How Entrepreneurs Can Survive a Cash-Flow Crisis

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Peter Hoey

Peter Hoey

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First, harvest the low-hanging fruit: Read the fine print for unnecessary add-ons or mistakes in leases and contracts. Next, when it's time to extend those leases and contracts, shop around for other suppliers. Then call your current vendors and raise the matter of a better deal openly and honestly. Can you pay early for a discount, pay with a credit card for a discount, or do without some bells and whistles? Other entrepreneurs prefer to make a take-it-or-leave-it offer. Says Tepper: "Some vendors might say, 'I'd rather have some money than no money.' "

O.K., IT'S A CRISIS

1. Slash expenses as if your life depends on it. Reduce salaries temporarily, making sure the boss—that's you—takes the largest pay cut. Tell your suppliers you're running into a problem and need to extend payment over a six- to nine-month period. Then have a promissory note executed, with interest.

2. Consider last-resort borrowing. Taking a distribution from your IRA is effectively a tax-free loan, but only for 60 days. After that there's a 10% penalty, plus tax implications—and you're putting your retirement at risk. You might also turn to a factor, who will pay you, after taking a cut, the value of one or more outstanding invoices. Although the practice is common in the food, fashion, and trucking industries, it's a short-term fix at a cost well above prevailing interest rates — no panacea for a company already in trouble. The field is lightly regulated, so vet all factors through the Better Business Bureau, and get bids from several different ones.

3. Liquidate inventory. "Call it a 'The Economy Stinks Sale,' " says Lenzer Kirk. Most business owners know what it would take to make an offer "that customers would find impossible to refuse," Rice says. If doing so can garner enough of a reaction, it just might hold you over for the short term.

Let customers know this isn't a normal business practice, which will make it easier for you to raise prices later. But bear in mind that, in commodity businesses, some customers will disappear when prices go back up.

Back to BWSmallBiz December 2008/January 2009 Table of Contents