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Cash Flow: Alternative Sources

FastTrac, Kauffman Foundation

Traditional internal and external funding sources may or may not provide you with the best option for cash flow. After evaluating each potential funder, you might want to consider alternative cash flow sources.

New owners/partners - One way to obtain new funding for a company is to bring in a new owner. Along with a cash contribution, this new owner may be able to provide a new skill set and fresh ideas to the business. Consider that equity owners, to some degree, will become part of your management team and will have direct input into decision-making. Be prepared to discuss your expectations before entering any agreements.

Customers - In some instances customers want products or services so badly they will either put a deposit down with their orders or supply the money an entrepreneur needs prior to getting the job done.

Professional advisers, business acquaintances - Lawyers, CPAs, other business professionals, and business acquaintances have been known to invest in an enterprise if the prospects look bright enough. Sometimes business acquaintances have other contacts who may make additional resources available that can nurture your new firm.

Leasing companies - Leasing is becoming a more popular financing strategy. Equipment/asset leasing, including the sale and subsequent lease back of an asset, can be a major source of capital.

One of the benefits you might identify in your evaluation is that leasing can free you from purchasing equipment that will be obsolete with changing technology. For example, a computer expected to have a 20 percent residual value in three years could be worthless in one year. The lessor accepts this risk. Many lessors provide takeouts, rollovers, or upgrades for technological changes so that your business can maintain state-of-the-art equipment.

Generally, lease payments cost less than loan payments on equipment. However, to fully understand the long-term ramifications of a lease, be sure that a thorough evaluation of the lease arrangement is performed. Your evaluation needs to include an analysis of the tax, financial, and cash flow impact that the lease will have on your business.

Factoring - Factoring is a way to short-term finance by selling accounts receivable to a commercial financing company called a factor. Factoring applies to companies with Accounts Receivable. Therefore, it is usually an appropriate, albeit expensive, way to finance the early and mature operating stages.

Factoring does not use your Accounts Receivable as collateral. Instead, Accounts Receivable are sold directly at a discounted value to a factoring company. Factors do all of the collection work, which includes mailing the invoices and doing the bookkeeping, usually at a considerable cost.

Joint ventures / Strategic alliances - Sometimes other firms with an interest in your business will form a strategic partnership to help you accomplish tasks. For example, if you were working on a new toxic waste disposal system, you may find a waste management firm to finance your work. The strategic alliance would probably involve a specific agreement that provides benefits to everyone involved. For example, you would receive the resources of the larger firm, and it would receive exclusive licensing rights to the resulting technology. In other cases, you can use a joint-venture arrangement to help finance your operations. Two or more firms can share the same assets such as the plant, offices, and people, thus lowering their capital needs.

Sale of distribution rights - Often people will pay money for distribution rights to a product. Naturally, to get a lot of money from a distributor, you must be prepared to give a lot in return. The distributor may ask for the rights to a large area, such as everything east of the Mississippi. Before selling such rights, you should require performance guarantees.

© 2007 Ewing Marion Kauffman Foundation. All rights reserved.

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