Field Notes: 8 Thing to Do (and Not Do) When You are Cash Poor
All of us have times when we are cash strapped. Sometimes it is because of seasonal flux in business sales, at other times it is because we have problems with our business approach or model that burn through the checking account. Particularly during the start up phase, small business owners often seek options other than approaching their commercial lender. Here are some things you could (or shouldn’t) do when you are cash poor:
1. Tap Into Reserves: This one is obvious. Typically a small business should have cash in a reserve account to cover times when the business is eating cash faster than earning it. Most everyone starts here- but remember to replace those dollars when sales improve.
2. Liquidate Un-needed Assets: Sometimes small businesses have assets they no longer use or need. Liquidating a piece of equipment or a fixed asset can convert those un-used business assets into cash. Note: It may take a bit of time to sell business assets and you often won’t get full market value for them if you need cash in a hurry. Keep in mind too that your balance sheet will suffer the loss of those assets- especially if you use up the cash in hurry on operational expenses.
3. Crowdfunding: While we are all still waiting on the SEC to provide guidelines for how we can implement crowdfunding in the United States, there is a robust array of crowdfunding sites already on the web offering you the opportunity to solicit for contributions (not loans) in exchange for gifts or goodwill. See last week’s blog for a few examples.
4. Life Insurance (Whole Life Policies): Some folks have life insurance policies which have a cash value which grows over time. It is possible to, in essence, make a loan to yourself by borrowing against these policies. Note: Most of the small business owners I’ve worked with over the years have a difficult time paying these types of loans back. They accrue interest and the insurance company certainly isn’t going to harass you to pay it back, so they often sit for long periods and de-value the life insurance policy.
5. Home Equity: This used to be the most common method of cash generation for smaller business before the housing bust. This is still possible for some but check out the points and fees before attempting to tap into any equity you may have. If you go this route, you might as well check into a business line of credit and guarantee it with your home equity rather than directly borrowing against the value of your home.
7. Factoring: If you have accounts receivable, factoring may be an option but it is an expensive one. Factoring entails selling your receivables to an outside company who pays you in advance for those account balances after subtracting a hefty fee. They then go collect your receivables over time. Note: Factoring can disrupt the rhythm of your cash flow and simply delay a cash crisis. Get the facts and talk to a professional like your regional SBDC office before you jump into this.
Maureen Collins-Williams is Director of Entrepreneurship Outreach at University
of Northern Iowa
