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Creative Financing for New Businesses

It can be very difficult for businesses with less than two years of operation to obtain business credit. With the vast majority of businesses failing within the first two years of operations banks are not aggressive with lending monies to new businesses. In fact in the United States 90% of small businesses cannot obtain financing from a traditional bank. All businesses, at one time or another, need to access operating capital to grow or to overcome seasonal revenue fluctuations. It is no surprise that many businesses fail due to cash flow issues. If you can’t get financing from a traditional bank where does the money come from? A lot of businesses owners will tap into personal savings, put there home ownership at risk or get family and friends to invest. This does not have to be the case.

There are ways to start or operate new businesses and access working capital without a bank loan, personal investment or the investment from family and friends. These financing methods include acquiring equipment with a lease, merchant cash advances, invoice factoring, and purchase order financing.

If a new business is unable to get the capital to purchase equipment they can lease. Equipment leasing is a viable way of securing much needed equipment, computers or vehicles. There are leasing programs available for start up companies and for individuals with marginal credit. Leasing is extremely flexible and payment plans can be tailored to protect your cash flow. If your credit rating is strong you can lease equipment with a 90day deferral payment so that you can use the equipment to finish the job before you even need to make a payment. Leasing equipment generally requires a lower credit score than borrowing money for the equipment.

One of the toughest industries to secure a small business loan is for a new business operating in retail or as a restaurant. These types of companies usually have very little in the way of assets to secure financing and are classed as higher risk. Both restaurants and retail locations accept credit cards. This provides for a method of accessing unsecured cash called a merchant cash advance. This is not a loan but rather a sale of future credit card receipts at a discounted rate.

If a new business receives a large purchase order they can use that purchase order to obtain the funding needed to purchase the supplies to fill the contract. Purchase order financing can provide 100% of the funding needed to get your product out the door. Typically this type of financing would be for import/export or distribution companies where a product is purchased and resold at a profit, however some lenders will look at covering labor and associated costs. It all depends on how credit worthy the customer is and what type of industry they are in.

If you supply your product or service to other businesses and they don’t pay you for 30 to 90 days it can become almost impossible to manage your cash flows. Once you add in growth to this situation cash flow management becomes even more difficult. Due to the delayed payments, your costs increase faster than the revenues coming in. Lets look at a simple example. You own a staffing agency and you land a new large customer that will double your sales. This new customer will pay you 60 days after your temps complete the work. Your sales just doubled and so did your costs. Payroll can’t wait for 60 days, because your employees need to get paid on time or they will go elsewhere.

Cost immediately double but you do not see an increase in revenue for 60 days. This is a major hit in your cash flows and you need access to working capital immediately or you won’t be able to make payroll. The solution to your problem could be in factoring the invoices. With invoice factoring you can receive cash within 24 hours of your temps completing their work. Now there are no cash flow issues. Factoring is easy to qualify for, if your customer has good credit, and set up correctly it can be a tremendous cash flow tool.

At one time or another almost all companies will need to access additional working capital to enable growth or to survive revenue fluctuations. For most small business owners this may seem like an impossible task because banks turn down the majority of their financial requests. It is extremely important for business owners to know where to turn when a bank says no. Their company’s survival depends on it.