Borrowing Trouble

Don't put yourself in debt. Here are some ways to save money when you're starting out.

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Business Start-Ups magazine, April 1999

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 ( a former staff reporter for Journal of Commerce and American Banker.

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