In trying economic times, many businesses find it difficult to obtain financing to support expansion and growth or fund working capital. Before rushing out to a bank or venture capitalist in search of external financing, take a close look inside your business first. Upon closer inspection, most businesses find that there are things they can do to generate cash internally, techniques often referred to as “bootstrap financing.”
Tighten Credit and Collections
Bootstrapping usually starts with an analysis of credit and collections procedures. Many companies leave cash on the table by not tightening up their credit policies and being diligent about collecting outstanding receivables.
The first step is to establish a credit policy that dictates which customers will and will not receive payment terms from you. This helps nip the problem of unpaid receivables in the bud by not extending credit to high-risk customers in the first place. Even with a credit policy in place, however, you may still have to deal with late payers.
To find out which accounts are past due and how late they are, create an accounts receivable aging report that tracks the payment status of all your customers. The report should reveal how late payments are (e.g., 0–30, 30–60, or 60–90 days past due) and the amount of each late payment, enabling you to spot potential problems early enough to take action.
Next, act quickly to collect unpaid accounts. The longer that accounts are past due the less chance you have of collecting them. Studies show that the likelihood of collecting receivables drops from more than 90 percent after 30 days to 74 percent after 90 days and just 50 percent after six months. Here are a few tips to help you get paid quickly:
- Send invoices immediately, preferably upon shipment of goods or delivery of services.
- Make sure your payment terms are stated clearly on your invoice.
- Follow up on past-due receivables promptly. If your terms are net-30 days and payment hasn’t arrived on day 31, get on the phone with your customer to inquire about it.
Obtain Trade Credit
Another good potential source of bootstrap funds is trade credit. In the same way that you offer payment terms to some of your customers, your vendors and suppliers may offer terms to you. In effect, these terms are the same thing as an interest-free short-term loan. For example, if a supplier offers you net-30 or net-60 terms, this gives you an extra 30 or 60 days to use your cash.
Most suppliers will want to see some history of on-time payments from your business before extending terms, especially if you operate a new business. But you may be able to negotiate terms upfront if you can show a solid financial plan that demonstrates your understanding of your business’s finances.
Another alternative is to pay suppliers and vendors with a credit card, if they allow it. If you pay off the balance each month before the due date, credit cards also essentially act as an interest-free short-term loan.
The most obvious but often most neglected way to raise funds internally is simply to cut costs and reduce waste:
- Avoid miscellaneous bank fees: Switch to a free small business checking account and avoid overdrafts and paying out-of-network ATM fees.
- Bundle your telephone, Internet, and wireless services: Competition is forcing rates down in many markets, which may offer more opportunities for savings.
- Scrutinize your shipping and delivery costs: Does that package really have to be sent overnight? Two- or three-day delivery is usually adequate, at half the cost of overnight shipping or less.
Don Sadler is a freelance writer and editor specializing in business and finance.