Fast Cash
January 15th, 2019

Fast Cash

Cash for car titles; payday loans; quick cash; fast money….  So how does this relate to small business ownership?  Cash.  Lack of adequate cash is one of the biggest causes of small business failure.  There are multiple causes for cash flow problems, but two often stand out.  The first, and arguably the most important, is not knowing your cash position each day.  Things can often happen so fast that all of a sudden a particular event can create a cash flow problem.  Say you have to purchase new inventory; even if you have terms from the supplier the inventory may not be turned into cash fast enough and suddenly you are short on cash.  This is not at all an uncommon occurrence but if you haven’t planned for it you could suddenly be in trouble.  And one of the results of such an occurrence is that you may have to forego a paycheck or take less until you sell that inventory.  And let’s say you do sell that inventory at a profit, but then you may be thinking I’m making a profit so why don’t I have any more cash?  Profit is not cash, and if you’re not regularly paying attention to your cash position you might not see the problem coming and be able to do something about it.

The other thing that stands out as mentioned above is failure to plan for it.  If you know that there are going to be periods where there might be a shortfall due to the normal business cycle or even some unforeseen event, know what the most likely sources of working capital are.  The most obvious place to start is your own bank.  Bank financing is generally the cheapest form of debt financing there is.  But generally banks don’t like providing lines of credit or working capital loans to startups or early-stage companies with limited earnings history – even if it’s your own bank.

 So if you haven’t done it already, the first thing you should do as soon as possible is to go to your bank and find out what if anything they will do or if they will even consider it.  If not, it may be worth checking other banks – like getting a second medical opinion.  In Richmond, Virginia for example, there is one place where there are four banks in two blocks.  And they are not long blocks.  There are also two more several blocks away.  So if you get a “We don’t consider working capital lines of credit….” from your own bank, don’t stop.  Remember, banks are always after new accounts.  You could say something to another bank like “As we grow we are going to be running a lot of cash through your bank.  We are going to be a good customer for somebody. Your bank could be it.”

Whoever you talk to at your or another bank, find out exactly what they would need if you apply and have it ready almost like emergency supplies that you can grab and go like up-to-date P&L and balance sheet and personal financial statements and most recent tax returns if you have them.  Also you should probably check out some of the multitude of online lenders that have appeared in the last few years to fill that void of banks not lending to small businesses.  Their loans are frequently more expensive, but if you are in a bind and can get it fast it could be worth the extra cost.  It could save your company. 

And your car.


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Student Loan Debt
January 8th, 2019

Long-range weather forecast – possible strong storms on the horizon.  Federal student loan debt is the only consumer debt segment that has continued to grow since the last recession, also leading to a rising default rate.  Over the last eleven years student loan debt has grown almost 157%.   According to the Federal Reserve there was $1.5 trillion in student loans outstanding through the second quarter of 2018, and the number continues to grow.  At the same time student loan debt currently has the highest 90+ day delinquency rate of all household debt, and these delinquency rates are within about a percentage point of their all-time high in 2012.  Couple that with the fact that interest rates are continuing to slowly increase and you have the possibility for those severe storms on the horizon to do some serious damage.  One of the most severe effects of the student loan crisis is the potential negative impact on the broader economy which is continuing to slow down, albeit slowly.  But it is definitely slowing.

One segment of the economy potentially affected by defaults on student loan debt is small business.  Debt financing of many kinds such as working capital loans, equipment purchases and real estate acquisition is often critical to a business, but if there has been a default it can have a serious negative effect on a credit rating making getting loans more difficult or even impossible to get.  An unpaid student loan on a credit report is close to the kiss of death.  I had a borrower turned down for a loan because of an old – very old, unpaid student loan payment.  The number was almost tiny; the business owner had been trying to pay it off but could never get a response from the servicer. The borrower was very strong including a high credit score, but that unpaid student loan killed the chance to get a loan.

As young adults struggle to keep up with student loan payments they are forced to make financial concessions such as delaying starting families or buying a house – two things that generate substantial economic activity.  It is a serious problem that is only going to get worse before it gets better and could also have a negative effect on the formation of new small businesses.

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