Start-up financing

How to get start-up financing without a bank loan

Start-up financing

Start-ups grow fast, and they need to piece together an elaborate puzzle to see the fruits of their labour. That includes brilliant people, endless hard-worked hours and sufficient cashflow. No wonder start-up financing is such an important piece of the puzzle.

It’s incredible to see a young start-up reach new levels in their business, but if the proper financing is missing, they’ll never realize the picture they envisioned. For many, the biggest challenge is getting the working capital to operate at the right scale.

A widely quoted U.S. bank study explained that 79 percent of young businesses failed due to “starting out with too little money.” Bank loans can be extremely challenging to secure at an early stage, and other financing like angel investments can bring its own set of challenges.

Co-founders and young CFOs then spend countless meetings drumming up new rounds of funding, and for good reason. Securing these series of VC funding can mean an incredibly rapid enhancement in growth, but at a cost. With pressure to grow exponentially (sometimes 10x each round) eventually, deals can be made with the wrong partners. Unfortunately, many founders never secure their funding and are forced to abandon their current business goals.

Growing like a weed, but stuck without options

Startup financing

Start-ups aren’t handcuffed to the traditional entrepreneur financing resources. Alternative solutions exist that can be an immediate source of consistent working capital.

For Ted Hope, President of PM Retail Solutions in Scarborough, Canada, that’s exactly what he did when faced with a financing dilemma.

“As a start-up company, you don’t have the credit or history of a more established organization. At the same time, you’re subjected to a lot of COD and cashflow issues,” Hope explained.

Hope was four months into his new business venture, a custom manufacturer of retail store display fixtures, and the outlook for the business itself was looking very promising. In fact, the company brought in almost half a million in revenue in the first six months, but that was exactly the problem.

“We were self-financing, but as we got more sales, I had about $150,000 in A/R that I wasn’t going to see for at least 60 days,” Hope explained. Since they had to wait for customers to pay their invoices, cashflow was tight.

Different kind of start-up financing

Start-up financing high growth

For start-ups and growing small businesses, this situation is likely familiar. It’s unfortunate, but 82 percent of businesses that fail, do so because of cashflow problems.

For companies with regular invoices like PM Retail Solutions, they found an alternative solution with accounts receivable financing (also known as factoring). By leveraging those unpaid customer invoices, they could get almost immediate cash flow from their Liquid Capital partner. Hope worked with Liquid Capital to get paid upfront for a significant value of the customer invoices.

The fix was almost instantaneous. PM Retail attained a pre-approval and received $60,000 in their account within only one day of initializing the transaction. Liquid Capital was then responsible for collecting on the customer invoices, and distributing the additional revenue to PM Retail at that time. This also freed up a lot of time for Hope and his team.

Hope had found his solution. “Factoring allowed us to free up our cash flow during a precarious time as a start-up, making us almost instantly capital self-sufficient. We can pay COD for almost everything we do, and have better terms because we have money in the bank.”

Finding the best solution for your start-up

Of course, this solution is one of many, but it’s worth investigating to see if it’s the right one for your business.

Alternative financing specialists can offer you sound advice, and should be able to work as a supplement to your traditional banking options as necessary. In many cases, Liquid Capital will work with clients on both short and long-term timeframes as needed, and can help a client graduate to access traditional bank loans as well.

Until that point, alternative solutions like accounts receivable financing can not only bridge the start-up funding gap, but can be the flexible solution that a founder and CFO have been searching to find.

Read the full story on PM Retail Solutions here.

Cash flow terminology

Cash flow terminology: Learn the basics

Must-know cash flow terminology to help you stay cash positive.

Cash Flow Terminology

Cash is king, and cash flow — the net money flowing into and out of a business — is your operational lifeblood. When cash is in high supply, you can be riding a wave of exhilaration — making entrepreneurship feel like the golden path. But when cash flow issues arise, it can threaten your entire enterprise.

Sure, you might be able to ‘outwit’ your bank loan challenges, but sometimes borrowing from the bank isn’t always an option. The best way to get ahead of these challenges is to know your options and alternatives to keep cash flow positive.

Here are some cash flow terms to help you stay on top of your terminology.

Break-even point 

The level of sales revenue a business needs to cover all operating expenses, which would put you at a zero profit. (Sales revenue — Cost of sales and other expenses = Zero). Everything beyond the break-even point would be considered a net positive profit level.

Burn rate

This is the rate that a company is losing money, figuratively describing cash as being ‘burned.’ Typically, the burn rate is expressed as a monthly figure, and it can be synonymous with negative cash flow. Investopedia also describes this with a twist in the venture capital world as, “…the rate at which a new company is spending its venture capital to finance overhead before generating positive cash flow from operations.”

Cash Conversion Ratio

This is the amount of time between when your business pays for its inventory, also known as your cost of goods sold, and when it receives payment from its customers.

Cash Flow Budget

The cash flow budget is quite simply a report on your business cash flow, showing how much money is entering and exiting the business. The cash flow budget shows how much cash you’ll have on hand at any given period of time.

Related: Learn 7 things a cash flow budget can teach you.

Cash Flow Statement

Also called a “Statement of Cash Flows,” this is part of your financial statements. Explore the steps to create your cash flow budget here.

Discounted Cash Flow

A method used to value an investment by discounting its future expected cash flows to find their value today, or net present value. The discount rate is chosen to reflect the risk of the investment. Possible discount rates are the weighted average cost of capital or the discount rate from similar projects.

Negative Cash Flow

Your cash flow is considered ‘negative’ when cash spending is more than cash generation over a particular period of time. In this case, the business spends more than it makes. See examples here.

Positive Cash Flow

Conversely, your cash flow is considered ‘positive’ when cash generation is more than cash spending over a particular period of time. This should be your goal.

 

Learn much more about factoring terminology in the Ultimate Factoring Encyclopedia. This free resource includes every definition you’ll need to know when applying for invoice factoring and securing working capital. Still have questions about cash flow? Connect with us today!

Ultimate Factoring Encyclopedia

 

About Liquid Capital

At Liquid Capital, we understand what it takes for small, medium, and emerging mid-market businesses to succeed – because we’re business people ourselves. Our company is built on a network of locally owned and operated Principal Offices, so whenever you’re talking to Liquid Capital you’re talking directly to your funding source and a fellow business person.

Five small-business trends that every company should consider

Every small-business owner is looking for an edge to set their company apart or give them better odds of success. Smaller companies are generally nimble enough to change or adopt new strategies when needed. But these businesses also run on a tight budget, and the trends they focus on need to both be cost-effective and demonstrate quick and tangible results. If the strategies are easy to implement, so much the better.

In many ways, small businesses serve as a testing ground for industry trends, and strategies often emerge from their operations that can benefit businesses of any size. Below, five members of South Florida Business Journal Leadership Trust share the trends they’ve noticed and implemented that should be on the radars of leadership teams across industries.

1. Be agile and innovate.

Few small businesses or larger companies from a decade ago have survived and thrived without being agile to prepare for and predict what’s around the corner. Businesses must be vigilant in learning and exploring how to adapt to the unforeseen marketplace — the best of small businesses and companies help create those very changes and innovations in their product, services and delivery. — Jeffrey Bartel, Hamptons Group, LLC

2. ‘Outsource’ technology.

Forty years ago, “outsourcing” was replacing internal labor with external labor on a large-scale basis. Today, a better application of “outsourcing” is the leveraging of technology applications. There is now an “application” solution to just about every function a company needs to perform, scalable to volume and sophistication. Small businesses can achieve high-level functioning at an affordable cost. — Michael Sluka, B2B CFO Partners

3. Try a handwritten note.

A very inexpensive trend that has historically worked well for us is the art of the handwritten note. Whether to say thank you, send a holiday wish or something else, it’s been extremely successful for us, especially in a time when everything is digital. — Durée Ross, Durée & Company, Inc.

4. Adapt to the changing expectations of the workforce.

Digital nomads, the gig economy and a fluid workforce have changed the traditional business model. Employees value freedom, autonomy and flexibility. It is very much an “adapt or die” model for many older businesses right now. It is critically important to evolve the business model to continue to attract and retain top talent, which ultimately dictates the success or failure of a company. — Jaime Sturgis, Native Realty

5. Conserve cash to accelerate growth.

Successful, fast-growing companies conserve cash in several ways. Contract manufacturing or outsource until volume justifies bringing an activity in-house. Reduce lead times (inventory holding costs) by purchasing from distributors rather than manufacturers. Use supplier credit or trade finance, which grows as volume grows and is less expensive and time-consuming than raising capital. — Dennis Custage, Liquid Capital

International expansion: Is your company ready? (Part three)

In part one of this series, we explored the pressures that cause us to consider international expansion for our companies. We also discussed the importance of market research surrounding cultural differences and structure (distributor, joint venture, wholly owned subsidiary). In part two, I shared lessons learned over 30 years as a senior executive running international operations for Fortune 500 companies.

In part three, the last of this series, we will focus on international finance, logistics, labor and treasury functions.

International finance often plays a decisive role in determining whether you should go with an arm’s-length distribution structure or take a controlling interest in your international operations. Considerations such as protecting intellectual property, competitive advantages or service-level consistency when serving major home-market customers’ foreign subsidiaries are legitimate reasons to take a controlling interest in your operations outside of the home market.

However, these concerns may be mitigated sufficiently by selecting the right distribution partner, as illustrated in part one of this series. The right distribution partner worldwide, or in a particular country, would allow your company to minimize the use of its own capital while taking advantage of the opportunity to expand outside of its home market. In an earlier article titled “Why company leaders need to think like outside investors,” I demonstrated why return on investment should be optimized even if gross margin is negatively affected. This is doubly true when dealing with foreign markets. When foreign markets are targeted for expansion, consideration should be given to the possibility of future restrictions on repatriation of profits and barriers that favor local operators. Transfer pricing between entities that are owned by the same entity can be subject to scrutiny by authorities.

Be prepared to face currency exchange rate risk. If you choose to invest in a country other than your home country and the exchange rate there devalues against the home country currency, not only will your equity in that country be worth less, but your product will also be less competitive against locally made products. Borrowing in the local currency may be a good strategy; however, your local entity in the foreign country may not have sufficient borrowing power to cover the amount needed without a guarantee from the parent company.

Here’s a tip. In the event that your company operates different product lines independently in the home market, when expanding internationally it is best to combine them into a single entity with a shared treasury function in each country. This way they can borrow from each other, present a stronger balance sheet to financial institutions and perhaps gain tax advantages. Such a combination also affords the opportunity to hire seasoned, savvy local management that will add value and complement the expertise of the product people you send out from your headquarters.

Supply chain lead times can increase costs for destinations that are on lanes that are served less frequently or involve multimodal transport. Costs can also increase through constant delays related to clearing customs. Be sure that these issues are clearly identified when you’re determining which markets to target.

Affordable and abundant labor may be one of the attractions for expanding internationally. However, the rate paid per hour may be misleading. Will the savings in labor costs make up for the added cost of materials, logistics and tariffs? What are the real labor costs when productivity, benefits, ability to hire and fire, training, and government regulations are included?

In my experience working at Xerox in the 1970s and ’80s, the company approached Latin America with a realistic human resource strategy by setting up training centers in key countries around the region. That allowed them to plug the gaps in technical, sales and management training. Among the benefits Xerox accrued were reduced spending on expats, attraction and retention of a highly motivated workforce, and quality of work standards that met or exceeded the levels achieved in Europe and North America. An added benefit was a great understanding of the developing country markets.

It has been a pleasure to share the lessons learned during the more than 35 years that I managed operations outside of my home market. Please contact me if you would like to discuss any aspect of international expansion. Let me leave you with the following bullet points that were the basis for this three-part series:

  • Buyers in each market exhibit different buying habits, even if they speak the same language that is spoken in your home market. Local knowledge is required.
  • Conduct market selection research that emphasizes culture, human resources, government regulation, financing, logistics and aspects that may be barriers to entry, in addition to the more obvious product-related research.
  • The decision to invest in a wholly owned subsidiary or a joint venture, or to name a distributor, requires deep research and participation by all involved in the business.

The Ripple Effect

As I work with companies in a variety of businesses, I generally focus on specific financing needs that run the gamut of scenarios; from high growth to high financial stress. My client is focused on addressing the company’s financing needs as it impacts company operations and seizing new business opportunities. At first glance, one could view the impact of acquiring the needed financing more narrowly. However, businesses are multifaceted, and the benefits extend throughout all aspects of the business and beyond, as well as positively impacting the U.S. economy as a whole.

Each party that interacts with a business is its own microcosm that has the same financial and operational needs. Whether it is a supplier, a customer, a building owner, an equipment provider or service provider, each has a vital interest in conducting business with companies that are financially stable and readily able to meet their financial obligations. In doing so, each party in turn can meet their own financial obligations as well.

The most poignant impact of a financially stable company is the ability to retain employees and attract desirable new employees. Every employee has their own set of financial obligations that need to be met. These would include paying their rent or mortgage payment, car payments, food, goods and services etc. Those providers in turn benefit and are able to address the financial and operational need of their business. The effects are felt further and further out into the economy. As in a single stone being thrown into a pond, the ripple effect generated spreads far beyond the point of initial impact. Given that small businesses constitute the vast majority of employers in the U.S., and correspondingly dramatically impact our overall economy, the value of companies having the requisite financing cannot be understated.

An important functional benefit is that when a company’s financing needs have been met, the business owner’s time and attention can be more readily focused on those issues that promote stability and growth versus being preoccupied and distracted with trying to find an answer to a financing shortfall. I have seen time and time again the emotional relief when this critical issue has been addressed.

I would welcome the opportunity to discuss my services with your clients and/or prospects as well as their far-reaching effects throughout their business.

Looking Under The Hood

The other day, I was thinking about the complexities of running a business and the many operational and financial components that must be in sync to truly optimize it success. As I thought about drawing a useful comparison, a gas powered car engine came to mind. Taken individually, each part of the engine contributes to its performance. However, if one or more of the parts does not operate properly, performance can be degraded, or worse yet, the engine can be seriously damaged. Critical to the operation of the engine of course is fuel. An unobstructed flow of fuel is the lifeblood of an engine. All components of the engine rely on the fuel to allow them to operate effectively and consistently. Conversely, any restriction of fuel will cause the engine to operate inefficiently, damaging parts and potentially causing the engine’s performance become erratic or to stop operating altogether. This comparison created many parallels as to the operation of a business and the critical role predictable cash flow plays in optimizing its performance.

While having predictable cash flow is seen as fundamental to the operation of a business, the ripple effects on all aspects of the business, not unlike the effects of fuel on the operation of the engine, bear further mention. The overall impact is that business decisions can be made, versus limitations and/or deferral due to undetermined receipt of payments by customers. These include:

  • Timely payment of suppliers – ability to take on more/larger orders and potential to negotiate discounts
  • Staying current with payables
  • Equipment leasing/purchase
  • Expanding facility or acquiring a new facility
  • Retaining/adding employees
  • Staying current on tax payments
  • Expanding marketing efforts
  • Engage needed advisors/consultants

While the above list is not all encompassing, it highlights the critical impact cash flow has on the business. An important by product is improved financial performance, ability to reduce debt and position the company to be a viable candidate for traditional financing or the ability to increase current financing availability. The result is a «high performance company hitting on all cylinders».

If your clients and/or prospects are experiencing «engine knock» in the operation of their business due to poor cash flow, I’d be happy to discuss a tune up and maximizing their financial MPG.

Just In Time – Just In Case

When a pressing need arises, we’re just in time. When planning for the future, we’re there…. just in case.

In working with a variety of clients, there have been numerous scenarios that called for using my financing services. They have run the gamut from seizing a sizable business opportunity to just keeping the doors open. In many instances, the timing was crucial, and we were “under the gun” to establish the account and start funding. In the alternative financing industry, these occurrences are common. However, it benefits all parties if a more time is available to address the issues on a proactive and strategic basis. While it may be a short term or “one off” financing need that we’re addressing, more often a longer-term integration of alternative financing is called for. That being the case, having time to assess the impact of predictable cash flow and the ability to confidently take on larger clients/orders aids in being able to make critical business decisions, many of which have been deferred due to the lack needed financing resources. Equally important, is the business owner’s ability to utilize those resources as they see fit. By being able to do so, the overall cost of the financing can be more effectively controlled.

At Liquid Capital, we utilize a business model that provides the business owner not only the needed financing but a level of discretion and flexibility to customize our services to their specific needs. Once a client’s customers are approved, our client can choose which customer, which invoice/s and the timing. Whatever the situation; a seasonal spike or lull in sales, a creditworthy but slow paying customer, a supplier needing a payment before shipping or an inordinately large order, the client can use our services as needed. Conversely, if there’s no current need, there is no requirement to use the financing nor any cost for not doing so. Being available as an “On Call” resource gives our clients confidence and comfort in conducting their business free from the frustration of second guessing when or if they’ll have needed cash flow.

This same flexibility benefits our banking partners. In working with a bank client, many times it’s only necessary to finance receivables of a select number of clients and specific invoices versus having the client finance all eligible invoices. This allows us to address the needs of the client while leaving the bank in a secure collateral position…. truly a win/win scenario.

“Success or failure in business is caused more by the mental attitude even than by mental capacities”. – Walter Scott

Recent Fundings – January 2020

Financiamientos Recientes – Enero 2020