The Cash Flow Blog

On the heals of yesterday’s post on limited commercial lending, here’s a Reuters article that adds further frustration to the topic.  According to the article, stimulus money intended for small business isn’t reaching potential buyers because the lenders don’t want to take it — the strings attached aren’t considered good business for the banks.

The problem?  Paperwork and potential restrictions from the government on dividends and payroll of the banks making loans.  That and some banks are concerned of a potential stigma of being known as an institution that took stimulus money.

The middle-man in the deal doesn’t like the deal.  And that may mean businesses who can benefit from a loan — if not have a necessity for one to survive — may not get one.

Bankers said they are hesitant to take capital injections from the government because of the stigma and the potential restrictions on dividends and compensation…The bankers said the SBA loan program has promise but involves a lot of paperwork and takes a long time to process the loans.

Here’s the rub

As shared in yesterday’s post, banks are cranking out new credit card programs left and right to bridge the gap in lending.

So, what’s a business to do?  When it comes to access to commercial lending, it appears small businesses are facing the reality of damned if you do, damned if you don’t — taking credit where you can get it or throw-in the towel.  Even if it means taking money with up to 30% interest.

What do you think about all of this?

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There may be times in your business-life when there simply isn’t enough money to pay all the bills.  Regardless of intent, you may not be able to service all of your debt.  At times like this, what are you to do?

Reality is, not all bills are a like.  So, for the sake of this discussion, let’s eliminate all bills such as utilities and non-strategic suppliers.  For the moment, let’s only consider business debt from strategic suppliers, partners, and similar business relationships. When you get behind in payment, what should you do?

Here are six tips to handling a business debt you can’t immediately pay:

• Communicate – The first thing you want to do is communicate with the company or individual you owe money.  Don’t run from them, return calls, and be honest about your cash flow problem.  Avoiding the problem doesn’t make it go away and lack of communication only escalates the issue.  Simple communication can make many problems smaller than first believed.
• Ask for terms – If payment is due in full, ask if a partial payment can be accepted.  Often the person or company you’re dealing with will give terms when asked.  For them, it may be an attractive way to manage their risk and exposure in the money you own them.
• Try to find an area of flexibility  – Related to asking for terms, discuss with the person or company you owe what their immediate needs are.  You may find they have an immediate need for money you can satisfy.  You don’t want to appear to be haggling over the money you pay, but sincere in trying to help them while asking for help yourself.  Look for a win/win solution you both can live with.
• Don’t make a promise to pay you can’t keep – This is a common problem.  You feel a bit embarrassed and desperately want to make a payment as soon as possible so, you give your best case scenario for payment as an expectation.  And then miss the expected payment date by days, weeks or months.  Your credibility is lost.
• Don’t overextend – Don’t make a payment that’s greater than you can realistically afford.  If you think you can pay $X, but feel safer paying $Y, discuss paying $Y.  What you want to do is be sure you service debt, but don’t dig yourself into a larger cash flow hole.
• Look for opportunities to factor a  receivable – Factoring is a legitimate business relationship with a lender whereby you sell your accounts receivable at a discount.  The buyer pays you immediately and collects the payment from your customer.  The discount percentage can vary and not all receivables are credit worthy of factoring, but for some companies this is a wonderful opportunity.  You can use the money you receive to service debt.

There are six tips to handle a business debt you can’t pay.  What would you add to my list?

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UPDATE:  Think twice before you use a credit card.

When under cash flow stress, there is great temptation to pull out your wallet and fix your cash problem with a credit card.  Many business leaders have done it.  And many, if not not most, have lived to regret it.

I’m not talking about using credit cards to pay routine business expenses, we all do that – web hosting, travel, etc.  I’m speaking about using credit cards in volume to pay expenses such as payroll and rent when you’re facing a serious shortage of cash in your business.  In cases such as this, you should seek short-term lending from your bank, investors, and other lending sources or you should take aggressive measures to quickly lower expenses.

The problem with using credit cards to address cash flow problems is it’s digging a bigger hole to bury yourself in later.  Credit card debit comes with outrageous interest rates and can be as addicting as crack.

Credit cards look good in a cash flow crisis for several reasons:

• easy to use
• immediate access to money
• low monthly payments
• puts the immediate problem behind you

But here are the realities:

• high interest rate
• doesn’t fix the problem, just pushes it to the next month
• makes your cash flow problem worse as next month you have the original expense and need to service the credit card debt
• gives a false sense of relief and can stifle action to fix the underlying cash flow problem

Two quick stories.

I know someone who periodically floats rent and sometimes payroll with credit cards – giving himself a temporary loan while awaiting receipt of customer payments.  It works for him and he hasn’t been bit yet.

I also know a person who had a serious cash flow problem in their business and used credit cards to manage their way through it – $100K in credit card debt later they called it quits.  Years later they are still working to settle their debt.  When asked how it happened, this business leader answered “It was easy to get the money and we thought we could get ourselves out of the mess in a few months.”

Think twice before you rack up credit card debt to pay business expenses.

Related, if you’re interested in FICO scoring – how it’s established and its importance to accessing credit of all type – here is a nice article that breaks it down nicely and easily explains the importance to all borrowers.

Lenders are tightening their standards for new loans and credit cards, and they’re paying close attention to an applicant’s credit score. That score, called a FICO score, often determines whether you’ll get credit and at what interest rate. ~via npr.org

Part of the story is how your use of credit cards and other available credit can lower your FICO score, thereby increasing your cost of moeny while deceasing your access to funding – a double-edged sword.