Alternative Sources of Financing

• Suppliers Inventory Buying Plans
• Renting and Leasing vs. Buying
• Leasehold Improvements
• Advance Payment from Customers
• Factoring Accounts Receivables

Suppliers Inventory Buying Plans

An alternate way of realizing working capital is through supplier financing. Suppliers may be willing to extend payment terms to 60, 90, or even 120 days. Some suppliers offer 2% discounts for early payment (within 10 working days) and penalize slow paying dealers with monthly interest charges. Other aggressive suppliers may offer floor planning or factoring options to assist dealers in financing stock purchases. Occasionally, such a supplier promotion plan will enable a dealer to pay for specific items only as they are sold (supplier retains ownership of goods until paid for).

These plans entail your empowering a representative of the supplier to enter your premises and take spot-counts of the supplier's merchandise in your stock. The supplier then invoices you for what has been sold according to the representative's report, and replenishes your stock to the original agreed level. This system also permits the supplier to constantly alter the mix of his/her merchandise on your shelves, quickly replacing slow moving items with those that seem to sell more quickly in your particular market.

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Renting and Leasing vs. Buying

In aggressively competitive equipment markets, most leasing companies will be pleased to arrange lengthy leases on equipment and computers with an option to purchase in order to close the sale for the supplier. Renting or leasing can free up equity capital for investment in other areas of greater return; free up borrowing power (improves cash leverage) for more critical borrowing; requires no down payment; fixes the rate for a set term; allows you to deduct the full expense from your taxable income; and still allows you the flexibility to exercise purchase options at a later date at a predetermined price.

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Leasehold Improvements

When you are negotiating a lease for a rented premises, remember that a substantial amount in leasehold improvements will be going into that location. The person in the best position to oversee the leasehold improvements as a security for the loan is the landlord. Moreover, the landlord or property manager will often agree to provide a portion (a dollar amount per square foot allowance), or all of your leasehold improvements against a longer term lease. A three or five year lease gives you a reasonable negotiating position for including leasehold improvements in the deal and paying for these through your rent over the course of the lease. This may represent $30,000-$60,000 of start-up expenditure for retail locations, for example, and off-laying that can significantly reduce the start-up cash and equity required. In addition, it can make a balance sheet appear healthier when its ratios are examined. A skilled lease (contract) lawyer, acting on your behalf, can perform great service in this kind of negotiation.

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Advance Payment from Customers

You might consider negotiating a full or partial advance payment from customers to help finance the preparation costs related to taking on their business. In some project oriented industries, it is customary to receive a stepped (partial) payments payable at defined stages of project progress, prior to the completion of the project.

Consider requiring a deposit for all work (normally deposits are held in trust pending completion). This will reduce the need for a line of credit. Deposits collected for work that involves special orders for goods or services will serve to prove the customer was committed to the order and will prevent the business having to absorb costs resulting from non payment.

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Factoring Accounts Receivables

An effective way to grow a business with limited working capital is by utilizing a factoring company to discount your accounts receivable. In fact, with good supplier credit and a professional factoring company, you may need a lot less capital than you think. The factoring company can also provide you with credit management expertise.

What happens is basically the same thing that happens when a retailer accepts a credit card. You receive the money right away while it is the factoring company who waits for payment. By having the use of your money right away, you can begin to concentrate on making the next sale. A strong focus on sales is the key to success for every new business.

Factoring is more expensive (typically 3 - 5% of your invoice) than most other forms of finance, therefore; it is important to find ways to build it in (pricing) and earn it back (suppliers). There are also savings realized by not having to perform necessary credit functions yourself. If you can use the factoring monies to add new business, then the costs or factoring are fairly easy to justify.

By factoring your receivables, you do not increase debt or dilute equity. You are simply given access to your own money when you want it rather than when your customer chooses to pay. As you build your own working capital, you can reduce the amount that you factor and carry more of your own accounts receivable. Eventually you can become completely self-financed. (Special thanks to First Vancouver Finance for this information on Factoring).

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