Creative Credit Card Solutions for Cash Shortfalls

Nifty cash management tricks for boom-bust survival funding needs

Q.  I have a friend who started a service business at the beginning of the year with two employees. Now he has 50 employees and is cash strapped. He'd like to get a $20,000 loan to cover payroll until customers pay. His bank says his company's history is too short for credit and we all know that the SBA takes forever. Should my friend talk to angel investors instead of banks?

A.  A few weeks ago, I made a presentation to a group of first-time entrepreneurs. The title of my talk was "5 Ways to Blow Up an Explosive Growth Company." Number one on my detonation list is the very problem you describe.

When businesses have to pay the costs of product or service delivery long before customers pay (which is most businesses), they quickly run into a precarious boom-bust negative cash flow position. Yes, sales are booming, yet the company bank account is bust. This is the painful moment when hyper-growth entrepreneurs realize that growing sales don't always lead to financial success.

What is terrific is your friend has anticipated this potential problem and is smart enough to seek extra capital before taking on extra expenses. Well done.

So, can angels help with the coming cash shortfall? Possibly, but not likely. Here's why.

Most active angels want to multiple their investment by 4 to 10 times. Unless your friend's business in some way is developing proprietary services that can be duplicated exponentially or intellectual property that has considerable upside, it is unlikely that a stand alone service business will meet the growth expectations of the average angel equity investor.

Your friend's best chance is to appeal to wealthy individuals who might already have professional experience working in your friend's industry. If they understand the business already, they may be more sympathetic to your friend's entrepreneurial goals.

Another option, of course, is to play the revolving credit card game. This high risk maneuver, if executed well, can be a low cost source of temporary funds. Here's how it works. A company's owner obtains two or three low or no-interest promotion credit cards. The owner draws funds from one credit card, and then pays off the balance with another credit card within the credit card grace period. Even if the owner has to pay, say 15% (1.25% per month), it is still a relatively fast way to get affordable cash. Visit www.bankrate.com for a current listing of super low interest rate credit cards.

The problem with credit cards is the temptation to use them for ordinary, not extraordinary needs. Credit cards are not for startup operations and they are not for companies that don't have a very reliable near term source of repayment.

My suspicion is your friend doesn't just have a one-time 60 day credit need. As long as he is in business, he will experience some cash flow lag.

Here are my recommendations:

• Before initiating another growth spurt, your friend should focus on profit margins. What can he do to wring out another percentage or two of profit? Every percentage saved in margin, will improve long-term cash flow.
• Your friend has to take the time – no matter how much time it takes – to apply for a more permanent line of credit from community banks or through SBA backed lenders. He shouldn't rest until he gets this in place.

Remember, short-term solutions don't ever solve long term problems. Encourage your friend to put out his cash flow fires once and for all. It's certainly better than getting scorched by a business that can't pay its bills. In one way or another, the owner eventually will have to cover the shortfall.

Take Command Action Step

Business profitability is a very different financial concept than cash flow. During the first months of a business, striving for cash flow break even is more important to business survival than profitability. So what's the difference? Cash flow is a company's air. It's the life line. If customers don't pay you on a timely basis for the products or services you have sold them, then your business can easily slide into a dire cash crisis or worse, bankruptcy. It doesn't matter if you can produce products with a big profit margin if you can't pay the rent. Business founders who pay attention to projected cash flow details impress angel investors and lenders. Be one of them. You can do it!

Do you need time-saving tips to help fund and grow your business? Ask Susan How! Write to small business funding expert Susan Schreter at susan@takecommand.org.

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