Emergency Financing Choices for Small Businesses

The great thing about business, and even a business in a seemingly impossible situation, is that there are always alternative solutions. 

Getting Money from Vendors

Your vendors make money off of you. It is in their best self-interest to see you not just survive, but also prosper. Don’t hesitate to ask at least for extended terms when you need it, or even a direct financial loan.

Find out what extended terms may be available in your industry and take full advantage of them, changing and playing one vendor against another if need be. For example, in the book business, it became standard industry practice for book publishers to offer what was called “dating,” or extended terms to encourage bookstores to place a larger order than they might otherwise place for older books called “backlist.” A typical backlist order might delay payment terms from a usual 60 days to as much as 180 days.

Also in the book industry, major vendors, such as leading publishers and wholesalers, would consider extending or maintaining very large credit lines to financially shaky bookstores if the bookstore was willing to make them a secured creditor. Don’t offer to secure your payables to a vendor without giving it a lot of thought, but it is one way to help keep a key vendor’s goods flowing when you need it.

Getting Money from Customers

Sometimes you can get your customers to help finance you. But you typically need a customer who really wants your particular product or a service a lot more than a competitor’s. Here’s a typical situation where you might seek customer financing: you are key supplier for a product or service and your customer, who is much larger than you, wants you to ramp up production more quickly than your existing financing allows you to do.

Getting Money from Friends and Relatives

I know you don’t want to, but sometimes you just have to! Get over it, swallow your pride, and go ask your friends and relatives for a loan or even a direct equity investment. I’ve asked for it! It can be tough, but you can do it.

Turn Assets into Cash

There’s got to be something you can sell! Maybe the business has some extra inventory? Maybe you have some excess computers or furniture? Maybe you have an extra personal item, like the boat you no longer have time to use?

Maybe you need to sell off part of the business? Several times, I have sold parts of my business off in order to preserve the rest of it and keep it growing. I hated to do it at the time, but sometimes you just have to.

For example, in my early days in the book publishing business, I sold off a couple of humor books we published that were primarily being sold in sporting shops. I ended up selling them to another book publisher who had become one of our largest customers because the publisher had developed a specialty business focusing on sporting shops.

Another time I sold off a magazine business that I loved but didn’t see easily transitioning to the digital world and I needed cash to support my new and struggling Internet businesses.

Selling things you weren’t planning on can be hard. But when in doubt, one of my maxims is “Make the hard decision.”

Asset-Backed Financing

Although you are unlikely to obtain new or additional unsecured bank lending if you are facing a cash crunch, you may be able to obtain asset-backed financing. Try approaching nonbank sources, such as commercial financing companies. Unlike most bank lending, true asset-backed lending focuses primarily on the value of the asset used for security, rather than the ongoing cash from the business.

You do need to keep in mind, however, that such lenders, unlike banks, will seldom hesitate to seize your assets after even a few missed payments. You may also have to pay a stiff premium over traditional commercial bank loan rates.

If you are already borrowing from a bank, you need to make sure that borrowing from another source does not violate your loan agreement. Even if it doesn’t, do keep your bankers apprised of any other borrowing you undertake.

Use Factoring to Turn Receivables into Cash

If you have a good amount of solid receivables, factoring may enable you to raise a lot of cash in a hurry. Factoring firms are private, nonbank lenders that buy, outright, your creditworthy receivables and collect them at their own risk. Even discounting the element of risk that factoring companies assume, they will typically seek a higher premium than bank lenders offer. This is especially true if your business is facing difficulties. 

Sell Everything You Can, Then Lease It Back

Look around your office. The furniture, computers, vehicles, and any other equipment you may own have a cash value. You can realize the value of your assets in instant cash and still retain the equipment for use in your business! You just need to find a leasing firm willing to buy the items from you and lease them back to you.

Leasing is similar to asset-backed lending. First, the financing is based on the value of the asset. Second, you will probably pay a significant premium over that of a bank loan. One major difference, though, is that the leasing firm will actually own everything you lease. Because all the equipment belongs to the leasing firm, it won’t hesitate to take physical possession if you fall behind in your payments.

A big advantage to leasing is that, even though it must be included in your financial statements, it allows you to borrow money without increasing your line at the bank while keeping all of your strictly defined banking business at one place.

Takeaways You Can Use

  • There are lots of ways to raise money in an emergency.
  • You can’t be shy about asking people to help finance you.
  • There’s got to be something you can sell, even if you have to turn around and lease it back.

About Bob Adams

Bob Adams is a Harvard MBA serial entrepreneur. He has started over a dozen businesses including one that he launched with $1500 and sold for $40 million. He has written 17 books and created 52 online courses for entrepreneurs. Bob also founded BusinessTown, the go-to learning platform for starting and running a business.