the early stages of operations when every penny is precious. However, you’re constrained by the time and effort it may take to save the amount you need for the business. Pulling money from a retirement plan or insurance policy can give you a large sum, but have your financial advisor factor in any penalties for early withdrawal, taxes, and the lost gains had the withdrawn amount not been taken to fully understand the cost. And if you take money out of your house (via a home equity line of credit), you’re risking the loss of your home in the event you cannot repay the funds according to the set terms—which may be an unacceptable risk, considering that many startups fail within the first five years.
2. Traditional debt financing – Most common with traditional firms, you have a binding agreement with a lender while remaining in complete control of your business. However, keep in mind that payments usually begin the first month after the loan is funded, and the often-substantial interest rate and repayment terms can take a serious bite out of your cash on hand. It’s also important to note that it can be difficult to obtain debt financing in the early days of a fledgling operation when the company has little or no credit history. Also, carefully consider the timing and amount of repayments so that they don’t put a stranglehold on the business.
3. Credit cards – Many businesses use credit cards to pay suppliers and ease their cash flow by extending their working capital; you can effectively enjoy a 30-day “float” of the money before a payment is due and of course you’re not required to pay the full amount, which further reduces the impact on your cash flow. Interest rates on balances vary widely, so shop around for cards that will give you the best terms and don’t overlook associated benefits such as discounts, points that can be redeemed for rewards or cash back, airline miles, automatic warranty extensions, etc. as these can really add up to significant value. Beware of the cash advance feature that credit cards offer—while they can be useful way to meet just-in-time cash flow needs, the high rates that credit card companies charge for them makes these a last resort option. Making late payments or missing them altogether affects your credit rating, which will cost you in the near term with fees, and can cost you in the long term because of higher lending rates due to a damaged credit score.
4. Offering a slice of the pie – A common finance option, especially for a business that simply needs money to grow, involves offering equity in your business in exchange for cash. Giving investors a piece of the action can net fast funds and distributes the financial risk beyond yourself. It doesn’t place a burden on your cash flow because when you aren’t making a profit, and you don’t make repayments (or your agreement may be to plow any profits right back into the business). If the company tanks, the money doesn’t have to be paid back to those unfortunate investors. The downside here is the erosion of control as you take on additional investors. If their share equals more than 49% of the company, you’re no longer completely in the driver’s seat in making decisions.
5. SBA microloans – The Small Business Administration offers loans of up to $50,000 to qualifying small businesses via a host of intermediaries. The repayment terms are very affordable and structured so as not to unduly compromise your cash flow. What’s more, businesses can consider the training and/or management assistance that some lenders require as a condition of the loan as free technical advice that can help improve the odds for a successful operation.
6. Crowdfunding – Go directly to the public to finance your business idea. This is a popular financing device (e.g., Kickstarter) because you’re not relying on a single source for a large sum and the effect on your cash flow is purely positive; many people pledge small amounts of money during a time-constrained campaign in exchange for your product.
7. Purchase order financing – Say you want to scale up, but don’t have the cash flow to build and deliver on a large order. A purchase order financing company can step in, paying the funds directly to your suppliers, allowing your business to get the materials you need to make and deliver your product, then repay the purchase order financing company. Because of the cost, this strategy is considered best for companies that resell their products at a markup with gross profit margins of 30% or more.
8. Bartering – Don’t overlook one of the oldest trade methods of all time—that of swapping your skills or products for those of equal value from a like-minded company, all without exchanging actual money. This preserves cash flow for both parties involved.
9. Grants – Your cash flow never takes a hit when the money you get is via the gift of a government grant. Of course, there are stringent requirements, but certain types of companies with sound business plans that align with government research and development goals may qualify for SBA grants through its Innovation Research and Small Business Technology Transfer programs.

When comparing options, make sure to consider not only how much you can finance but how much of your cash flow will be compromised, both monthly and over the long term, to cover the cost of that financing. Look for the plan that offers you the most with terms that you can reasonably manage, even in your leanest times—and don’t overlook the possibility of grants.