Chapter 4 | Potential Sources of Money to Start or Expand Your Small Business | 63
You may be able to fall behind a month or two on your mortgage payments and generate some quick cash that way. However, the mortgage holder will take the property back from you after a few months. Don’t use this method unless you’re very sure that you can become current again quickly. This scheme should be tried only if you’re sure you’ll be able to come up with the money when you need it. As with everything else, common sense should be applied to living expense deferral plans. Otherwise, you may find yourself trying to read a foreclosure notice in a dark room.
Trade Credit Arranging for trade credit involves borrowing from the companies from whom you will buy your merchandise or raw materials. This form of borrowing rarely works for service businesses, because salaries are the biggest expense and employees are usually not interested in lending you their salaries. However, I do know of a number of new businesses where friends and family members pitched in for free in the early days; it never hurts to ask. If you’re in the retail, wholesale, or manufacturing business, arranging for trade credit can help considerably. In most businesses, you typically order supplies and pay for them 30 to 60 days after you receive them. The problem for new businesses is that it’s also standard practice for suppliers to demand cash up front from start-ups.
This policy isn’t immutable, however. Often, if you present your business plan to potential suppliers, you can arrange to order at least some supplies and merchandise on credit. After all, your supplier has an interest in helping you succeed so that you will buy his merchandise for many years to come. The key to maintaining good relations with suppliers while borrowing from them is to keep them informed of what you’re doing and why. This communication rule is particularly important for new businesses. If you arrange credit and can only pay a part of your first bill in 30 days, pay that amount and ask the supplier for a short extension. Some suppliers may offer extended payment terms to get your business. Occasionally a supplier will ship merchandise in a slow part of the season and let you pay for it several months later, in the busy season. Before you try any of this, check with your suppliers’ sales reps about company policies. Your suppliers are invaluable to your business, and you want to keep them on your side.
Friends, Relatives, and Business Acquaintances The type of financing provided by close friends and relatives does not normally vary much from that provided by strangers. The help may be in the form of a gift, a loan, or an equity investment. The big differences are usually the availability of money in the first place and the interest rate or investment return.