From the April 1999 issue of Startups

Before incurring onerous debt likely to plague your bottom line for years, ask yourself if getting that loan is really necessary. Could you start your new business with personal savings? Would liberal credit terms from vendors help carry your existing business through downturns? Might improved cash flow be enough to fund expansion?

Fact is, most small businesses are funded by savings, leaving owners with no loan repayments, no partners, no one to share profits with and no exorbitant interest to pay. But if you absolutely must look elsewhere, ask friends and relatives to help with start-up capital. Or investigate borrowing against your retirement plan (if you're currently employed), stock-market holdings, life-insurance policy, certificates of deposit or home. (Be aware that a home-equity loan is risky; in a worst-case scenario, you could lose your house.) Other options:

Economize. Slash start-up expenses to meet available funds. Forgo moving into an office or buying new equipment. Use your existing vehicle, furniture and supplies. Need tools or materials? Buy used or lease.

Conduct business from home. If you must have an outside location, negotiate for lower rent and leasehold improvements.

Need professional services? Look into trade-outs or time payments.

Do you buy from outside vendors? Arrange in advance for volume discounts and just-in-time (JIT) delivery. JIT reduces inventory and the need for storage space--plus, you don't have to pay for materials until they're delivered.

If you have an existing business that's facing a financial shortfall, examine your cash flow to find out why. Most often, temporary or cyclical shortfalls stem from slow-paying customers. While they may take 90 days or longer to pay your invoices, you've already expended funds for materials, labor, supplies and more. Even if yours is a service business, you've still invested time, energy and expertise, not to mention covered rent, utilities and marketing. Your solution is to accelerate income. How?

  • Demand deposits upfront.
  • Include bills with deliveries or submit them as soon as you complete projects.
  • Submit interim invoices on long-term projects.
  • Track regular clients' payment cycles, and be sure to bill in time to be paid in the next cycle.
  • Offer discounts for prompt payment.
  • Track accounts that are past due, and diligently pursue payment after 30 days.

    Another solution is to increase income. Ask yourself:

  • Are there complementary products or services that would fit naturally into my business?
  • Could I broaden the scope of the business without incurring disproportionate expenses?
  • Could I raise prices or increase fees without losing customers?

    Finally, decelerate cash outflows:

  • Delay payments to vendors. Don't pay any bills on receipt; most creditors ask for payment within 30 days, but 45 days is generally acceptable.
  • Negotiate terms with regular vendors. Many will forgo immediate payment if you explain how doing so would be mutually beneficial.

Paul DeCeglie (MrWritePDC@aol.com) is a former staff reporter for Journal of Commerce and American Banker.

Factor It In

Question: My partner wants to factor the accounts receivable of our temporary-help agency. Is that a good idea?

Answer: Your new and growing agency pays your employees before your clients pay you--the classic cash-crunch condition. A factoring company buys your client receivables from you as you bill. Your clients pay the factor when the bill is due. The factor looks to the payment ability of your customers, not you. You have to be solvent, not creditworthy. In effect, you "borrow" on your clients' credit.

Your partner has a good idea if you have strong profit margins; stable, fixed costs; and enough administrative capacity to handle new sales. Unlike bank lines of credit, there is no required annual payoff, and factor financing can keep pace with rapid sales growth.

The good news: Factoring is both unregulated and entrepreneurial. Factors deal where banks fear to tread. The bad news: Factors are expensive, and their contracts are mostly one-sided. The factor will "advance" you a percent of each invoice; the remaining "reserve" balance, less the factor's "discount," is paid to you when your customer pays the factor. If you receive an 80 percent advance on money you would normally collect in 60 days and pay a 4 percent discount, your annual interest is 30 percent [(0.04/0.8) x (360/60)]. Can you give up 4 percent on invoices and remain profitable?

Get proposals from at least three factors. Understand the contract completely. Is there a minimum invoice size, a minimum monthly volume, an administrative or setup fee, or other interest or penalty costs? How long are you locked in with the factor? Who eats the bad debts? When and how are reserve balances paid to you?

Factors operate nationwide; start your search with the Yellow Pages. Ask your bank which factors it deals with. Call your trade association for factors interested in working with your industry. Check out the Edwards Directory of American Factors (Edwards Research, $199, 617-244-8414) or the Commercial Finance Association's Web site (http://www.cfa.com).

George M. Dawson (gdawson@txdirect.net) is a small-business consultant and author of Borrowing to Build Your Business: Getting Your Banker to Say "Yes" (Dearborn, $16.95, 800-621-9621). Send him your financing questions at bsumag@entrepreneurmag.com

Read It With Interest

How do you turn $15 into a lifetime nest egg? Use the money to buy The Generation X Money Book: Achieving Security and Independence (Adams-Hall Publishing, $15, 800-888-4452), then follow author Don Silver's clear, cogent and doable advice.

Silver, an experienced estate-planning attorney, illustrates how you can convert mere pocket change into a $200,000 nest egg, how investing $2,000 a year for just three years can net you $140,000 by the time you retire, and how to begin a savings plan with only $20 and grow it into a fortune. More important, he discusses what to do with your money and how to protect it from loss and taxation.

Leaving no stone unturned, Silver examines the realm of retirement plans (including the new Roth IRA), home buying, marriage, aging parents, children, banks, insurance, lifestyles, financial advisers, pitfalls and much more. This one is well worth a read.

Final Warning

You can be late for business meetings. You can be late paying bills. You may even be late making deliveries. But do not, under any circumstances, be late filing your income taxes. The penalties are severe. File on time even if you owe and can't pay; you can make arrangements with the IRS to make payments.

In a rush and need help preparing your returns? While it may be too late to enlist the aid of an accountant, ample resources are available on the Internet, where you can prepare and even file your federal business and personal returns electronically.

Begin your search at http://www.el.com/elinks/taxes --an all-inclusive, easy-to-use site that leads you to forms, publications, online filing instructions, accountants, programs and every other tax-related source in existence. If you're on AOL, check out keyword Taxlogic. On Microsoft Network? Go to The Tax Center for Business. Others can access any of the following Web sites:

Defining Moment

Accrual Accounting
A bookkeeping method that allocates a business's income and expenses to periods to which they apply, even though they haven't actually been received or paid. In this system, when you bill a customer, the amount is immediately reflected in your books as income, regardless of when the invoice is actually paid.

Accounts Payable/Receivable
Accounts payable represent money your business owes to suppliers and other creditors at a given point in time. Accounts receivable are funds owed to you by customers and other debtors.

Accounting Period
A period of time (month, quarter, year) for which a financial statement is produced.