By Bruce Fischer - Wednesday, July 1st, 2009

From a credit line with the bank to funding through the Ottawa Community Loan Fund, there are a number of financing options a business can explore to carry it through a rough patch. But it just makes good business sense to first put internal operations under scrutiny and see how cash flow can be improved before seeking an infusion from an external source.

If your business is in need of a short-term cash boost, the organizations that you can turn to will be far more receptive if you can point to clear and decisive measures you have taken to cut spending, increase sales and improve cash flow to more efficiently operate your business. It’s always easier to get help if you have demonstrated that you have first tried to help yourself.

Measures to improve cash flow include:

• Educating yourself. If you’re not familiar with bank statements or accounting statements, work with your advisor to be sure you understand cash flow, what it means to you and understand the issues. I’ve seen people who think their business is broke, and yet, they have a $150,000 in receivables on the books. One business owner was paying his creditors in two days, but giving his customers 30 days.
• Collect on your receivables. Don’t let customers use their debt to you as a form of credit. Consider offering them a quick payment discount as an incentive to pay early.
• Delay paying payables. By the same token, don’t put a creditor’s nose out of joint by using them as a form of credit. But don’t pay the bill any sooner than you are obligated to do so, unless there is some kind of obvious advantage, such as the incentive of a quick payment discount.
• Be co-operative and communicative. Everyone’s facing the same challenges. Be open and transparent with customers and suppliers and work together to establish a schedule for payables and receivables that everyone can live with.
• Manage your inventory. If you are in cash-and-carry business, such as retail, allow your inventory to drain a bit. Retailers typically carry at least 20 per cent more inventory than they should at the best of times. Cutting back on inventory can provide a big boost to cash flow. If times are tough, suppliers are more than likely dealing with their own inventory bloat and have the stock on hand to quickly resupply your business if the need arises.
• The loonie factor. On the other hand, if you import product, pay close attention to currency changes – be quick to take advantage of what is effectively a discount on foreign goods when the value of the Canadian dollar rises and stock up.

Sources of financing to consider

If, after putting your cash flow under scrutiny you still see the need for external financing, here are some options to consider:

Business Development Bank of Canada
BDC is a federally mandated institution dedicated to providing small- and medium-sized businesses with the financing options and consulting services they need to succeed. It offers venture capital to start-up and early-stage companies, subordinate financing for companies that are in transition, expanding or planning an acquisition, and term loans for businesses at various stages of development.

BDC does not offer grants, interest-free loans, lines of credit, or other services typical of a full-service chartered bank, such as bank accounts, term deposits or GICs.

To learn more, visit www.bdc.ca.

Ottawa Community Loan Fund
The OCLF provides short-term loans of up to $15,000 to small business owners, aspiring entrepreneurs, talented individuals with international training and community groups. It is a private organization that works with other community-based financial organizations to qualify borrowers, who must be able to demonstrate a worthwhile business concept, practical work experience and/or training, and a solid business plan.

To learn more, visit www.oclf.org.

Small business loans
Full-service chartered banks offer a diverse range of business services, including small business loans. These fixed- and variable-rate term loans are typically secured and reserved only for the purchase of long-term assets that support your business growth, to refinance an existing debt, or to fund a business expansion or acquisition. If your need is to cover a short-term gap in your cash flow, you need to discuss with your banker other options, such as a credit line.

To explore your options for a small business loan, arrange to sit down and have chat with your banker. RBC, for example, offers these options and terms for a small business loan.

Export Development Canada
EDC is a federal agency that provides financing, insurance and bonding solutions to Canadian companies that export goods and services, or that invest in other countries. On the financing side, it provides a number of services to support international transactions, such as paying for the up-front costs associated with the production of a large export order, to expand into new markets or to respond to a buyer’s request for financing.

Learn more about the various financing options EDC provides for exporters.

Friends and family
Never overlook the resources that are closest to home. Friends and family can come through for you in a pinch when institutional lenders will not. The challenge is to make sure to formalize any arrangement on paper to prevent family feuds or bitter estrangements. For example, in return for a cash investment, a family member can be given a convertible share. And pay interest on any loans with a formal repayment schedule.

Customer financing
This isn’t always a viable option, but you never know until you ask. Depending on the circumstances, a customer may be willing to make an upfront payment or a series of milestone payments. This is much more likely if you are recognized as a stable and trustworthy organization and you have a longstanding relationship with the customer.

With one of my ventures, we had a customer in the telecommunications industry who wanted to spend $350,000 on a product we hadn’t even developed yet. To secure this product, the customer was willing to pay 95 per cent of the value of the order up front to finance development. The customer was also in a bind where it needed to spend its budget before the end of its fiscal year, which played to our advantage.

And lastly, a note on personal exposure

It’s worth mentioning measures such as drawing on retirement savings to help float the business or using one’s home as collateral to guarantee a bank loan. But this kind of personal exposure can be risky and should only be considered as an option of last resort. Look before you leap and make certain you fully understand all the implications.

If you do put personal money into your business, ensure you cover it with repayment plans and loan agreements to get it out tax free. I have often seen people put money into their business, then declare it as income and pay income tax when they pay themselves back. This IS NOT taxable income. This is the repayment of a loan you have extended to that separate entity known as Your Business, Inc.

Category: Expert Advice.
Industry: Retail, Technology, Services
Functional Area: Finance
Tags: BDC, Business Development Bank of Canada, cash flow, EDC, Export Development Canada, exporting, financing, inventory management, OCLF, Ottawa Community Loan Fund, payables, receivables, small business loan