7. Choose a mix of lenders and lessors. Don't rely on a single financing source. Develop relationships with several large and small lenders and lessors who can be depended upon. Many businesses only have enough account activity to maintain relationships with one or two banks-perhaps one for the receivables line and another for a mortgage. It makes sense to identify an independent lessor or two, who can augment direct bank financing but do not require anything like a full banking relationship. Also, the time may well come when a bank will reach its lending limit or, worse yet, reduce the credit line or refuse to renew it.
8. Match financing terms to the life of the asset. Try to avoid using short-term financing, such as a receivables line, for long-term assets or those that require extended earning power to support. Instead, use short-term financing for short-term needs. Consider leasing as a cost-effective form of medium-term debt to finance assets that will retain their value longer than the lease term. Equipment leases are usually written for a period of three to five years, but can be longer if the asset life and the company history support extended terms. This allows a business to accurately match revenues to costs. If a firm has recently acquired a large amount of equipment and would like to improve liquidity, a sale-leaseback may be a good option, allowing the transfer of title to the equipment while keeping it in service and paying back the debt over the economic life of the asset.
Veteran venture capitalist Fred Adler said it best: “Happiness is positive cash flow.” But I am sure that he really meant positive enough for long-term growth. Crossing over to positive cash flow is the first step. But maintaining healthy growth over time is the only way to realize the full value of the business. Whatever the year ahead holds for the U.S. economy, those businesses that have been maximizing their cash position and building reserves for the long term are likely to move ahead of the competition and enhance their long-term prospects.
Martin E. Zimmerman is president and CEO of LFC Capital, Chicago. He earned his MBA in finance from Columbia Business School, where he was a McKinsey Scholar and Kennecott Copper Fellow. He is a member of the business school's Board of Overseers and its advisory Board for Entrepreneurship. He can be reached at (312) 228-6000.
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Eight tips to build a solid financial foundation
Manage for the long term
Aim for conservative growth
Balance the balance sheet
Complete financial statements in a timely fashion
Treat lenders as clients
Choose a mix of lenders and lessors
Match financing terms to the life of the asset
Long-Term Living 2009 April;58(4):35-36