Whether you are buying a business, you need cash flow to stay afloat, or you have plans for expansion when the economy improves, you'll need to be creative if you want cash. While the traditional bank loan or line of credit might work, many small businesses are being shut out of these cash sources. Some of these cash sources have been around for a while and others are newer. The ideas on this list involve selling assets or future streams of income at a discount. It's time to dust off these possibilities for generating cash.
Factoring of Receivables
Accounts receivable financing (called "factoring"), has been a source of quick cash for many years. Companies called "factors" buy your receivables at a discount; the price paid depends on the type of receivables and their age (how long they have been owed). SCORE suggests factoring as a way to generate cash quickly. Factoring also is a source of cash for a business purchase; I talked the other day with a young professional who is buying a long-standing business. He is considering buying the receivables and immediately selling them to a factor to generate some of the cash he needs for the down payment. Contact the International Factoring Association to find a factor in your area.
Selling Installment Contracts
If your customers pay you in installments, consider selling these installment contracts for cash. A local health club, for example, requires members to sign a contract agreeing to pay a monthly fee for a year. You can sell these contracts for quick immediate cash. The amount you receive will be heavily discounted because the buyer knows that some customers won't pay, and since you are selling the contract you won't be able to keep the future payments.
Selling Future Lawsuit Settlements
This cash source is a possibility for professional practices which get money for providing care for patients with worker's compensation claims or personal injury lawsuits. At the end of the process (which might take several years), the professional receives compensation for fees charged to the patient. The future cash from a lawsuit of this type might be sold, again with a large discount (say, 25% of the value).
Selling or Borrowing Against Purchase Orders or Invoices
A small software company in our area sends out invoices to large customers and expects to wait 90 to 120 days before receiving payment. In the meantime, this company can borrow against the invoice to get cash immediately. Then when payment is received, the company pays the lender with interest. The same idea works for purchase orders. You can sell or borrow against a purchase order to get cash while you are preparing products or services for delivery to a customer. Heavy discounts also apply in these cases; you won't get more than 70 cents on the dollar, but it beats not being able to pay employees while you are waiting to be paid.
Unsecured "Signature" Loans or Credit Cards
If your business credit or personal credit is excellent (above 750 for personal credit), you may be able to get a bank or other lender to give you an unsecured loan or line of credit based only on your signature. If you are getting a line of credit, get as much as you can qualify for; you only pay interest on the amount you use, and it's nice to have a little available for those times when your cash flow is negative. Consider getting another business credit card for emergencies. Then strictly limit those emergencies.
Getting cash for operations, purchase, or expansion means you will have to pay a price, in the form of reductions in these assets or discounts in future income streams. But having the cash in hand to do what you want may be worth the price.