Small Business

Credit crisis: Escape the cash crunch

Written by Tony Martin

Hard to come by and pricier than usual. Whether you’re looking for working capital or growth financing, the credit crunch is having a huge impact on where and how entrepreneurial firms can obtain money. Across the board, rates are higher, conditions stricter and monitoring more stringent.

Although the big banks remain a vital source of capital for many small and mid-sized enterprises (SMEs), their money isn’t as free-flowing or cheap as it was just a year or two ago. But, thankfully, they’re far from being the only game in town.

In fact, so many financing sources exist that figuring out which ones are worth the time and effort required to pursue them is a big job in itself. So, PROFIT has done the groundwork for you, considering a range of alternatives to bank financing and identifying those that are the best bets in today’s tumultuous markets.

Let’s start with a few sources you can cross off your list. With stock markets on life support, making an initial public offering (IPO) is pretty much only an option if you’re in the infrastructure or utility space with annuity-type cash flow. The crash has also sidelined angel investors—high-net-worth individuals, usually former executives or entrepreneurs, who regularly invest in high-potential startups and early-stage businesses. “A lot of them are already sitting in investments they’re not able to monetize,” says financial intermediary Mike Middleton, managing partner at Toronto-based Q1 Capital Partners Inc. “There’s no IPO market for them to get their money out.” The same is true of many venture capitalists, who are struggling with their existing portfolios and worried about the survival of the businesses they’re already invested in.

Buyout funds are also out, unless you have an existing relationship with one. “Most have committed the funds they’re interested in putting into new investments and are focusing on helping existing portfolio companies,” says Michael Epstein, managing partner at Fuller Landau LLP, a Toronto-based accounting firm. And asset-based lending (ABL)—which even in good times is usually a no go for service businesses that lack the machinery or other hard assets required as collateral—is currently scarce even for manufacturers. Epstein says these lenders are looking for assets that are still liquid in the current market, and are lowering their estimates of how much they can sell them for. That’s making ABL more expensive, as well as harder to get.

But the outlook for finding the financing you need is far from hopeless. Here are six sources that even in these dark days remain good options, along with our advice on how best to pursue them.

BDC: The Business Development Bank of Canada has numerous lending programs that look to your management team and viability as much as your balance sheet. And that’s good news, because this federal financial institution is one of the few viable options that’s still doing deals, says Dave Kennedy, a Toronto-based advisory partner at KPMG Enterprise, a consultancy for private firms: “The BDC is in business, they’ve got money and they’re actively out there in the market and doing deals.”

There’s more good news. In November, the federal government boosted the limit on the BDC’s borrowing authority from other lenders to $11.5 billion from $9.7 billion—a hefty 19% increase—explicitly so it will be able to provide more financing help for SMEs, given the credit crunch. “The recent credit market tightening has increased the demand for financing offered by such Crown corporations as the BDC,” said Minister of Industry Tony Clement in announcing the increase. “Our actions will ensure that the BDC has the necessary flexibility to help small and medium-sized businesses and manage its liquidity and business activities in a prudent and cost-effective manner.”

You’ll still need a good business plan and projections you can defend, though. Kennedy adds that the BDC won’t go for pie-in-the-sky stories: “Assume the people you’re talking to will do a lot of due diligence and won’t take stuff at face value.”

Customers: Although your customers have always been a viable source of financing, you may have overlooked them thanks to the years of cheap and readily available money from elsewhere. But they remain one of the simplest financing sources to tap into. And don’t assume that because money is tight, this is no longer a viable option. All it may take is a little proactive negotiating on your part.

Start by stepping up your collections process so your clients aren’t using you as a bank. Bill more often, and in smaller amounts. “People are more inclined to pay small increments,” says Kennedy, who also has this advice: “Follow up, follow up, follow up! If you’re the one calling up, pleading your case, saying, €˜I really need to get on your disbursements list this week because I have commitments,’ you’re more likely to be the one who gets paid.”

When money was in easy supply, many firms stopped giving discounts for early payments and charging interest on overdue accounts. But offering 1% off for paying within 10 days, for instance, translates into a huge yearly discount that Kennedy says many customers will jump at.

In return for asking customers to pay sooner, says Kristi Miller, senior investment manager at Vancity Capital, a Vancouver-based investment firm specializing in growth financing, you should offer something of value. You might, say, put them at the front of the line for a product or service of yours that’s in heavy demand.

Credit unions: If there’s one in your region, your odds of securing financing are better than from a bank. “You won’t necessarily get better rates, but you’ll likely get better service,” says Mark Wardell, president of Wardell Professional Development Inc., a Vancouver-based firm specializing in growth strategies for SMEs.

The financial crunch has forced credit unions to tighten their requirements and raise their rates. But they remain keen on entrepreneurial firms. “Credit unions are still trying hard, because their bread and butter is smaller businesses,” says Wardell.

Government programs: These are good options because their mandate to help businesses hasn’t changed, and governments are on a spending spree to try to revive the economy. The often-overlooked jewel is SR&ED, the Scientific Research & Experimental Development program. SR&ED offers hefty federal tax credits for R&D projects. “The stories we hear are, €˜Wow, we got our claim in and got a cheque pronto,'” says Kennedy. “These guys understand how important they are to many companies’ cash flow, and they are playing ball.” (See “The myths of free money” in PROFIT’s December-January 2009 issue, or at

Although no other program equals SR&ED for the sheer number of firms eligible for it, a vast array of other tax credits, grants and subsidies are available. The challenge is sifting through the options to find those that suit your needs and that your firm qualifies for based on your industry, region or other criteria. Find a consultant who not only specializes in government programs but has worked with businesses in your sector.

Suppliers: The more business you represent for a given supplier, the greater your bargaining power. Now is the time to use that leverage to ease the pressure on your cash flow.

If, for instance, you’re buying a big piece of machinery, a standard contract might call for you to pay half down and half on delivery. But now you might be able to get away with just 10% or 15% down, paying the rest by instalment. “It’s a matter of your relative negotiating power,” says Kennedy. “Everybody’s cutting back, so if you’re out there spending, you’ll get somewhere.”

But Miller warns against simply delaying payment on a few accounts. “It needs to be managed proactively and negotiated in advance,” she says. If a supplier trusts you and has a vested interest in growing with you long term, it’s more prudent to offer some options. This could include asking if a payable can be turned into a loan that you’d pay interest on. Or you might let a key supplier know you’re approaching a slow cash period and propose switching your 30-day payable to 60 days.

Barter: The simplest way to ease your financing requirements is not to need money in the first place. Trading goods or services with another like-minded firm means you don’t need to spend a cent, and often you may get what you’re swapping for at a discount.

There are downsides. Not having to come up with the hard dollars may mean “spending” more than you would have otherwise. As well, even though no cash changes hands, the Canada Revenue Agency considers bartering a transaction like any other, so you’ll have to account for the cost at fair market value.

Still, says Miller, such deals “can be incredibly lucrative.” She witnessed the advantages of bartering while working in Russia at a European bank helping ex-Communist countries make the transition to capitalism. In one mega-deal, PepsiCo Inc. swapped syrup used to make soft drinks for Stolichnaya vodka, since the Russians couldn’t come up with U.S. dollars and PepsiCo didn’t want to be paid in rubles. In return, PepsiCo got to market the trendy vodka in the U.S., which packed a hefty profit margin.

Your own bartering isn’t likely to be on a scale as big as that one. But even a smaller swap will achieve a key goal: to preserve your cash supply at a time when it’s hard to get your hands on it. And if you have a good eye for a deal, you might manage to craft a lucrative deal like PepsiCo’s. The key to achieving this best-case scenario, says Miller, is “to barter something that’s of less value to you and of a high perceived value to somebody else.”

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