Another thing for you to consider is to lease instead of purchasing. Generally, if you are able to shop around and get the best kind of leasing arrangement when you're starting up a new business, it's much better to lease. It's better, for example, to lease a photocopier, rather than pay $3,000 for it; or lease your automobile or van to avoid paying out $8,000 or more.
Leasing has been around for a long time. It's common for businesses to lease real property for retail facility, office space, production plant, farmland, etc. There are advantages for both the small-business owner using the property or equipment (the lessee) and the owner of that property or equipment (the lessor.) The lessor enjoys tax benefits and may gain from capital appreciation on the property, as well as making a profit from the lease. The lessee benefits by making smaller payments, retains the ability to walk away from the equipment at the end of the lease term, and may be able to negotiate build-in maintenance provided by the lessor.
Still, there are many ways that a lease can be modified to increase your cash position. These modifications include:
- A down payment lower than 10 percent or no down payment at all.
- Maintenance costs that are built into the lease package, thereby reducing your working-capital expenses. If you needed employees or a repair person to do maintenance on purchased equipment, it would cost you more than if you had leased it.
- Assignment of all executory costs such as insurance, property taxes, etc. While this will initially increase your cash-flow, it will reduce the amount of taxable income the business generates.
- Extension of the lease term to cover the entire economic life of the property. Use of the property can be guaranteed for as long as you wish to use it.
- A purchase option, which can be added to the lease allowing you to buy the property after the lease period, has ended. A fixed purchase price can also be added to the option provisions.
- Lease payments that can be structured to accommodate seasonal variations in the business or tied to indexes that track interest to create an adjustable lease.
Avoid the Need for Financing
Bootstrap financing really begins and ends with your attention to good financial management so your company can generate the funds it needs. Be careful and aware when you buy. Make sure that you don't go top dollar when you don't have to, and that you aren't in an overly expensive office or location, unless it's really going to pay off in dollars and cents. If a new desk isn't necessary for your business, and you have an opportunity to buy a used desk, then by all means do so.
Also, keep a close watch on operating expenses. If interest rates are high, it won't take too many unpaid bills to wipe out your profits. At an 11- or 12-percent interest rate, carrying an unpaid $10,000 is costing you as much as $120 per month.
One way to foster a profitable cash flow for your firm is to start each production order off on the right track. Implement this three-step payment plan . Negotiate terms and conditions that require payments when you want them. Profitable cash flow will occur when you establish and execute timely cash-flow concepts into every order.
This article was excerpted from The Small Business Encyclopedia.