3 Ways to fund a business in distress without a bank
For businesses of any size, one thing is clear: Access to cash is essential.
Once a business runs out or has reached its limits, everything comes to a standstill. It takes money to make money and that means that knowing how to get access and what to leverage in what way can mean the difference between life and death of a company.
Before we begin, note that everything in this article can also be relevant to companies that are not in distress. Any company that has maximized its internal cashflow could benefit significantly from each strategy listed below.
There are 3 strategies that allow a company to get access to funds relatively quickly:
- Leverage invoices through factoring: Fast and simple, and great to generate a one-time boost in available cash
- Leverage your inventory through inventory financing: Fast and can be leveraged as long as you have finished inventory available
- Leverage your new sales and capability through work in process funding: Fast and can be leveraged as long as you have new projects available
Each of these has different use cases and a different impact on the business.
This article is split up according to 3 different needs (click the one that is most relevant to yours):
Strategy 1 - When you have existing customers to leverage.
The idea behind this is simple. We’re going to use factoring as a way to get access to cash quickly.
This is how this works:
- You sell your outgoing invoices to a factor
- The factor pays you a significant percentage of the invoice up front
- When the customer makes payment, you get the remainder minus a small fee for the factor
It’s fast, simple, and doesn’t involve any debt.
Of course, this strategy has its limitations.
- It only works when you’re not already leveraging your invoices.
- It can only provide a relatively small boost in funds
- It basically shifts your payment schedule which means that unless you keep factoring your invoices, you will experience a dip in cash on hand really quick
When does this make sense?
Factoring to boost your available cash on hand only makes sense if you’re in one of these situations:
- You have a one-time expense that needs to be covered
- A large but slow-to-pay customer’s payment is taking too long and the slow payment itself is lies at the root if the maximized internal cashflow
Note that factoring can give you operational advantages as well, but that’s not what is in scope for this article.
Strategy 2 – When you have unleveraged inventory available
If your company is in a position where it needs additional cash, a good option is to leverage your available inventory. Even if you move inventory regularly, but have a constant buffer available, you can use this to have some extra cash available when you need it.
This is how it works:
- You have your inventory appraised by the funder
- The funder opens a credit line for you based on that appraisal
- You are allowed to use the funds for any transaction needed, or for a few pre-determined uses
The leverage often takes the form of a credit line that is just available to your business when needed.
It goes without saying that this is a great way to overcome temporary needs for cash and can cover a significant amount.
Moreover, this strategy can give you quite an operational advantage since only IF you need it, the value of your inventory is immediately available for use.
With this, you are able to transform your inventory into an asset, where previously it was just a necessary burden.
Is this perfect? Of course not.
Here are a few cases where inventory financing is probably not available:
- Your inventory is perishable
- You carry branded items
- Your inventory is in a specific niche that the funder does not understand
With this strategy, the personal nature of this funding structure comes to light. More often than not, the most effective solutions are more personal.
When does this make sense?
Inventory financing is always very useful, but for companies that need to get out of a difficult situation, inventory financing only makes sense if you’re in one of these situations:
- You sell your inventory in relatively small parts of its total value
- You will be able to sell your inventory and there is a demand that you have access to
At the same time the following needs to apply:
- You sell a product that has a broad audience
- You sell a product that retains its value over time
- You have a significant amount of inventory worth more than $100,000
Strategy 3 – When you have a new customer
So, when you do have that new customer, and all you need is the cash to execute and fulfil the order, what can you do?
Well, provided that your purchase order is well-structured with the right safe-guards in place, you have two options, for two different types of companies:
- For Manufacturers: Work-in-process funding
- For Distributors and suppliers: Purchase order funding
Here’s how both work:
- You have a purchase order
- The funder provides the means to buy the needed product
- The product gets delivered
- Payment is made and the funder’s fee is detracted
For purchase order funding, you are not allowed to change anything to the product. As soon as any additional work required, work-in-process funding is your way forward.
For work-in-process funding, as long as you can deliver the
Here’s a more detailed explanation on the difference between the two: Which financing options make sense for manufacturing companies in 2021?.
Note: WIP requires industry knowledge which makes it a rare solution and hard to find.
When does this make sense?
Leveraging purchase order can be done whenever you have a new customer. In fact it is one of the most reliable ways to scale a company beyond its current capacity or means. That means it’s also a very effective way to jump-start a business after a difficult period.
These solutions make sense when:
- Your products are proven in value
- Any contract you have in place provides enough protection in case the buyer wants to change the purchase
- The purchase order is significantly large ($200,000 +)
- Your capability for delivering the product is proven as well as your suppliers
This means that these are not options for most starting companies, but absolutely perfect for companies that have been in business for a while and want to grow or push for survival.