Financing Business – Why Clients Are Giving Vendors the Cash Squeeze

People go into business to make money. Up to now, capitalism, private ownership and the free market economy was applauded and encouraged in the United States. Now that a recession has hit the United States, capitalism is being blamed. It’s not an argument I want to get into. But I maintain that capital and lack thereof, is a real world problem and concern than capitalism.

Less business

So you’re a business doing business in the B2B space, which means you’re doing business with other businesses. For those who are winning and retaining contracts and business, congratulations. Businesses are not spending. Fewer requests for proposals on the street. Shorter contracts. Fewer contracts. Bottom line, a leaner bottom line for your business.

Fewer loans

Our economic recession in the United States was precipitated by dramatic declines and defaults in the financial industry. Banks are going out of business. Those still in business are tightening their criteria for business loans. Businesses still need a way to finance their operations. Small business owners especially are prone to having business and personal credit scores that are not so good. Some banks are requiring credit scores of 750 to consider a loan, even ones guaranteed by the federal government via the U.S. Small Business Administration (SBA). So if you’re a small business turning to a traditional banking / lending institution for money in the form of a line of credit or a loan, you’re probably finding the situation challenging.

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Financing Business Opportunities With Fewer Restrictions

Opportunities in business can be exciting but frustrating if you don’t have the cash required to take advantage of them. On one hand, this opportunity could be too hard to pass up because of the potential growth possibility, but, it can also mean accepting the often onerous terms of the lender to acquire the cash needed.

Owners can choose from small loans, factoring or a new twist on receivables financing. The least restrictive to the business owner is the receivable financing solution. It offers an online auction marketplace designed specifically as an outlet for small to mid-sized businesses to accelerate positive cash flow while maintaining complete control of the transaction.

This online receivables marketplace allows businesses to sell their commercial accounts receivable through auction. Financing opportunities in this manner is similar to factoring but the transaction is entirely different.

The auction platform gives greater control to the seller of the receivables. On the contrary, factoring allows the factor to set the terms, including advance amount and fee. In addition, the arrangement can often carry with it an all-asset lien, which requires that all of the invoices from a particular customer be included and that your customer be notified that your receivables have been sold.

Factoring can come at a high cost with many restrictions. With factoring, not only do you lose control of pricing, but by notifying your customers, you can potentially place the relationship with your customer at risk. Seller determine which invoices to sell, the minimum advance amount and the maximum discount fee they will pay.

Also, their customer is not notified, meaning the Seller retains the relationship. Once the accounts receivable are posted to auction and the auction goes live, buyers-a global network of accredited institutional investors-bid to purchase these invoices in real-time, ensuring a competitive cost of capital.

Loans can also be quite restrictive and time-consuming for small to mid-sized businesses-and that is if they can get approved. This loan process can often take weeks and months of gathering information, filling out applications, interviewing with the loan officer and then waiting for his answer just to find out if your company has been approved.

By the time the money is made available, the price of the specialty equipment or added resources you needed has gone up, the prospective employee has found another job or the larger office space has been snapped up by another business or worse, the competition.

Another limitation of financing business opportunities with a traditional loan is that the bank sets all of the terms- the rate, payment amount and penalty, and what collateral is required. Restrictive covenants are often part of the loan terms as well.

These clauses allow the bank to dictate the actions of the business in order to satisfy the loan requirements. It protects the lender by enforcing financial compliance of the business. If anything significant changes in the financial health from the time the loan is issued, the bank can call in the loan-worse force you in default which could lead to bankruptcy-because the covenant has been broken.

By using the online auction marketplace for trading receivables, the seller gains quick and flexible access to working capital without these restrictions and without taking on additional debt. Another attractive aspect of this alternative working capital solution is that the seller can potentially receive funds in as little as 24 hours.

So, for small and mid-sized company owners, this type of receivables financing means freedom. Instead of relying on and being beholden to other lending entities, you can now dictate the terms and unlock the cash held in accounts receivable quicker, with little risk and few restrictions.

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Entrepreneurs Find Personal Loans Can Help Finance Business Startup Expenses

Being short-term loans that assist your immediate cash needs, personal loans can help finance business startup expenses. Typically personal loans are a single payout loan with a high rate of interest. The borrower usually returns the loan with interest in one go rather than paying monthly installment. In general, personal loans are not recommended due to their high interest rates. A borrower may find it difficult to repay the whole debt in a single shot, however, with business startup’s the case is indeed different! Let us see how different finance options can save the day for business startup’s.

Typical Business Start-up Expenses

Once you have decided to start a business you will most likely have a solid business plan that will detail your initial financial requirements. Typical business start-up expenses can be broadly divided into overheads and variable expenses. One thing that remains constant with almost every new business, is that you need some money to purchase inventory, lease a building, start an advertising program and work towards your first sale. Personal loans are extremely useful in financing those overhead expenses that usually occur at the beginning as a one-time cost. Variable expenses are those that continuously occur in the process of conducting a business and are generally tied to sales projections.

For instance, in case of a software business start-up, the administrative costs, licensing costs, initial infrastructure setup cost would constitute overhead costs. On the other hand client visits, traveling for demonstrations etc. would constitute variable costs that will keep occurring every time there’s a potential client and may not be predictable. Also, irrespective of sales, overhead costs will still remain to keep your setup active!

Before you borrow any money, it is vital to have a repayment plan as well as projected business plan, to understand how your cash flow will operate. Once you segregate your expenditure into fixed overhead costs and variable expenses, you need to sort out the expenses that will be one-time events. A business loan or credit line can help with these one-time costs provided your business is able to afford it once projected sales begin to be realized! You need to anticipate all possible scenarios and ensure enough cash flow over the period of few months before you take a personal loan.

Types of Personal Loans

The beauty of this financing, is that it often can be obtained with or without security collateral. A secured personal loan involves borrowing against an asset such as your property. If you default on your repayment, the lender can claim your asset! On the other hand, unsecured financing, does not need collateral, however, the lender generally protects his loan from possible default by charging you a high rate of interest. In the event of a default, the lender may resort to legal channels to recover the amount.

If you are confident of repayment, it is best to go for a secured personal loan wherein you can negotiate a low annual percentage rate (APR) while pledging your property or car or any other asset.

If your business startup requires funding that cannot be met by a single personal loan, you may even borrow more than one loan. The more you expose yourself to the debt scenario, the more financial risk you’re exposing yourself and your business to. It is important to conduct thorough research and prepare for contingencies. It is always best to dig into your own savings or borrow from close relatives if they’re willing and able however, for those that need instant cash and a huge amount at that, a personal loan could be a lifesaver. In fact, if you successfully repay your personal loan within the stipulated time, you could even get a good credit score which in turn will be better for the future of your business!

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