Grants and Free Money

Have you heard from commercials, online ads, or friends that there are a lot of small business grants out there, just waiting for someone to apply for them? This is one of the most common questions that business owners or startups ask. There are a lot of scams and false information out there, so this article intends to help you learn the truth about grants and free money. 


The Facts About Grants

The fact is, no government agency is giving out free money; 100% financing is not available. According to the KSBDC, less than 5% of businesses are started with help from government grants. There are a few government grants available, but they are usually not for 100% financing of the project costs, and they are for very specific programs: high technical areas of industry, schools and training programs, and other government programs. 

If you happen to find a grant that fits your business category, there are very specific requirements for even applying for the grant. Grants are given from a variety of public (government) sources, as well as private sources, so there are usually eligibility requirements for them. Also, if you happen to secure a grant, there are required activities you are responsible for carrying out... and if you don't then you may have to pay back the grant money.

 

Legitimate Grant Resources 

 

Beware of Scams

Always be wary of anyone or any business that is offering you a chance at free money. This is especially true if they are asking for a fee upfront or money that you must pay in advance. Typically those giving out grants do not ask for a fee to apply for the grant. These scams may also ask for sensitive information. Do not give them any of your personal information, especially your social security number. Just because a business or individual advertises in national media outlets or on the internet, it does not mean they are legitimate. A good idea is to check with the Better Business Bureau and/or the state Attorney General's Office for complaints before talking with a company who is offering their services in regards to grants. 


Anybody can claim that "over 1 million entrepreneurs received grants last year to start their business," but that is simply not true. Most startups have to borrow funds from friends and family, receive a bank loan, or invest some of their own cash. Grants are very inciting, because who doesn't like free money! Yet it is very hard to get a grant as a startup and there is not much out there for you. If you have any question as to weather or not a grant you are looking at is legit, contact your local SBDC office and they can help assist you.

Bank Loans vs. Lines of Credit

There is a common financial principle called "The Matching Principle." This is the concept that you need to match your type of financing with the type of asset you want to purchase. This is easily seen when you use debt funding. For instance, if you want to purchase a new grill for your restaurant, what kind of deal do you look for? What if you want to purchase a building and land? There are 2 main ways that you can fund purchases with debt funding: traditional bank loan or a line of credit.

Bank Loan

We all know what a bank loan is. You might have one for your car, your home, your credit card consolidation, etc. There is a set interest rate and a set period of time until the loan should be repaid. With this, there is usually an amortization schedule given to you so you know what payments will need to be made each month. A bank loan can be a short-term loan (1-5 years) or a long term loan (5+ years).

When you look at the matching principle, you want to fund short-term assets with short-term debt financing. For example, if you need to purchase office supplies for your business (short-term assets), you will want a 1-2 year bank loan (short-term financing). On the flip side, if you purchase a building (long-term asset), you will want a 10 year+ bank loan (long-term financing). If you do not follow the matching principle and you finance a long-term asset with short-term financing, you can mess up your cash flow and find yourself struggling to make payments. A short-term loan can be useful if you know exactly what short-term assets you want to purchase and can justify how those short-term assets will bring about a positive change in the business. What about those purchases that you have no clue how to project and could be seasonal expenses? A line of credit could be a perfect fit for you.

Line of Credit

A line of credit is a excellent option for seasonal businesses or those businesses who need short-term financing. A business who might need some additional cash to help make purchases during their peak time, a line of credit would be a perfect option, because they do not borrow more money than they need. A line of credit works very similar to a credit card; you only pay back interest and principle once you borrow (take a draw) the funds. A line of credit will give you a credit limit (the maximum amount you can borrow) and will not charge you interest on money you do not draw on. There are some differences between lines of credit structures with different banks, but most operate the same way. 

DO NOT use a line of credit to support a long-term asset. Lines of credit are perfect for inventory control, emergency funds, or seasonable businesses. If you are purchasing a long-term asset, you will want to look at a traditional long-term loan. A line of credit is a revolving fund, and should not be tied up to a long-term investment. Always remember the matching principle when you are looking for fund purchases: support short-term assets with short-term financing, while support long-term assets with long-term financing.

Managing Cash Flow

We hear this term, cash flow, thrown around a lot, but what exactly is cash flow? Basically, it is money that comes in (sales) and the money that goes out (expenses). It is the position of cash you have to cover your daily costs and pay your bills. For instance, if you make a sale for $1,000 and you receive cash payment, your cash flow is positive $1,000. If on the next day, you pay your rent for $750, your cash flow is negative $750 for that day, bringing your cash position to $250. This is a very simple illustration, but what happens when you don't receive payment on a sale for 30 days? Or what happens when you purchase inventory and don't pay your supplier for 60 days? Your cash flow is directly influenced by your accounts receivable (money people owe you), accounts payable (money you owe people), and your inventory.


Managing Accounts Receivable

Remember, accounts receivable (AR) is the money a company or person owes you. If you fix someones' sink, you might give them an invoice that is payable within 30 days. Collecting on sales is a vital driver of the operating cycle and affects your businesses cash flow. If you make a sale, but don't collect cash on that sale for 120 days, you might be low on cash, which might affect your ability to pay your bills. It is vital to improve your collection of your accounts receivables.

How to improve your collection of receivables:

  • Send out invoices as soon as a sale is made or work is completed.

  • Make it simple for your customers to pay you via credit card, PayPal, or automated electronic payments to your bank account.

  • For bigger customers, do a credit check for new customers. Order a credit report to determine whether their credit history shows any risks.

  • Set limits for customer’s credit.

  • Print your credit terms on every invoice.

  • Be sure your terms are followed. Keep track of who owes you money, send payment reminders on a regular basis, act immediately if payments are overdue, and stick to your credit terms if late payments are overdue.

  • Offer discounts for early payment to encourage customers to pay quicker.

What to do if payments are late?

  • Get in touch with customer. By letter, then phone. See if there are any problems, if they are unhappy, etc.

  • Stop any current or future work/sales for the customer until balance is paid

  • Set up payment plan that will let the customer clear the debt over time

  • Last resort, use professional collection agency


Managing Accounts Payable

Accounts payable (AP) is the money you owe when you purchase supplies, goods, services, or other items. Often times, suppliers will allow you to purchase goods on credit, in which you have to pay back in 30 or 60 days. Managing your payables can directly help your cash position, especially if you are seeing fluctuations in your sales. 

How to manage your accounts payable:

  • Keep on eye on your spending. Buy only what you need, and if sales start to decrease you need to reduce your spending to avoid cash flow issues.

  • Research multiple suppliers and review payments terms for each. If you find a better deal, your current supplier might be willing to match it.

  • Try to negotiate time. If you cashflow is tight, ask for an extended time to pay (45 days instead of 30).

  • Be sure your terms begin when you receive the complete delivery, not partial.

  • Pay within the terms. Don't pay earlier that you need to, but don't pay later that you are supposed to. If you cannot pay by the due date, contact your supplier and arrange for a payment plan.

  • When dealing with large companies, ask about paying quarterly instead of monthly.


Managing Inventory

You always want to make sure you have enough inventory on hand to satisfy customer demand. Too little can upset your customers, and too much means that you just spent cash that you could have used to pay bills. You don't want excess inventory sitting on the shelf tying up cash flow. It is important to have just the right amount of inventory, according to your market demands.

How to better manage inventory:

  • Do a thorough review of your entire inventory. Determine what items are selling and what items are not, which items are providing the best profit and which items are not, etc.

  • Take action to move out older or excess inventory. This might mean giving discounts, selling them at costs or below costs, or even donating them. The point is to free up cash so you can invest in fast turning inventory.

  • Be aware of items that you must never run out of. These basic items that your customers demand should always be in stock.