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Does Your Business Have a Clean Bill of Financial Health?

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When it comes to a successful business, financial health is imperative. Financial health consists of knowing the business’s financial needs as well as the options available to help start, manage, and grow the company.

Exceed Network had the opportunity to have an in-depth discussion about managing cash flow and different methods of financing a company with Abby Parsonnet, Regional President of Webster Bank; Alain Mehani, Financial Advisor of Israel Discount Bank; Alfred Hedaya, President of Hedaya Capital; and Elina Baldgula, Business Development Officer and In-house Counsel at Hedaya Capital.

Cash Flow Management

To manage cash flow, you must have good information about what you’re looking to finance, your asset conversion cycle, capital financing, and matching financing to conversion cycle.

“The big math is understanding your payback and your ability to generate cash flow to service the debt. This all comes down to good information and model, which is critical to a business of any size,” commented Abby. “With a small business, you usually see an entrepreneur who may not have the grounding in accounting, and who may not have access yet to the kind of systems that give that information. It’s important for them to know what they don’t know and where they may be able to get that advice, or how to outsource some of those functions. That way, they still have access to the information to get the financing they may need and meet requirements.”

Understanding where money is coming from, how long it takes to convert resources into cash flow, and what is the most effective way to finance your company are vital. This knowledge will help you make better decisions for your company’s future. Especially if you are a new company, understanding your limits will give you a better grasp on what you need for your company to grow.

Inventory and Purchase Order Financing

Abby Parsonnet elaborated on inventory financing. Inventory financing is bank line of credit made to a company so it can purchase products. The products act as collateral in case the business cannot sell the products to repay the loan. This type of financing can help free up some cash that a business has allocated for inventory to cover more pressing needs. “In many cases, inventory financing might be one of the only options for a startup, simply because they have no other assets,” said Abby.

Inventory financing is appropriate as financing is riskier when assets have less liquidity. Inventory is, by definition, less liquid than cash, but is not fixed, so inventory financing can minimize risks when financing your company.

Purchase order financing is a short-term commercial finance option that provides capital to pay suppliers upfront so your company doesn’t have to deplete cash reserves. Purchase order financing is designed for growing businesses with little access to working capital or poor cash flow. The type of business that qualifies is usually a producer, distributor, wholesaler or reseller of manufactured products.

Factoring

Factoring, one of the oldest forms of business financing and is the cash-management tool of choice for many companies. Essentially, factoring is a funding source that pays a company the value of an invoice, less a discount. It can be an expensive form of financing, but can be valuable in industries in which receivables are not easily converted to cash or to rapidly expanding companies seeking cash for new opportunities.

Factoring is very common in certain industries, such as the apparel, where long receivables are part of the business cycle. This form of business financing is also very good for a new company because it may be harder to provide financial statements showing three years of profitability when attempting to get a cash flow loan from a bank.

Alfred gave advice as a factor. “For new companies, we may ask for financial statements, but we’re not making our decisions based on those statements. Our primary concern is who the company is selling to and do we believe that the company has the ability to produce, ship and sell the product.”

“Part of the benefits of factoring is that the receivables are sure, as long as they’re credit approved, clients can ensure that if their customer goes out of business or bankrupt, they will still receive payment.  Factoring is also very flexible, if the client is growing, so is their availability to additional financing,” added Elina.

Private Investors

A company may seek financing for many reasons.  Some may have depleted personal finances and need to go to an outside source. Others might be looking to improve their business without tapping into personal finances. Sometimes a business seeking capital finds help from private investors. “Whether a business decides to get capital from the bank or a private investor, the business should always consider business environment and their own financial condition,” commented Alain. Companies in touch with their financial health will know if seeking financing from a private investor is a productive option. Before approaching an investor, some recommend working to keep the business afloat through other means.

Unfortunately, most businesses that look to access capital from investors don’t realize the extent of the investor’s involvement. Often, a potential investor will want more than the business owner is willing to give. “A business may go in thinking that they will get a large capital infusion for a very little in return to the investor, whereas the investor understands the risk of the investment.” explained Alain.  “For the most part, investor will expect a very large share of the company, often times more than 50%. I don’t believe that a private investor should be a business’ first resort.”

 Crowdfunding

Crowdfunding, collecting finance from many people, typically over the internet, has helped many startups reach their initial goals. Recently, celebrities and producers have started campaigns on Kickstarter, a crowdfunding website, to raise money for movies or music albums. “Crowdfunding actually benefits the business more than the investor,” commented Alain, though that is not always the case with private investors. “I absolutely love crowdfunding; at our financial institution, we actually worked with a client from Exceed Network who crowdfunded for her new business. After raising a substantial amount of cash through crowdfunding, it only made Exceed Network and future investors more excited about her business plan and where the company was going.”

Although crowdfunding has proven to be successful for many in the beginning stages, can this actually be a model to use as the business grows?  “We believe that crowdfunding is good for the startup capital, but not for sustaining a company’s growth,“ stated Elina. “Companies must think about the future, once they start to grow and have to deliver product in large quantities, crowdfunding may not be the best option,” added Alfred.

One benefit of crowdfunding is that investors are motivated to participate in promoting your company, as they have already put money into it. It can be good marketing for your product, or at least provide feedback in case of failure. On the other hand, failure can hurt your reputation after publicly failing to deliver. Also, since the same type of people will participate in crowdfunding ventures, the network of supporters may become exhausted quickly. Finally, publicly announcing product details may lead to idea theft, but without enough details, investors might not trust the integrity of your company.

Financing your company can be a challenge. Understanding your company’s finances is an essential part of seeking financing. Your business may benefit from a unique combination of factoring, inventory financing, or even crowdfunding. Research methods of financing and seek plenty of advice before embarking on a novel path towards financing.

By Lolita A. Alford

Interested in finding out how to improve your company’s financial health? Call us at Exceed Network and see how we can help you!

info@exceednetwork.org

718-787-1400

379 Kings Highway

Brooklyn, NY 11223

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