You know the situation. Most business owners probably experienced it at least once. You have an unusually slow month, and cash is running low. It’s time to make the payroll and pay the vendors. You already maxed out your credit cards but you need another $XX,000 to sail through this and hope things will get better. What should you do?
Well, it’s a really tough situation. If you are already low on cash, it’s hard to find a lender who will lend to you at a reasonable rate. But if you are in a cash flow emergency, the following are some options you can consider.
- Negotiate with Vendors: One thing you can potentially do is to negotiate with vendors and ask them to extend the payment terms. This might be a difficult conversation, but I think most vendors will appreciate you to be honest with them rather than to ignore the bills completely. Someone actually taught me a trick that I can use as a last resort: send a check without signing. The vendor will return the check and ask you to sign. This will give you some breathing room while you turn around your business.
- Friends and Family: Before you go to a loan shark, please consider getting help from your friends, family and clients. If this is truly a one-off situation, most people will offer help if they can afford it. If applicable, offer your products/services to them in addition to paying the money back. It might be a win-win situation in the end.
- Sale-and-Leaseback: If you own equipment, you can sell the equipment to get some cash and lease the equipment back. Most equipment financing providers offer this service. This is a relatively painless solution if you own some hard assets.
- Short-term Working Capital Loans: If the above solutions don’t work out, you can consider getting short term working capital loans from cash flow loan providers. The interest rate is going to be high (70+% APR) and in most cases you will have to personally guarantee the loan.
- Merchant Cash Advances: It’s similar to the short-term working capital loans, but you might be able to get the advance without a personal guarantee. Merchant cash advances are usually paid back based on a percentage of your business’ revenue. If your business goes under, there will be no revenue, hence no payment, and you will not be personally responsible for it. It all sounds great, but you will be paying an even higher APR than you would for cash flow loans. You also have to incorporate your business. If you are a sole proprietor, you will still be responsible for the amount you owe because you are your company. Each MCA provider has a slightly different format — read the contract carefully and consult a lawyer friend. Given the tough circumstances, MCAs might be a decent solution for you to get the capital for your business to make it work. If things don’t work out, you will lose the business but your personal debt load won’t be increased. Read What Happens When You Default on A Loan for more details.
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Prevention is the best medicine. But if you get into a tough financial situation, think hard and find a solution that will work out in the best and the worst case scenario.