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Dear Oaklyn Consulting,
I have a business that needs a cash inflow. However, my local bank is not willing to provide more credit. What other options do I have to obtain capital, and what are the pros and cons of each alternative?
From Oaklyn Consulting
This is a classic dilemma for entrepreneurs: an idea for the future which could become real if there were more money to spend on getting it going.
Too often, however, the dilemma results from not understanding how businesses use and deploy capital. Here are some things to consider:
- Why does your business need cash flow? Could it be that sales are too low? Expenses are too high? Equipment needs to be purchased? The payment cycle, from doing work to billing to getting paid, is too long? Maybe you are paying yourself too much to be supported by the current size of the business?
- If your business had additional cash to invest, what would the return on investment be? Will money fix the problem that is causing the need for cash inflow? If you add cash to the business, will the improvement in the business be large enough to pay the person who provides the cash for the use of that capital? How much risk are you asking someone to take that fixing your business’s cash needs will result in a good outcome?
- What are you offering the provider of capital to help minimize the risk of repayment? Capital investment tends to be organized around categories of risk based on collateral, and in each case, the capital provider is an expert in the risk/return characteristics of both your business and the collateral. For example:
- Banks tend to provide liquidity by lending cash (a liquid asset) on the basis of fixed assets, like a building (an illiquid asset). So bankers know a lot about real estate values.
- Factors advance cash against accounts receivable, helping businesses have cash earlier in order to pay bills. So, factoring companies know a lot about customers’ payment patterns.
- Equipment lenders spread the payment terms of equipment purchases over time, providing money up front to purchase the equipment and maintaining a lien on the equipment in case of nonpayment. So equipment lenders know a lot about the resale value of industrial equipment.
- Venture capital investors tend to finance the up-front sales and marketing costs needed to acquire long-term contracts. So venture investors know a lot about efficient sales processes and the economics of long-term contracts.
Your options for getting the capital that your business needs and the related pros/cons are determined by 3 things:
- What specifically do you need the money for
- How convincingly you can tell the story of how this capital will be repaid over time
- Matching the capital provider’s expertise and your business’s specific uses for their funds
At Oaklyn Consulting, we help business operators communicate effectively with capital providers and negotiate successful capital transactions. If you’re struggling with the decisions about how to find the right capital for your business and make a convincing case to lenders or investors, we can help.
