If you’ve been in business for any length of time, I’m sure you’ve heard the expression, “I can only get financing if I don’t need it”. You may have even said it yourself.
This is usually uttered out of frustration when business owners and managers are trying to get financing for cash flow deficiencies or debt consolidation actions to improve their cash flow funding.
And yes, at the time of financing is when the money is needed most, yet it can be so elusive to obtain, or if you can obtain it, the related cost is in the stratosphere.
Unless this cash flow crunch is fueled by an abundance of extra work or orders that came out of left field, then this is definitely the wrong time to apply for financing.
First, you’re presenting your business to lenders or investors at a point of weakness. You need to be marketing a business opportunity where they can make money. It can’t look like you’re asking them for a favor that would put them into an uncomfortable position.
Second, if the debt didn’t accumulate over night, what were all the company’s financing decisions that led up to this point, and why were they made prior to looking for more financing? If recent history shows more of an I will take anything I can get financing strategy that includes several sets of arrears payments that are months behind, then there is nothing to inspire lender confidence.
When you get into these types of situations, additional capital is going to be very hard to come by and the key to survival will lie in the ability to simplify the business, work with existing creditors, and manage within the cash flow you have to work with already. If additional capital must be acquired to make anything work, then you may have to take on higher priced debt that will further erode your equity. Just make sure there is a cash flow plan that can work with any new debt additions, or its not likely going to be worth signing up for.
Seeking business financing is about working from a position of strength, or relative strength. It also means looking ahead to see what the near future is going to be like and being realistic with yourself about how things may unfold with respect to your cash flow.
Even if you are only suspicious of more challenging times being ahead, then start at that point to build your financing contingency plan by either accessing more debt or equity capital, or start cost cutting to build a cash reverse out of your monthly cash flow.
From a lender’s point of view, especially lower cost lenders, when you need more money for cash flow is a future event that has been planned for versus an unplanned event that has been ignored or avoided leading up to the current cash flow problems.
The harsh reality is that lower cost financing is for lower risk situations. If you’re already in the soup to some degree with your cash flow, the business risk is higher and as a result the interest for helping you will be less and also more ruthless because the lender or investor is in a much stronger position to dictate terms.