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The cost of money

Home > Money With Melanie > Business Development

10 / Jul / 2008

There is so much talk about getting an investor that it’s easy to overlook other sources of funding. There is no doubt that investors bring lots of money and they add more than just money to your business. Well, it’s never JUST money.

But let’s look at where you can get your hands on money to get you through any cashflow crisis and short term funding difficulties.

First, about the cost of money!
This is key. Consider very carefully how much your money costs you. If you get a loan backed up by real collateral it will cost you about 10%, money from credit cards will cost you 18% and money from investors will cost you at least 25% PLUS!

So look at your funding strategy, keeping the cost of money in mind. Often you can put together a ‘funding mix’ that will give you flexibility and reduce your overall cost of funds.

Mortgage everything
The cheapest money you will ever get is by mortgaging your ‘bricks and mortar’. It is the safest form of lending so the rates are very low. There are cashflow implications – the loan needs to be repaid. Can that be funded from sales? If you are not making sales then this probably will not be an option for you.

There are also personal implications. Your life partner may not want to mortgage everything you own to put it into your business. That is a discussion that you’ll need to have. I’ve been in meetings where the partner simply refuses to sign up – and that was after the entrepreneur thought that all was OK. Talk to your family about the impact of your business decisions on your family life. That way, you’ll keep your family even if your business goes belly up.

Manage your accounts receivable
There can be real gold here. Unpaid invoices are cash for your business. Make sure that your invoices are paid on time and have in place a rigorous follow up system. Don’t let anyone go overdue without a gentle word from you. And not so gentle if they go way overdue.

Credit cards
One of our speakers holds up his wallet and says that he has over $120,000 in it. He has made it standard practice to get lots of cards and to get the maximum limit. Why do this? First, he has access to instant cash. No approval, no paperwork. Just walk into the bank and ask for the money. Second, it will get him through a cashflow emergency. You still need to pay the money back. but it may well get you over a short term cashflow problem.

Bring accounts receivable forward
Can you get customers to pre-pay for your products and services? You’ll need to be careful here. You’ll need to make sure that you can deliver to your clients.

Manage your suppliers
Look at what you can do to extend your payment terms. Keep your cash for as long as you can.

Factor your debts
This form of cashflow management is well accepted these days. Not all of your invoices can be factored, but find out what you can factor and look at the advantages and disadvantages of factoring for your business.

These are the more common forms of cashflow management. Having a mix in your funding strategy may well provide you with extra cash to help you through the tough months that most businesses face in any trading cycle.

Source: Smart Company E-Newsletter 30/6/08

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