One of the things a new business owner should keep in mind– with respect to ensuring that his or her business is always adequately funded – is to first realize that most start up activities and milestones rarely go according to plan. This means having a back-up plan in place which includes on-going access to funding, just in case. Most business owners believe that their customers will supply them with enough sales to sustain the business’ cash needs, but as a new business, it often takes longer than planned to get fully set up and running. Without access to reliable financing, you may find yourself faced with serious production and operation delays. As a precaution, business owners should have multiple ways to gain access to cash.
Access to Cash
Access to emergency cash should be planned for prior to starting a business. There are a variety of avenues that can be considered, such as family and friends, 401K’s and IRA’s, bank loans, investors, and factoring to name a few. It is the business owner’s full responsibility to ensure that his or her business is always adequately funded. Planning for this in advance will reduce major set-backs and possible closure of the business in the future.
Starting Off Small
If a business owner applies for a small business loan that can easily be paid back in a short period of time, they will likely gain the trust of the lender and be able to borrow again for a larger amount. It’s imperative to prove to the bank (or investors) that you are trustworthy. This strategy allows business owners to be in a position to access cash before it’s needed, so when a crisis hits, it is more likely that the bank, family or friends will come through for them. Since the business owner has already established a relationship and proven themselves by repaying previous loans they have received, they are more likely to be successful in seeking out additional financing.
Initial Start-Up and Up-Front Costs
Most initial start-up funding is generated for large upfront purchases such as office furniture, office equipment, production equipment, telephone and computer networking systems, move-in costs, and other miscellaneous expenses. These operational costs are necessary in the beginning, but business owners should be aware that sales from customers are normally not generated during this period and should have some other means of financing.
Operational and On-Going Cash Needs
Once the business has moved beyond the initial set up period, funds from cash sales should be expected. However, although sales may be made during this period, you may or may not actually be able to collect cash at the time the sale was made. Businesses which provide services often bill after the service is done, and rely on a customer paying that invoice on a future date. Debts collected weeks or months after the sale has been made is referred to as accounts receivables.
If you find that collections on your accounts receivables are slow to come in, an alternative may be to consider factoring. This outsourced process allows business owners to sell their accounts receivables to a third party for a discount and receive immediate cash. These companies use specialized software for factoring, which automates the process completely. Factoring can save your company valuable time and energy, while providing the cash you need today.